Financial inclusion means delivering financial services at affordable rates to those in the low income groups. By financial services we broadly mean the following: savings, credit and insurance. And for all of this to be effective, there must be multiple providers of such services so that customers can choose from various alternatives. It is assumed that competition will bring down rates and also that it will ensure some level of industry performance standards.
In India, steps towards achieving financial inclusion were kicked off in 2004/5 when RBI urged banks to provide a no-frills banking account to customers. General credit cards were issued to the poor and Know Your Customer (KYC) norms were relaxed for those with annual deposits of lesser than INR 50000. Then in 2006, RBI allowed microfinance institutions and NGOs/SHGs as financial intermediaries. Since then Kerala, Pondicherry and Himachal Pradesh have announced a 100% financial inclusion.
Despite all measures, given that the magnitude of the problem is huge in India, it is estimated that 60% of the population still don’t have bank accounts and about 90% don’t get loans. Also only 10% have life insurance of some sort while only a 0.6% has non-life insurance cover. Primarily the following persons are financially excluded: marginal farmers, landless laborers, those in the self employed & un-organized sector enterprises, urban slum dwellers, ethnic minorities, socially excluded groups and women.
The biggest hurdles to achieving financial inclusion are the lack of legal identity required for accessing financial services, lack of basic literacy that prevents the customer from even opening an account (and to add to it sometimes rather complicated procedures) and most importantly lack of available branches/offices in the area that customers reside in. Most commercial banks operate only in commercially profitable areas and they set up offices only in those areas. Traveling to a far off location often means a day’s wage loss and there is also the added cost of travel.
Currently in the absence of a formal financial institution, most people have to depend on the local moneylender. Studies have shown money-lending rates across Asia, Latin America and Africa to be in the ranges of over 10% monthly for 76% of the sample size and over 100% per month for 22% of the sample size. Even though these rates are high, their services are convenient, quick and flexible (especially when borrowers run into problems) and they thrive even in places where microfinance institutions exist.
Microfinance had been touted as a solution that will help bring people out of poverty and ensure financial inclusion. Among the poor, empirical evidence goes on to show that those involving themselves in microfinance programs were able to improve their welfare both at the household and individual level much more than those who did not. One particular statistic declares that over 55% of Grameen borrower households were “no longer poor” as compared to 18% of non-borrower households.
The highest concentration of microfinance accounts are in India globally (consider postal savings state agricultural and development banks, financial cooperatives and credit unions and specialized rural banks as institutions practicing microfinance as well). In fact in Andhra Pradesh alone, microfinance penetration is rural areas is around 800%.
However microfinance is not without its share of criticism and troubles. For one, the rates of interest being charged are close to around 25% annually and this is in fact much more than 15% above the long-term operating costs that these institutions incur. Regulation is poor in this sector and a considerable percentage of the money that donors give is not channelized effectively. Microfinance loans are also given to those to enhance existing business and not help start new ones. In other cases, the borrowers become forced wage laborers selling crafts or agricultural produce through organizations controlled by the MFI. Even though MFIs claim high repayment rates, it is interesting to see that most of the clients are repeat customers that have become dependent on such borrowing (in fact the 800% can easily be interpreted as a debt trap).
There are some interesting models that are evolving. SHGs have been known to work where members collect money and create a group fund. Local banks then lend against the corpus raised in the group fund. There are also Internet-based organizations today that have platforms which facilitate peer-to-peer lending where a loan is disbursed as the aggregation of a number of smaller loans at often negligible interest rates instead of being made in the form of a single, direct loan. Zidisha, Lend for Peace, Kiva and the Microloan Foundation are all proponents of such a model. United Prosperity has a rather unusual model wherein it provides a guarantee to a local bank which then lends back double that amount to the interested borrower. Per this the micro-entrepreneur also develops a credit history with their local bank for future loans.
No comments:
Post a Comment