Financing the poor

Vikram Akula

Microfinance can change the face of poverty in India, but for that the stakeholders must come together and learn to think big

Independence has brought us political freedom, but a vast majority of the poor still suffer financial apartheid. While middle and upper classes can get a loan, write a cheque, open a savings account, buy insurance, and send a wire transfer, most poor people cannot. Their primary source of credit is extortionist loan sharks and pawn brokers. These groups charge rates that average 36 to 60 per cent annum (in the case of daily finance, as high as 3,000 per cent) and put the poor in a debt trap.

Meanwhile, most banks don’t lend to the poorbecause they don’t have collateral and because it is costly to service tiny loans of Rs1,000 to Rs10,000. Moreover, when it comes to other financialservices, the poor have virtually no access whatsoever.

The microfinance movement has tried to change that. It is a movement that first emerged in India 30 years ago and has ramped up significantly in the last decade. It includes thousands of institutions, from small NGOs to national-level regulated microfinance institutions (MFIs). It includes the public sector Regional Rural Bank self-help group channel as well as the private retail MFI channel. Together, these channels reach about 1 crore families.

Numerous studies have shown that microfinance enables the poor to increase income, build assets, and get out of economic poverty. At SKS, we see this daily among the nearly 8 lakh borrowers we serve across 13,000 villages and slums in the country.

But for all the impact that the movement has made, it still reaches only a small fraction of the poor — an estimated 15 per cent — and the movement has provided only an estimated 10 per cent of the credit needed by the poor and even less of other financial services. The blight of financial apartheid continues. In order to change that, MFIs, Banks, and the government need to think about the sector in a radically different way.

The first group is MFIs. Today, nearly 90 per cent of MFIs serve fewer than 10,000 clients. MFIs must start envisioning servicing lakhs of poor instead of thousands. To do this, MFIs need to overcome some ideological hang-ups. Since most MFI practitioners have social sector roots (including myself), we have traditionally looked at ‘business’ as a bad word. We need to overcome those ideological blocks. We need to look to and learn from international companies like McDonald’s and Starbucks and domestic players like Airtel and Big Bazaar.

These companies know how to scale and the microfinance sector needs to learn those techniques. We also need to move beyond our paper passbooks and dusty ledgers and understand how these companies use technology to ramp up. At SKS, we’ve taken a small step in this direction by setting up standardised scalable business processes and deploying technology; as a result we roll out 30 new branches and enrol 65,000 new members a month. That’s good, yes. But it is a drop in the bucket.

The second group that needs to act radically different is banks. Bankers must look at the poor not as a group that needs charity but as an entrepreneurial segment that provides them a business opportunity. As a microfinance movement, we have proven that the poor are credit worthy, and they will use the credit productively, earn income and repay. At SKS, for example, we have disbursed over Rs900 crore, have taken no collateral, and have a 99 per cent repayment rate.

Commercial bankers need to start providing more financing to MFIs (or increase lending to the poor directly) and charge a lower interest rate. To date, only a handful of banks have come forward in a large way, including HDFC, CITI, and ICICI — to name a few. But we need more, especially public sector banks, which have largely stayed away from financing the MFIs.

The final — and perhaps most important — group is the government and RBI. The RBI must bring back the brilliant business correspondent regulation of 2005 that had enabled regulated NBFCs to conduct banking on behalf of banks. This policy had enabled them to finally have access to additional products, such as savings. But it was rescinded in 2006. If the NBFC-Business Correspondent regulation can be re-instated, the poor will again have access to financial services. Savings, in particular, is crucial as poor people have no safe place to save and end up, literally, putting their hard-earned cash under their mattress or spending on consumption or making unproductive gold purchases.

If the poor had access to banks through business correspondents, the investment they make in gold could instead flow into the economy and stimulate growth — and, as important, the poor would be able to build up the savings required to get out of poverty. Just as there is a new economy, a new entrepreneurial spirit among the poor, a new breed of politicians and regulators, there is also a new generation of NBFC MFIs. The government needs to harness, not hinder, them.

In this regard, the attempt of the parliament to bring in a microfinance bill is laudable, but since NBFCs and Section 25 companies (which serve 80 per cent of microfinance clients) do not fall under its ambit, it essentially misses the mark. As for what our elected politicians can do, they can make a better attempt to understand poor people’s financial needs — how devastating it is to have to turn to a village loan shark, how a health crisis puts a family without health insurance in a downward spiral, how difficult it is to build a home without access to finance, how hard it is to save without a safe place to put earnings aside.

If there was a better understanding of the needs of the poor then, perhaps, policy measures will emerge that will help us leap, not hobble, towards financial inclusion. Hence all of us have a role. Only if we expand our vision and work together, will we be able to expand the promise of economic freedom for those crores of families who have been left behind.

Vikram Akula is founder and CEO, SKS Microfinance.