Technology can bring sustainability
The poor were viewed as good borrowers until the mayhem occurred in AP, which turned the sector topsy-turvy. The Joint Liability Group model was really successful in the sub-continent, but the crisis revealed that lack of regulatory framework could spell doom for the sector. It also brought to light yesterdays’ trivial topics as today’s significant ones and even questioned the entire business model. Under these circumstances, it is imperative to analyze the future challenges that loom large.
From the industry’s perspective, the MFI bill, which is expected to be tabled in the Parliament during the winter session, may prove to be the game changer. If passed, the bill could help in bringing the much-needed regulatory framework that could separate the wheat from the chaff. Also the sector may shrink in a bid to consolidate by using size as a bulwark. This could also avoid negative interferences into the sector based on pure political grounds. From the perspective of a customer, the challenge lies in utilizing the money with a proper plan of action that can result in the formation of an enterprise. During times of emergencies, the customer has her task cut out or if the customer invests the amount in agriculture or live stocks that are more risky propositions, then her repayment capacity will be questioned. So the challenge before the customer is to utilize the money with a proper plan of action that can result in the formation of an enterprise. From the Government’s perspective they should incentivize socially committed MFIs in the form of grants or subsidies and thereby helping them in raising the much-needed capital. At the same time, MFIs that violate the norms prescribed by the authorities should be dealt with accordingly. From a business perspective the challenge is to collect accurate data of the clients and keep them updated. Also it is important to understand the transformation that the client undergoes as part of the social oriented initiatives of the concerned MFI.
In short, technology is the one word that can thwart the aforementioned challenges. From the Industry’s perspective, technology plays a key role when the sector grows in size. With out proper technology, manipulation and fraudulent practices will be a never-ending affair. From the customer’s perspective, technology gives a clear picture of her debts and prevents her from falling in to the trap of over-indebtedness. It also helps in determining the impact of the transformation she has undergone due to ‘microfinance’. Government technological initiatives like Unique Identification Number (UID) can complement MFIs in deriving accurate data on the customers and avoid duplication / redundancy of data.
Under the current circumstances, it is clear that the success of the MFIs lies in their ability to lift people out of poverty, than sheer size or volume. For that technology has a definite role to play.
K.Paul Thomas
Managing Director
Why microfinance remains in the priority sector?
When 45.5 crore of India's population lives on `55 a day (as per World Bank report), it is only appropriate that RBI retains the priority sector status of MFIs. MFIs are here with an aim of providing sustainable livelihood activities to the poor and thereby eradicating poverty. We realized that it was not just low income and consumption that define poverty; there are social barriers like caste, gender, status, disability etc. too, which cannot be estimated. It's here that MFIs can play a crucial role through its business model based on Sangams. During sangam meetings, people come in unison sans any barriers, with a sole aim of uplifting their living environment.
Retaining priority sector status can also be attributed to the fact that microfinance is considered as responsible finance and not just mere money lending. Factors like Accountability and Responsibility counts high in case of MFI programs. It's true that India spends more on programs for the poor than most other developing countries i.e., 2% of GDP. This is three times higher than what China is spending. But due to faulty administration, most programs failed to meet the purpose. Even though the Mahatma Gandhi National Rural Employment Guarantee Program (MGNREGP) is a landmark achievement, we all know how negatively it has affected the output of small farmers who are finding it difficult to get labourers on time.
The flourishing of small and medium enterprises is another reason that justifies the priority sector status to MFIs. Availability of funds on time is very important for the survival of SMEs, which contribute 45% to the national GDP. Marketing facilities offered by social microfinance organizations like ESAF give international exposure to the products of small and micro entrepreneurs. That's why whether it is in food processing, agro-industry, gems and jewellery, engineering, textile and readymade garments, electrical and electronics, meat products, leather goods, handicrafts , animal husbandry, toy making …you name it…and we have a success story to showcase…
K. Paul Thomas
Managing Director
'Responsible Credit', order of the day
At the outset, let me congratulate all the ESAF team members for doubling the company's portfolio to Rs 150 crores, in the last FY 2009-10. It once again underscores our capability to thwart all sorts of challenges and come up trumps. At a time when the company is making quantum leaps at the international level, it is imperative to continue focusing on our mission and functioning as humble heroes for the poor.
In order to improve the governance practices, MFIN (the NBFC_MFI association), has put in place a code of conduct that MFIs need to observe. It is intended to strike a balance between the industry's social and commercial goals. It is true that commercial orientation is required to support the substantial growth the sector has witnessed so far, but a fine balance between the social and commercial aspects is also equally important. In short, 'Responsible Credit' is the order of the day.
