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The micro-bubble inclusion

Last Updated: Monday, August 2, 2010 - 18:38

Rijo Jacob Abraham

The ‘rich-get-richer poor-get-poorer’ theory does not apply anymore. The trickle down also doesn’t work. This time, it is different, especially after what happened in the US. As India seeks greater global exposure, it does not want Bharat to lag behind. It wants to take the rural populations along. This time they don’t want it to just “trickle down”, but to rain.

The UPA’s much touted financial inclusion or wedding the rural India with the urban, is slowly taking shape. The UID is about to be completed and the much awaited RBI guidelines, on granting banking licence, is expected to be announced soon.

The guidelines are expected to ease the current stringent norms on corporate and foreign participation in banking sector, and have set parameters for the graduation of Non-Banking Financial Corporations (NBFCs) into full-fledged banks.

After all, Finance Minister Pranab Mukherjee has an ambitious budget proposal to meet -- all households in villages with at least 2,000 inhabitants should have bank accounts by March 2011.

Banking for financial inclusion

The traditional disenchantment of the banking-sector with the hinterland is slowly fading away. The growing rural affluence and the blurring of differences between the urban and rural are the major reasons. Consider this: 53 percent of the FMCGs and 59 percent of consumer durables’ demand comes from the rural areas. Naturally, banks want to finance the consumerist aspirations of this section of India.

This is but half the story. As the banks finance rural India’s first TV, refrigerator, scooter (or why not a Nano?), it is reaching out to those great lumps of people beyond the reaches of traditional banking system through micro-credit. Micro-credit, or lending small amounts of money (less than Rs 50,000 according to RBI) to people who lack collateral, has been around in India since the 1980s. But it got its prominence after Muhammad Yunus and his Grameen Bank received Nobel Prize in 2006 for developing micro-credit into a viable social business-model.

Many MFIs sprang up. NBFCs started micro-lending and a host of leading commercial banks like ICICI, HDFC, ABN AMRO, and Citibank jumped into the fray. According to a report by Intellicap, between 2004 and 2009 the average portfolio size has increased 107 percent on year-on-year basis, while the number of clients increased 91 percent. The projected loan portfolio will go up to a staggering Rs 135,000 crore by 2014. This is happening when India has a microfinance penetration of a mere 3.6 percent. Rural India is not disappointing the market, after all.

Traditional microfinance has been through government players like NABARD, SIDBI, RMK etc. The money is lent to a group, where “joint accountability” pressures them to pay up. If the group does not pay up, it is disqualified from further loans. The NGO that supervises the group bears no credit risks. Instead the bank bears the losses in case of loan default. This model has a more of a charity tone to it.

Microcreditors turn microsharks

But with the success of Grameen Bank, commercial banks adopted a model of lending to MFIs which in turn distribute loans to a group of people as a more commercially sustainable form. There were rampant expansion of MFIs and, as a result, interest rates soared. And in 2006 after a spate of suicides in Krishna district of Andhra Pradesh, the government clamped down on as many as 50 MFIs and asked others to lower the interest rate. The basic reason for the high interest rates charged by MFIs was the low equity capital they enjoyed.

The lending by banks to MFIs was treated as organisational-lending, which means that the loans were priced based on the MFI’s equity rating. The initial concessional funds and loans were only for a limited period. When the MFIs borrow from banks, a double capital allocation happens – one by banks (which depends on the equity) and then by MFIs on the money lent at the market rate. Added to these are the operational costs of MFIs. This is the main reason for the usurer-like interest rate the MFIs charged.

The market rate is often controlled by the government players who offer subsidised loans. So the entire scenario has become a kind of turf-war between the not-for-profit government lenders and for-profit MFIs. (The government entities still hold a market share of 75 percent)

Scouting equity

MFIs have been actively soliciting private equities and venture capitalists to invest in them to solve their equity woes. This would help them to lower their interest rate ultimately. The names are big – Michale and Susan Dell Foundation, Bill and Melinda Gates Foundation, Ebay founder Pierre Omidyar and Sequoia Capital, the venture capital firm behind Google among others. And this month, SKS Microfinace, the largest MFI in India, issued its initial-public-offering (IPO) and began trading on the BSE.

Old wine, new bottle and cork

That history moves spirally strikes us well when we consider the present rhetoric of poverty alleviation that microfinance has generated.

After the cold-war ended, in the early 1993, Bill Clinton’s deficit reduction plan freed enormous investment capital for banks. The banks expanded into those “untapped markets” of the Third World. Economic growth is the way to lift people out of poverty, the effects of growth will naturally trickle-down, they argued. But it didn’t take much time for a these countries do go broke. The result: poor-remained poor and investors grew richer. Microfinance is but the 21st century’s neoliberal arsenal to lift people out of poverty.

Towards a more tolerable poverty

By creating secondary markets for microfinance by bundling together the microfinance investments, we may end up “speculating” on the life of millions of people in the global and Indian markets, creating a kind of bubble that led to the subprime crisis in the US. But bubbles are a ‘hard-to-detect phenomenon’. Its existence will be known only when it bursts. As of now, it does not seem to matter. The potential is huge and the government is more than willing to open the doors to the hinterland.

The microfinance scenario is lying pell-mell without a proper market strategy or without an apex body to regulate MFIs, NBFC or banks involved in microfinance. A long-term strategy remains a far cry, as the entire energy of the Finance Ministry is spent on fiscal consolidation – right from fuel price hike, fertiliser subsidy cuts to GST implementation. By the time we are done with fiscal consolidation, will it be too late?

On the ground level, microfinance has only enhanced cash-flows. Without any solid investments, poverty will not go away. The borrowings are largely for meeting routine or emergency expenses like treatment, education fee for children etc. The borrowers themselves become lenders to other people. The farmers in many most cases have become distributors of consumer goods, “making poverty much more tolerable phenomenon” as some of its critics would put it.

First Published: Monday, August 2, 2010 - 18:38

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