Micro-finance has been recognised as an instrument for attaining poverty alleviation goals. The Twelfth Plan specifically mentions that micro-finance will help generate employment by providing affordable financial products for fixed capital formation in the household sector.

Although micro-finance includes financial services such as thrift, insurance, credit and remittance, credit remains the most emphasised service by clients and regulators alike.

India has two channels of micro finance -- Self Help Group- Bank Linkage Programme (SBLP), and Micro Finance Institutions (MFI)-led microfinance. MFIs have surpassed Regional Rural Banks (RRB) and commercial banks in terms of number of small loan accounts. Even after the crisis which started in 2010 MFIs have outpaced SBLP in annual growth in terms of number of accounts.

With MFIs growing at 68 per cent per annum in terms of unique client base in 2005-10, there can be no doubt that MFIs have played a crucial role in bringing about financial inclusion.

BOTTOM OF THE PYRAMID

But this is the success story of MFIs and not that of the borrowers. Growth of MFI and growth of borrowers do not necessarily go together. The general operational practices of major ‘for profit’ MFIs in India are not in congruence with the stated goal of pulling people out of poverty by providing them productive assets. To begin with, MFIs provide credit to only those units which are already in business for more than a year or two. So the very idea of providing credit to the poor is defeated.

The credit is used by clients to realise working capital requirements such as procuring raw material (in case of manufacturing) replenishing stock (in trading), upgrading shops (in service industry), or fulfilling some personal needs. So, one should already be doing well to get a loan to better oneself.

Additionally, the basic criterion for selection of borrowers in all major MFIs mandates that the borrower must be a permanent resident of the place and should own a house. This categorically leaves out the very poor.

ONE SIZE FITS ALL

Also, MFIs offer a fixed credit amount and fixed tenure to all types of enterprises. So, whether one is a tailor or welder, vegetable vendor, carpenter or in the photocopier business, one gets a fixed amount of credit repayable for a fixed time period. There is no assessment of business needs of different types of activities. A photocopying machine, for example, may cost around Rs 1 lakh and a sewing machine may cost just 5,000. The level of enterprise potential is not taken into account. A small amount of Rs 10,000-20,000 is not sufficient for starting most business activities. Even an average quality buffalo costs Rs 30,000-40,000. Incidentally, this amount is not even sufficient to cater to a running and growing enterprise, where entrepreneurs have to depend on private sources for peak season work.

Training and business advisory services are mostly supply-driven without taking into account the needs of the enterprise. Even government institutions for capacity building and providing market linkages are absent on the ground. Further, the sector is dominated by ‘for profit’ MFIs or NBFC MFIs. It is not their business to develop clients into entrepreneurs. The disconnect between MFIs and clients has been recognised as an important reason for the micro finance crisis that erupted in India in 2010.

All this does not negate the positive role played by MFIs. Their functioning has definitely resulted in consumption smoothening.

Also, small loans are welcome, because in a state of resource crunch this credit helps in sailing through many problems. Loans should be given for consumption purposes (presently they are given for productive purposes only). Right now, clients have to depend upon private sources of credit, such as relatives and money lenders for consumption loans that are very costly.

Employment generation through MFI has to focus on financial inclusion for those beyond the eligibility criteria of MFIs, and also on creating an enabling environment for borrowers, such as capacity building and market linkages for clients.

(The author is a freelance researcher.)

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