Credit Management : Some Radical Thoughts on Microfinance

By, Dr. Souren Ghosal

Micro credit to farmers and artisans needs to be routed through some voluntary agencies preferably of farmers and/or artisans. This has been the findings of almost all research studies undertaken in this regard particularly in Asia. The reason is very obvious. Most of the farmers and artisans in rural areas do not possess necessary skills and drive to transform themselves as viable entrepreneurs. They lack in technical knowledge and market intelligence. It is, therefore, necessary that they should get support from within by grouping themselves and also by joining with others who have necessary expertise and leadership to become better entrepreneurs.

Institutional Structure

Further, it would be advisable for commercial banks not to be branch-centric for catering micro credit to farmers and artisans. Merely conceiving a specialized branch to cater to rural finance may not be an adequate innovation. Banks should be encouraged to innovate and experiment as no foolproof institutional framework exists today. In fact, almost all research studies have found that conventional banking would not be able to reach farmers and artisans and for that reason most of them have remained under the clutches of moneylenders who, over the years, have swindled farmers and artisans by providing facile loans at a heavy cost.

It has become difficult to replace money lenders despite so much effort made in this regard due to two very important factors viz.,

1) facile credit system without the ordeal of much paper work and

2) making available the credit for all purposes. The question may, therefore, be asked why we should try to have any other system.

The reason is very obvious. Money lenders have exploited farmers ..

Up-to their neck for their lack of market intelligence and also for their weak financial position. The need is, therefore, to create such institutional structure that can provide easy credit with reasonable cost to help farmers and artisans become viable entrepreneurs.

For this, considerable experimentations have been made in India and from those we would easily understand that farmers and artisans individually are ignorant and weak in bargaining loans at competitive interest rates.

Micro Financing to Groups

One popular innovation is to form groups of farmers and artisans for obtaining any loan from banks. However, it has also been experienced that groups of farmers or artisans formed only to provide group guarantee for loans taken by them would not help them to become viable and in many cases such guarantees would not be of much help to the lending institutions also as the total group may not be viable because they had no guidance from banks on farming and marketing to become viable farmers and artisans. Further such groups do not have any control on individual farmers for undertaking better farming and marketing besides the fact that such groups could never become a cohesive group to look after each other’s interest both in farming as well as in marketing.

These groups are unable to harness resources for better farming and to generate enough bargaining power in buying inputs and marketing their produce. Recent studies have revealed that micro financial institutions should veer round the strategy of building healthy Self Help Groups (SHGs) of farmers and artisans and also create opportunity for female members of the family of farmers and artisans to be a member of the group or its subsidiaries as they have been found more prone to saving and motivating force for the families.

Micro Financing Institution – NGO

It has also been observed that banks in India depend heavily on 30/40 successful Micro Financial Institutions (MFIs) instead of developing new institutions wherever they find such existing institutions over burdened. It has to be kept in mind that Micro Financing Institutions (MFIs) are of recent origin and they do not have unlimited resource both in leadership and management skill. Moreover, such institutions have to develop Self Help Groups (SHGs) at local base in villages and semi-urban places where one is having adequate rapport with people of the area. It is true that it is difficult to prescribe any cutoff rule for the same as each micro financing institution has varied type of leadership and management skill besides having differing amount of financial resources.

Comprehensive Policy Framework

However, one may suggest that at the apex level, banks may develop or support one MFI to cater to one or two districts of a state. These institutions may be informal bodies of NGOs. But it would be better if some special legislation is enacted by the government to make it a legal entity to undertake all the jobs envisaged for such institutions by banks keeping in view of the potency of such institutions to enable small farmers and artisans to attain economic viability in the country. It may be worthwhile to note that Pakistan has enacted a comprehensive policy framework (Ordinance No. 2001) to regulate its micro financing institutions. It is high time for our government to come out with some such policy framework to guide and monitor these institutions. There cannot be any doubt about the need of these institutions in our country as these have been found highly potent institution for poverty alleviations. However, the strength of these institutions will depend greatly on how successfully they develop self help group of farmers at local base to conceive and manage projects to make farmers and artisans viable entrepreneurs. These projects could be on farming and/or subsidiary agro-industries based on local talent.

Self Help Groups and Micro Financing Institutions

It has been observed from the present performance of commercial banks that to make group of farmers and artisans (SHG) as viable unit, one has to keep in mind the following guidelines:

* Should have compact plot of land of 5 to 10 acres having irrigation facilities or having potentiality of developing such facilities. Similarly, for artisan groups it would be helpful if such groups are formed where cluster of artisans of same trade live or where exist the potentiality of developing such cluster of people having skills to pursue one or two identified trade.

