Sa-Dhan Newsletter Volume 5 Issue 2
Operational Costs of Delivering Microfinance : Banker's Perspectives
Micro-finance & Public Sector Banks
-M. A. Krishnan
M
small borrowers, particularly amongst the rural and semi-
icro-finance (mF) forms a part of the priority sector
urban poor, can be said to be the biggest stumbling block
financing activities of the public sector banks. The
in the path of all out foray by public sector banks in the
concept of priority sector is a by-product of the planned
field of mF. The sad feature of the story is not the failure
economic development of the country.
alone. Any failed experiment can be turned into a stepping
stone for success, provided proper learning takes place. But
When providing employment to millions of educated and
this does not happened. Thus the cost could be attributed
trained entrants to the labour market, uniform and balanced
to knowledge and skill building and progressing along the
development of all parts of the country and socialization
path of learning curve. Even though, the various committees
of the ownership of industrial enterprises were the corner
headed by persons of eminence and experience such as
stones of the country's economic policy, and that the
Mr. Narasimham and Mr. Rangarajan had critically analysed
development of small scale industries was thought of as
issues and had identified the reasons for poor performance
a priority. When the country experienced food crisis, we
on the part of the public sector banks in the field of mF;
ushered the Green Revolution to achieve food sufficiency,
not all the prescriptions have been accepted and whichever
agriculture joined small-scale industries as the other priority
accepted were not implemented whole heartedly.
sector. The phenomenal growth in the number of young
technicians, budding professionals such as doctors, dentists,
Yet one can assert boldly, that there is no need for
architects, chartered accountants, the need to transport
despondency. There have been other positive developments
industrial and agricultural products across the length and
since the late 1980s and early 1990s which have taken fairly
breadth of the country and to the interiors, through road,
strong roots in PSU banks that encourage the strengthening
etc. necessitated the inclusion of small transport operators,
of mF activities. To appreciate this sense of optimism, it
self-employed professionals, services and small business in
is necessary to know a little bit of banking history in the
the list of priority sector. The hunger for foreign exchange
late 1980s and 1990s.
saw exports join the band wagon of priority sector.
By 1988 or so, it had become evident that loan melas had
When the government nationalised 14 large banks, policy
dealt a severe blow to mF. However, with the initiatives of
directives were issued to them to direct 40% of their total
several individuals and NGOs in different parts of the
lending to the priority sector. The paucity of the lendable
country, mF began to take a better shape. Many NGOs had
resources on account of pre-emption of bank funds through
organised small social groups of men and/or women and
the steadily growing cash reserve ratio (CRR) and statutory
educated them to fight social evils such as drinking,
liquidity ratio (SLR) to cover the ever growing fiscal deficit
degradation of environment, pollution, illiteracy, female
of the Central and state governments meant competition for
foeticide, etc. These groups were homogeneous, and had
funds even amongst the different interest groups within the
a common identity and purpose. While working with the
priority sector. Besides, an opportunity to gain electoral
groups, the NGOs had noticed that these evils and poverty
advantage was discovered through populist schemes of
were highly correlated. It is not necessary here to discuss
financing the weaker sections such as, Differential Interest
which is the cause and which is the effect. It is suffice
Rate Scheme (DIR), Self-Employment Programme for Urban
to say that the NGOs, at least some of them, were practical
Poor (SEPUP), Integrated Rural Development Programme
and thankfully decided to do something about poverty.
(IRDP), Jawahar Rozgar Yojana (JRY), Indira Awaz Yojana,
etc. Hence, the Reserve Bank of India directed the banks
While policy planners and politicians continue to find
to ensure that at least 18% of the total advance went to
solutions in subsidies, target-oriented lending and
finance agriculture.
distributions of loans more as largesse; these social
scientists inverted the whole paradigm and started micro-
A target of 10% was fixed for financing weaker section
savings by the group members and lending the savings -
comprising of small and marginal farmers, landless labourers,
- which were augmented by donations -- amongst the
SCs/STs, who were below the poverty line. This can be seen
members. The terms of lending and saving such as
as the first and hesitating attempt by public sector banks
purpose, amount, repayment, interest, etc., were determined
at mF. Thus initially the psyche of the public sector bankers
by the group members themselves. No doubt, NGOs trained
towards mF was conditioned by the negative features of
and educated the members in the whole exercises. The
target-based lending and mass loaning through loan melas.
effects of this paradigm shift have been the realisation of
the value of saving and recycling financial resource through
At this stage, despite protestations, mF was certainly mired
timely repayment and empowerment on the group. The
in haphazard lending and near total helplessness followed
group decides the terms and enforces them. As the
by apathy of bankers at the operating level. The consequence
enforcement is by peer group, even extreme coercive
has been not only a large percentage (over 70%) of these
measures are tolerated and delinquency is rare for fear of
loans turning bad, but also growth of cynicism amidst junior
social ostracism.
level officials towards mF. This cynicism coupled with
widespread breakdown of credit discipline amongst the
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