India Needs Game Changer in Microfinance

SOURCE: BUSINESS TODAY

NANCY BARRY IS THE EX-HEAD OF THE WORLD Bank’s Global Industry Development Group and former President of Women’s World Banking. Over the last two years, Barry has built Enterprise Solutions to Poverty (ESP), which engages industry leaders and entrepreneurs in building inclusive growth strategies, both in India and other emerging markets. Forbes magazine has recognized her as one of the world’s most powerful women and U.S. News & World Report has dubbed her as one of America’s top 20 leaders. Here, Nancy shares her concerns about the evolution of the microfinance industry in India: The outreach that the Indian microfinance industry has achieved, through both the microfinance institutions (MFIs) and the Bank-Self Help Group (Bank-SHG) linkage model over the last 10 years, is impressive. Today, over 50 million poor women have access to very small loans. I believe this is the main accomplishment of the Indian microfinance sector over the last 10 years. However, there are issues that underly this accomplishment. First, both India and Bangladesh have problems rooted in the near exclusive reliance on group lending. The structures built are yielding tiny loans to millions of poor women and are not being leveraged to provide other financial products that build income and assets. Group lending is very powerful as a “startup” product, particularly for poor women, because it has built into it an empowerment component, a community component and a social component. The problem is that the SHG and Grameen-type group lending models have been used only to make very small loans. These groups involving 50 million poor women in India are organs that could be used to provide vital savings services, insurance services and housing finance. None of this has been done. The focus on microcredit—not microfinance— has been a very limited, superficial use of national grassroots outreach structures. Today, most Indian microfinance institutions are becoming loan dispensers, rather than financial intermediaries for the poor. Part of the problem lies with the group lending model in which group organisers are not comfortable making growth oriented loans or providing a range of savings, insurance and other financial products. Part of the problem also rests with the NBFC legal structure that many microfinance institutions have chosen, which does not enable MFIs to mobilise broad-based savings as a service or as a source of funds. As a result, MFIs have relied increasingly on foreign equity sources to fuel growth. Most of the foreign equity sources have no interest or capabilities in supporting MFIs in diversifying their product offerings to poor clients; rather, these sources increase the pressure on MFIs to make short term profits by focusing on dispensing more small loans. So, group lending business models keep the loans small, and legislation, MFI capabilities and the short-term profit push keep the
focus on microcredit. Also, some of the leading MFIs have moved the focus on building livelihoods to a mentality of a consumer lender, asking how much of the poor family’s purse or wallet they can gain by providing loans and consumer goods. What India needs are some game changers in microfinance, not more or bigger loan dispensers, fuelled by external funding. These game
changers will learn from SEWA Bank and BASIX and scale up some of the positive lessons of these grounded organisations. Enterprise Solutions to Poverty has engaged leading companies in India—including Tata, Reliance, ITC and Mahindra—as well as some emerging entrepreneurs— such as FabIndia, ICICI Foundation and SELCO. These companies are paving the way in mobilising large numbers of poor people as suppliers, distributors and consumers of asset building products. ESP has mobilised over 150 of the leading companies and emerging entrepreneurs of India, China, Mexico, Colombia, and most recently, in Brazil and Kenya. We are supporting these companies in building profitable and inclusive growth strategies geared to doubling the income and assets of over 50 million poor people by 2012.