The MFIN code of conduct stipulates that not more than three microlenders can lend to a single borrower and their cumulative loan offer should not exceed Rs 50,000/-(for unsecured loans). Over exposure of loans can lead the borrower to a debt trap and the lender will be the ultimate sufferer. So it is necessary to have a thorough understanding of the client's repayment capability and cash flow before lending. Another point that the code instructs is not to resort to any abusive or unethical tactics to collect dues. Observing this rule is important as it upholds the principles and values of the sector. The need for transparency is another point that the code insists. In order to fill the gaps in the disclosure mechanism, the code specifies to mention all features of the loan including Interest Rate, Processing Fee, Security Money and Insurance Premium in the Pass Book or in the Application Form. The MFIN code also proposes to encourage a grievance redressal system and offers ways to tackle incidence of large massive defaults.
I am happy to reveal that our established practices are not different from the code of conduct formulated by MFIN. We take this as an opportunity to re-assure that we are on the right path. We conduct training sessions for the staff on the values to be followed while interacting with the clients. On the transparency side, boards showing interest rates are displayed in all the branches in vernacular languages (loan documents are also available in vernacular languages). Moreover, we have created a Grievance Redressal Forum and placed complaint boxes in all the branches. At the branch level, we have also formulated Branch Advisory Committees with Cluster Level Client Leaders as participants. We also rely on visual presentations for effective communication. Yes, I can say that our practices truly conform to the code of conduct formulated by MFIN.
K. Paul Thomas
Managing Director, ESAF Microfinance
Financial Inclusion to prevent Social Exclusion…
In these times of continuing rise in the prices of commodities, what could have offered relief to the poor is a well-established and functioning financial sector, with a wide range of tailor-made products. In fact to foster 'inclusive growth,' there is a need to develop a range of services suited to various categories of the poor and vulnerable, like affordable and flexible credit for livelihood finance; access to risk mitigation services like health, weather, asset and life insurance; access to vulnerability-reducing services like warehouse receipt finance; and access to financial services like micro pensions, SIPs and empowerment of SHGs. Despite several initiatives by the RBI and the Govt., like the Business Correspondent Model and the Banking Facilitator Scheme, only 40% of the population still has bank accounts in rural India. Lack of proper financial inclusion drive may lead to social exclusion. That is a dangerous situation, which can lead to unemploy-ment and increase in organized crimes.
Big financial institutions are yet to discover the huge potential offered by India's rural financial market. There lies the scope of financial inclusion. Technology is another way to encourage financial inclusion thanks to innovative efforts like mobile telephony and bio-metric cards. As for the states, they can intervene in financial inclusion by making statutory enactions, issuing official identity documents for opening accounts, and by undertaking financial inclusion drives. Although MFIs have made revolutionary changes in the lives of millions of poor, their ability to effectively solve the 'last mile' issue has been crippled by regulatory constraints. But RBI's new initiative to permit for profit MFIs to act as BCs may bring us closer to the dream of financial inclusion.
For almost two decades, ESAF has been making continuous efforts in providing credit for various life cycle needs of the poor and marginalized. But we know that mere credit won't serve the purpose. So other than Income Generation Loans ESAF is providing Water and Sanitation Loans, Housing Loans, and Energy Loans. Through our SHG Federation we are organizing Financial Literacy Campaigns and Credit Counselling Programmes. We also give emphasize to credit plus services, like Skill Training, Healthcare Support and Marketing Support, which also play a vital role in financial inclusion. We at ESAF believe that India can achieve the dream of financial inclusion, but only if all the stake holders/ authorities concerned are willing to think out of the box…
K. Paul Thomas
Managing Director, ESAF Microfinance
Micro-finance, macro effects
Close on the heels of the Malegam report, the think tanks of most MFIs were in the busy mode. Discussions on the viability of the sector were going on at various levels and some were even calling for alternative, rather healthier models of microfinance. As for ESAF, most of the recommendations made in the report were routine affairs, something we adhere to since inception. Our experience shows that social oriented microfinance can create the transformation, due to its sheer impact at the personal, community and regional levels.
At the personal level, MFIs often support the members in acquiring personal skills and financial knowledge, which in turn gives them higher social status and independence. As a result, they get better access to education, healthcare, sanitary infrastructure, food supply etc. Many of the sangam members of ESAF are now community leaders, thanks to the skill training given by ESAF Business Development Services team. The fact that almost 189 of our members won Kerala State local body elections held in the state last year stands testimony to my claims.
