Macro View on Microfinance

Microfinance in India

Issues, Problems and Prospects: A Critical Review of Literature

SL Shetty

Academic Foundation, New Delhi

pp.658. Price Rs.1,295

Historically, the State has been seized of the issue of access to financial services to the poor. A review of the initiatives of the past century, shows that the concern about making financial services, to the disadvantaged sections of the society being articulated largely by the State. These articulations can be found in the form of

[a] seeking inputs for policy making by setting up study groups, committees, commissions, working groups and the like;

[b] institutional interventions in setting up new forms of organisations and new initiatives in existing organisations

[c] intervention in the operations of institutions by directing them to serve a section of the society through quotas, orders, notifications, schemes and subsidies.

While these initiatives were happening, the State was never satisfied about the penetration of these services and was looking to re-invent solutions to the problem. However, what was striking in the century long interventions were that the initiatives came from the state in state owned, state controlled organisations. Till recently there was an absence of the private sector in this space. Thus most solutions were supply side, welfarist solutions. Not many of them were market-based. The history of intervention in the financial services targeted at the poor started with the active participation of the state. A wave of initiatives through state partnered and state promoted co-operatives followed. This was followed by nationalization of banks, establishing Regional Rural Banks. On the policy side there were targets for flow of financial services to certain sections of the economy.

In the late 1990s the NGO sector actively embraced the agenda of financial inclusion. These initiatives proved that market based solutions could be offered in financial inclusion particularly through the provision of microcredit services on commercially viable terms. This demonstration led to an increased interest of the commercial world in providing services to the poor. This market based approach also coincided with the entire market paradigm starting to consider the poor as viable consumers of various services an “opportunity” discovered by Prof.CK Prahalad as a Fortune at the Bottom of the Pyramid.

With the excitement of newer forms of market-based interventions in the area of microfinance, there was an increased attention from researchers and academics, as also from the popular press on this topic. Much was written about how microfinance offered a silver bullet in doing good and doing well at the same time. The attention that microfinance got and the writing that followed was disproportionately higher than the impacts it was making. Shetty’s book is to be seen in this context.

The book is a scholarly piece of work and personifies Shetty who is known for his meticulousness, dedication, eye for detail and discipline. As I was reading the book I kept trying to look for some literature that I was familiar with, that could have missed his attention but have to happily admit that I failed. Shetty and his team trudge through reams of material, digest, classify, organize and critique it in a readable manner. The book is rich with data. It is very remarkable as it offers a lazy researcher a complete guide to the literature, significant amounts of secondary data and leads on where one go for more, making it a researchers’ delight.

The book is organized into 9 parts. I would hesitate to call them chapters because each part is not only a book in itself, but is also significant in its own way.

The first part deals with the theory - locating the “market” for microfinance. It talks about market imperfections, market failures and how they impact the poor, with due focus on women, who almost define microfinance in the Indian context. The theoretical elements dealt by Shetty, shows the importance of microfinance as a concept. In focusing on the poor, microfinance started at the far end of the poor and the excluded and tried to provide a solution for the requirements of financial services. Microfinance was not only correcting and intervening in what was identified as market failure [the finance for the poor] but expanding it to the clients who were not traditionally considered by the state as a significant group [the women, who usually were subsumed under the category of poor]. The dual disadvantage of being poor and a woman is brought out brilliantly by Ela Bhatt in her professional autobiography “We are poor, but so many”. Shetty captures the essence of her argument in this part.

Most of us working in the field of rural finance succumb to one stereotyping, and Shetty is no exception. Scholars working on the vexatious issue of finance for the poor, use two significant pieces of data. One is data on agriculture and the other is the data on rural areas, falling into the trap of equating rural/agricultural finance with finance to the poor. It might not be off the mark considering that a significant amount of poverty is in that broad segmentation, but it ignores a significant portion of the urban poor from the discussion leaving the urban poor off the policy radar. There is no other way of carrying this discussion forward as the availability and organization of data and literature is on a similar pattern. From Shetty’s discussion of the background another element comes out: that we do not have data ordered on gender.

