Defining the context of Microfinance Bill

Annual demand for microfinance services is estimated to be somewhere between Rs 75,000-100,000 crore

While the Indian economy grows at above 8 per cent, the fact remains that almost 75 million poor households continue to remain outside the reach of financial services, not to mention social security and livelihood opportunities. Out of these, 60 million are in rural areas, half of them landless, and two-thirds illiterate. Alarmingly, in the context of increasing rural migration to urban India, the urban poor are becoming the fastest-growing section, and by 2010, they will constitute a large portion of the poor.

Microfinance in India in the last decade-and-a-half has been able to reach a considerable segment of this population, largely because of the linkage between Nabard, self help groups SHG and banks. As on March 2006, there were 2.2 million SHGs covering 32.98 million poor households. A cumulative disbursement of Rs 11,398 crore has been achieved with a growth rate of 51 per cent in priority states. In addition, microfinance institutions Sa-Dhan members reached out to 7.3 million households with Rs 2,070 crore. But the annual demand for microfinance services is estimated to be somewhere between Rs 75,000-100,000 crore. The gap is gigantic.

It is in this context that we need to see the Microfinance Bill, that8217;s likely to be placed in Parliament during the Budget session. The Bill will allow for not-for-profit entities to provide thrift services. Further, it will allow for a sanction for microfinance in the mofussil towns. Finally, the bill will ensure that the quality of supervision of entities goes up resulting in an improved quality of assets in the sector. In addition, the bill also proposes no cap on interest rates for microfinance activity. In essence, we hope the cumulative impact of any such work will result in a net positive impact for the sector.

In thinking of next steps towards greater inclusion of the poor, we need to examine different approaches, including both the co-operatives and the regional rural banks, in addition to MFIs, in spite of their current state of affairs, in search for appropriate solutions. Focus will have to be primarily on the strengthening the organisations with skills, systems and governance to ensure that they are able to scale up. The key factors here: ownership and management.

Success, however, will not only be dependent on retailers. Any retail architecture will require a sustained building of 8216;industry infrastructure8217; that cuts across organisations and provides for increased third party information. Strengthening this will require efforts of building institutional infrastructure, preparedness and collective efforts from all stakeholders, involving coordinated effort between governmental bodies, formal banking system, corporate houses and microfinance sector for greater financial inclusion.

But it must be recognised that microfinance in itself will not be the ultimate solution for driving poor out of poverty. An integrated approach between microfinance and livelihoods needs to be first understood and then examined for how it can be translated into a delivery that would lead to improved productivity by the poor household, which is linked to the wider economic demand for products and services. Some of these require investments and other market-linkages, making the process complex.

Along with livelihoods, it is also essential that social security measures are also available for the poor as the degree of vulnerability among them is very high. The poor in the country face some of the worst risks, pension for instance. While the regulatory environment is supportive and promoting accessibility of micro-insurance to the poor, the operational environment is not coming forward. Results will really depend on how well we can both develop documentation and data that will lead to the reworking of products and channels by different agencies, which will match the demand.

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The microfinance annual conference that concludes today, therefore, focuses on an interface between requirements of traditional and occupational groups like farmers, artisans, migrant and wage labourers and the smooth delivery of long-term sustained financial services such as credit, savings, insurance, pension and money transfer services to them. A 8216;Voluntary Mutual Code of Conduct8217; that brings in focus client requirements and governance aspects of MFIs will also be released during the conference today. This will finally seek to begin the work that will result in the merging of the social with the financial in the fast expanding outreach of the sector.

The author is executive director, Sa-Dhan