At the community level, microfinance can create better labour conditions and productivity. This will give higher and more stable income for the community and improve their economic base and resilience. In association with ILO, ESAF has now registered many of its members in the unorganized sector to help them expand their market and enjoy the privileges of Govt schemes. At the regional level microfinance can create more job opportunities, which will help in reducing the migration flows to urban areas. Micro enterprises are the backbone of many economies providing up to three-quarter of the jobs.
Yes, gauging the effect of social impact is an arduous task. ESAF has adopted globally acknowledged tools like PPI (Progress out of Poverty Index) developed by Grameen Foundation, US, to measure the impact. Lack of social-oriented microfinance will result in social disruption. That's why ESAF always relies on financial sustainability based on social commitment.
K. Paul Thomas
Managing Director, ESAF Microfinance
Time to introspect on the social commitment…
At a time when MFIs are facing rough weather due to some unfortunate happenings in Andhra Pradesh, it is important to set the record straight and give emphasis to social obligations of MFIs. In a country where more than 600 million people live under less than $1.50 a day, the importance of social obligation is simply not ignorable. That's why more than 25 million MFI members are the living testimonials of how the sector can transform the social well-being of the poor and that's why Government machinery is considering MFIs as key components for balancing the social and economic environment of the nation.
The success of the sector clearly shows that social commitment is what differentiates MFIs from moneylenders. From ESAF's point of view, more than 3,00,000 of our members are now micro entrepreneurs. This gives them sustainable livelihood means, apart from steady flow of income. No wonder, most of them now have reasonable levels of savings. As a result, their children are now getting good education, housing facilities and clean environment. ESAF is also helping our members in marketing their products through our retail outlets like Swasraya Bazaars and Prerana. Moreover, we have hospitals and medical centers in rural areas to serve the poor. We also give them leadership training as well as vocational training to sharpen their natural talents. The fact that 300 sangam members of ESAF contested in the local body elections in Kerala and 178 of them emerged winners (representing different political parties) is ample testimony to substantiate our claims.
We also educate the clients on financial literacy, because attitude of the clients also determines the success of MFIs in meeting their social objectives. That's how the Najeebas, Pappathis and Zeenaths have shown to the world the power of microfinance. From the organization's side what is required is the highest possible standard of corporate governance and more than a bit of altruism. We are definitely doing our bit and are committed to do even more…
K. Paul Thomas
Microfinance is a Nation Building Sector
Even after 40 years of bank nationalization, the poor don't have avenues to park their money and India boasts of a network of almost 90,000 bank branches in the country! Going by a presentation made by Dr. Subir Gokarn, Deputy Governor, RBI, during his speech on inclusive banking at the SASTRA University, Kumbakonam, 71% of Indians earning less than Rs. 50,000 per annum have no bank accounts. At the same time, 98% of people who have income of more than Rs. 4,00,000 per annum have bank accounts. This clearly shows that being rich and using banks are co-related.
A more close observation of the statistics related to the poor shows that only 3% borrowers who earn less than Rs. 50,000 per annum have loans from banks, in fact 97% of them have borrowed from sources other than banks like moneylenders, friends and relatives. Almost 9 out of 10 heads of expenses of the poor are always unusual and beyond reasons, which do not appear significant to the bankers. Here lies the importance of microfinance, which recognizes the financial needs of the clients, by being neutral to the purpose of the clients' needs. Irrespective of their ability to offer collaterals, social-oriented microfinance meets the needs of the clients and saves them from exorbitant interest rates charged by the usurious moneylenders. ESAF has designed loans that meet the contingency needs of the clients like funerals, illness etc. Comparing to banks, it is easy for microfinance organizations to gather local knowledge about the clients' circumstances. Despite the circumstances, we are always spirited in serving the clients, a line of thinking, which is impossible for formally functioning banks to follow. That's exactly the reason why ESAF has started operations in the rural areas of Maharashtra and Jharkhand, where our staff is required to cover more than 70 kms a day to serve the clients. It's education that builds knowledge, knowledge gives ideas and a sense of belonging, ideas sprout business ventures that can change lives and build a nation…that's how microfinance scripts success stories across the globe…that's what ESAF has been doing all throughout, through Income Generation Loans (for agriculture/poultry farming), Vyapar Vikas Yojana Loans (for starting small-scale businesses), Nirmal Loans (for sanitation), and Jeevandhara Loans (for water). That's why we believe, more than anything else, microfinance is a nation building sector.
K. Paul Thomas