In the next part Shetty deals with the origin of microfinance as a concept and details out the players. Here he follows an interesting interplay between [a] theoretical definitions, [b] discussions of the concept, [c] the institutional responses and their redefinitions through notifications, product developments, partnerships and linkages and [d] the happenings around the world that seem to provide a greater meaning and prominence to the concept of microfinance. This is an endearing approach that helps locate the evolution of microfinance amidst much action across the world. Shetty deals with the multiple definitions by getting the context that evolved the definitions and how contexts could move and change. In addition, the players themselves have re-defined their role vis-à-vis the clients. While this part rightly has minimal data, it has examples demonstrating the evolution of the current concept of microfinance.

Part 3 talks about three different models of microfinance – the NGO led model, models run as government programs and bank led models. Each of these models are discussed in their emerging context and the regulatory framework. In a matter of a few pages Shetty is able to cover the setting for microfinance looking at its genealogy, geography and orientation. Having laid out the global landscape for microfinance, he focuses on India. This part deals with the evolution of microfinance in India and sets the story of microfinance, dating back to the establishment of Sewa Bank. This chapter also shows the subtle shift in Shetty’s orientation. While the first background chapter talks about the entire financial sector for the poor, in this chapter the focus is sharply on what is commonly understood as microfinance. There is no discussion on agriculture/rural. It discusses the initiatives outside of the government programs [except for the linkage with NABARD on the SHG-Bank Linkage programmes]. This chapter breaks away from the supply-side State sponsored models of inclusion to the model that was proposed and implemented by others, starting with NGOs and later by the private players. In highlighting the initiatives Shetty brings out the data on growth, the subtle difference in approach and also how it pans out at scale. Part 5 is a researchers’ delight. It provides all the data that one could have had about the aspects discussed in Part 4. It follows the operational models discussed earlier and points to not only the data sources but also brings in significant details from specific studies undertaken in this field.

Having looked at the evolution and the meteoric growth of microfinance in India in particular, it then becomes important to ask the question as to whether there was a regulatory framework under which these activities were being undertaken. The answer for that is yes and no. While the microfinance was being done in the available regulatory framework, it was probably an inappropriate framework for scaling. Shetty examines this from a chronological perspective as well as from the perspective of interest groups. While this is in itself a brilliant work, it could have been richer if Shetty had focused a bit on the policy towards microfinance. There was a churn on whether there should be a bill or not, and whether microfinance should fall under central or state government’s purview and the role of the Reserve Bank of India [RBI] etc. On the sidelines there were policy guidelines being issued both by the finance ministry as well as the RBI under the extant legislations. These dictated how the sector shaped up. Shetty focuses only on the details of the regulations, the issues that were debated and the fall-outs. It is surprising given that in the rest of the book he has examined various layers of the issue. Regulation has multiple layers of policy making, notifications, orders and advisories. The regulatory machinery did not have a uni-focus on law making during the period under question.

The next three parts look at what microfinance means to the poor - a detailed look at impact studies and the methodological issues surrounding them; the emerging debate on the critical issues pertaining to microfinance; and a concluding set of recommendations.

Shetty’s book is not easy to review because of the depth and width of its coverage. It is a book that can easily be admired, and referred to and will serve as resource material for a long time to come. It brings in divergent view-points, data and discussions. Shetty largely remains in the background, in his usual understated way. However, this is a book that should form a necessary reference material to anybody interested in microfinance and the larger issue of financial inclusion.

As we close, we need to engage in a lingering question. Did the new models of microfinance replace other more difficult and exploitative sources of finance such as the moneylender? Or did the women centered microfinance include the totally excluded segment into the formal financial sector? It is most likely that even the moneylenders did not consider poor women as a market segment. Therefore the importance of microfinance was in starting at the far end of exclusion if we were to take a welfarist point of view, or in “expanding” to create a new unexplored market segment if we were to take a Prahaladian point of view.

We should be thankful to Shetty for undertaking this rather difficult task and bringing out the output in such an easy and readable and referable format.