* Should be suitably empowered with skills and fund to perform their assigned functions.

* Should also have internet facilities at village level for easy reach to latest technology and market intelligence similar to e-Choupal conceived and promoted by the ITC in India.

* Should have well-defined roles to play and the same should be elaborated by the apex body, i.e., micro financing institutions at district headquarter (MIC) in consultation with the financing banks.

* Should also be empowered to develop schemes to cover risk partially or fully that may arise to farmers and artisans due to unforeseen reasons. A participatory fund may be floated in collaboration with the apex institution and the financing bank.

* Should be able to conceive, promote and manage infrastructure projects in rural and semi-urban areas to help farmers and artisans to store and market their products as and when they perceive good marketing opportunities.

* Should be able to give support services to farmers and artisans like supply of capital and crop inputs and transport and warehousing for marketing their produce.

* Should form a subsidiary group or have in the parent group itself a female group consisting of family members of farmers and/or artisans to promote savings and to provide employment to women folks in rural handicrafts and/or subsidiary agro jobs and rural industries.

System for Lending

* Banks shall lend fund as assessed for projects prepared by the SHG and also for anticipated consumption needs of the group of farmers. It may undertake reviews during the crop season and/or production season of farmers and artisans and keep SHG informed of its comments for initiating necessary action in the mid-course for safeguarding the loan. These reviews shall have to be undertaken by the extension officers of the bank who should be competent enough to guide farmers and artisans for improving their farming and/or village-based subsidiary industries.

* Bank shall assess the risk that farmers and artisans have taken and to what extent that can be provided for through subsidy of the government and contribution to be made by the bank and the SHG. A risk fund may be created to meet such exigencies in farming and business undertaken by farmers and artisans.

* Bank shall examine the possibility of providing loans to farmers and artisans on profit sharing basis as charging interest on such loans (high or low) have not yielded very healthy effect on farmers and artisans. In fact, right from the days of moneylenders to the days of institutional credit, policy makers have failed to develop suitable interest strategy with the result in most of the cases lending agents satisfied with interest only and foregoing principal amount and/ or exempting partly or fully the same as the rate of interest levied was unbearable. This strategy, therefore, needs serious thinking by the policy makers. In the Islamic banking, charging of interest is prohibited and sharing of profit is adopted. It is interesting that RBI has recently appointed a high power committee to study the efficacy of the adoption of Islamic banking system for lending in some areas. In fact, some foreign banks have shown interest in this considering the feasibility of adoption in some countries. This may be a boon to poverty stricken farmers and artisans as interest charging has been a bane to them for a long period. This will also do away with the controversy of whether one should charge low or normal rate of interest to farmers and artisans. Further, farmers and artisans need not look for mercy from the lending institutions.

* Bank may join hands with insurance companies to cover the risk in farming and business run by the group of farmers and artisans. Since risk has to be assessed on group basis it would not be very difficult to assess such risk and creating special risk sharing fund to meet unforeseen risks.

* Bank may also participate in Derivatives in the commodity markets to cover such risks. Government of India is considering the feasibility of such participation very seriously. In fact, a change in the market system in agriculture is in active consideration of the Government of India. The Government of India is actively considering changing the marketing route (AGRI-PRODUCE-PATH) to enable farmers to have direct contact with the market. The present system built around Mandi warps the price signals the market sends and thereby farmers just get only 20-25% of the price of their produce. To change the same, the Government of India is encouraging the private sector to buy directly from the farmers and to create an alternative link to Mandi. This can really work if MFIs and SHGs are roped in with adequate resource and skill.

* Bank shall have to develop new methodology to increase their rural reach and for this they may look to the experimentation made by ITC and HLL in India. ITC’s e-Choupal and HLL’s project Shakti may be worth studying.

* Banks may study the innovative method adopted by the ICICI bank to enhance their rural reach. ICICI bank has built up a supporting network of Village Internet Kiosks in partnership with Social Initiative Group (SIG).

* The above approach may bring a paradigm change in rural lending recently branded as micro financing. Such radical change is inevitable particularly when we are marching ahead in economic field. There is nothing wrong to adopt globalization as it strengthens the economy rather than weakening it as often wrongly assumed by the politicians and the deprived sections of our society. In fact, the deprived section of the society will not remain deprived if we carefully address to their economic problems. The above model of micro financing may address effectively some of their problems and bring out their latent strength for amelioration of their poverty. The need of the hour is to have a bold vision and to adopt innovative methods to reach deprived section of our population who are mostly habitating in rural areas.