Micro Finance - An Attractive Business Proposition
The booming economy of India coupled with a buoyant financial service sector has not penetrated to the rural segment as expected. Recent announcement from Finance ministry says that 73% of the Indian families have not availed any kind of services from banks. Further, 51.4% of families never availed any financial services from banks or private lenders and 21% of families availed loans from private money lenders. This shows the need of Micro Finance institutions in India. MicroFinance broadly refers to a movement that envisions "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers"1. Thus, Micro-finance spreads its shadow across the group of people who are still not availed the benefit of global financial progress. Micro finance targets poor people who are also talented entrepreneurs. Thus, Microfinance means building financial systems that serve the poor Today, lot of initiatives towards promoting micro-finance program is evidenced world over. The Consultative Group to Assist the Poor(CGAP) is one of the leading consortium which works towards expanding financial services access to poor people. But still, poor people are dependent on informal economy for their ventures, dwellings and other financial requirement. For poor Loans are inaccessible, Insurance is unknown and Savings - never done. With a whopping 400 odd million people spread across 6 odd million villages in India signifies the need of professionally managed Micro-Finance institutions in India. Historically, credit to the poor was viewed as a government program that required large amounts of subsidy. A long evolution in the financial sector has seen a change in the above trend. Three major events in the post independence era have contributed to the said change. The first of these changes was the nationalization of Banks in the year 1969 which forced the commercial banks to open rural branches thus enabling easy access of formal finance to rural India, whose majority comprises of the poor people,. The second one was the introduction of Integrated Rural Development Policy (IRDP) in the year 1978. This policy was regarded as one of the largest poverty alleviation programs in the world. The recent major contribution was the liberalization of the Indian financial sector in the early 1990s. This policy gains significance in the light that the interest rate controls for the poor was abolished thus enabling NABARD to transform the microfinance program to a full fledged program. Apart from these Government bodies, many Self Help Groups (SHG), Non Governmental Organization (NGO)s are moving towards Micro Financing Institutions(MFI). In one of the recent study, it was found that India is leading in spreading micro financial services where 188 million accounts were opened constituting 18% of the national population. Most risky factor for entering into micro finance is the fear of increasing Non Performing Asset (NPA). Further, the cost to handle the remotely located poor individual's financial needs is more as amount of financial services delivered to poor is less compared to urban financing requirements. Delivering wide range of financial products with single agency will help reduce the cost. Further the interest rate for these operations will be ranging between 3% and 5% pm, which is high compared to the rate in urban areas. This will meet the cost risk associated with micro financing. Along with this, revolutionary Individual Banking Programmes have entered into Micro Finance sector. ICICI, the largest private sector bank in India has entered into the micro finance business. With its vast experience in the financial market coupled with innovative business models and technology, it is already on its path to success with only 0.5% NPA in this business. ICICI, outsourced the rural finance operations to existing SHGs and Trusts which are into rural development. One of ICICI's representative will be coordinating with these institution. One Coordinator manages 6 promoters where each promoter will be having an average of 20 SHGs. Here, banks main role is identify the promoters/partners, designing system, lending funds, building funds and monitoring. MFI / Promoter's role is to Social mobilization, Training and Credit enhancements. Currently ICICI is having 30 plus micro-finance institutions including BASIX, PSS, SHARE, Spandana, Nirantara etc. In four years of its operation I'e from 2002-2006,micro-finance portfolio grown to $600 million comprising of 3 mn customers. With its "10 by 10 plan" bank plans to partner with about 200 Microfinance Institutions (MFIs) and expand its reach into over 600 districts in India by 2010. Bank is targeting for 25 million client base by 2010, by which total asset outstanding will grown USD10 bn. ICICI's microfinance portfolio is growing faster than others operations of bank. This justifies the hypothesis Micro Finance is moving towards profitability from Charity or social responsibility. The state and central governments have an important role to play in ensuring the growth and improvement of microfinance. Firstly, the service provider should be left to set interest rates, not the government. But Government should frame a policies to ensure transparency and full disclosure of rates and charges before lending. A proper regulatory framework helps in reducing undue advantages by service providers to needy poor. Furthermore, government regulators should set clear criteria for allowing MFIs to mobilize savings for on-lending to the poor; this would allow for a large measure of financial independence amongst well-managed MFIs. Each Indian state could consider forming a multi-party working group to meet with microfinance leaders and have a dialogue with them about how the policy environment could be made more supportive and to clear up misperceptions. Some valuable conclusions can be drawn from the successful operation of micro finance business. First, Structured approach in Micro finance brings down the risk associated with lending to poor. Secondly, micro finance institutions should not only lend, but they should also provide bouquet of services such as Credit, Savings, Insurance, Business Advise etc. Thus, Microfinance is one of the key growing sectors in financial services. This opportunity has a dual folded benefit - on one side social up-liftment by empowering the poor, especially the women and on the other hand increasing the profitability for the MFIs. 1. Robert Peck Christen, Richard Rosenberg & Veena Jayadeva. Financial institutions with a double-bottom line: implications for the future of microfinance. CGAP Occasional Paper, July 2004, pp. 2-3. Author Dr.Rakesh Ainapur , Education : M.Com., MBA(Finance), Ph.D (Supply Chain Management), Experience : 15 Years, Area : Finance and ERP Consulting, Current Designation : AGM - Business Application , Organization : JSoft Solutions - JSW Group Company. can be contacted at rainapur24@gmail.com
