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            Micro Credit – the missing linkAshok Khosla
 
            
            Despite 
            considerable policy-level recognition in India of the importance of 
            the micro and small industrial sectors, formal mechanisms to provide 
            financial support to it are quite limited.  Even where such supports 
            exist, they are further limited in scope to financing very 
            traditional economic activities such as purchase of cattle for dairy 
            or traction, tailoring, retailing and equipment servicing.  Most of 
            these activities offer almost no possibility for generating 
            surpluses, savings or investments in improved productivity of better 
            income opportunities.   
            On the 
            other hand, technology-based micro-industries, being unfamiliar to 
            most lending agencies, find it far more difficult to raise 
            financing, even though they are manifestly more profitable, less 
            risky and better in tune with the needs of an economy pursuing 
            sustainable development.   
            
            The large industrial enterprise 
            (with capital investment over 10 crores) has access to an extensive 
            pool of financial resources.  The commercial banks alone lend more 
            than Rs. 160,000 crores ($ 40 billion).  The other sources, 
            including financial institutions like IDBI and ICICI bring the total 
            equity and debt financing available to the large industrial sector 
            to the region of Rs. 300,000 crores each year.     
            
            Small and medium enterprises 
            (which have a capital investment of 20 lakhs to 10 crores) are able 
            annually to raise financing to the order of Rs. 40,000 crores, most 
            of it going to the larger firms in this group.  Most of this money 
            comes from banks in fulfilment of certain lending norms to which 
            they are subject. 
            At the 
            other end of the spectrum, 
            low-income individual or 
            household industries —  
            with capital investments below Rs. 10,000 — are eligible for 
            numerous loans for amounts upto Rs. 10,000. A few lending programmes 
            even have limits of up to Rs. 1 lakh. The term “loan” in this 
            context is a bit of a euphemism because most of the borrowers – and 
            lenders — don’t expect them to be paid back.  They are loans given 
            out by government agencies and nationalised banks which are 
            “refinanced” (essentially reimbursed) by various government schemes 
            such as the Integrated Rural Development Programme, the Prime 
            Minister’s Rozgar Yojana (employment plan) and various Scheduled 
            Caste and Scheduled Tribe funds.  The total funds sanctioned under 
            the various schemes of government add up to several tens of thousand 
            crores (i.e., several tens of billion dollars).    
            The 
            second set of sources of micro credit in India are in the informal 
            sector.  These include moneylenders (whose interest rates can be as 
            high as 200% per year), middle-men, “chit funds” that pool 
            contributions from members, and family and friends.  Loans from 
            moneylenders and middle-men are usually exorbitantly expensive and 
            carry the risk of creating a state of permanent bondage for the 
            borrower.  In any case, no financially viable production capacity 
            can be built up while servicing debt under such conditions. 
            The 
            third source, which is gradually growing, is from formal 
            institutions such as banks, cooperatives, and NGO credit facilities. 
            These include, for example, the Self-Employed Womens Association, 
            Working Women’s Forum, various Grameen banks and Self-help Groups 
            providing credit to the very poor, particularly to women and the 
            marginalised.  All of these have had an unquestionably deep impact 
            on the lives of people.  Literally millions of people have moved 
            from survival to subsistence, which is no mean achievement.  
             
            
            However, it is difficult with such small capital to generate the 
            surpluses needed to invest in improved productivity and continuing 
            rise in earning power that is the hallmark of genuine economic 
            development.  For this, somewhat larger enterprises are needed: 
            micro enterprises. 
            The
            
            micro enterprise sector, 
            as defined here (Rs 10,000 to Rs 10) gets, collectively throughout 
            the country, well below Rs. 100 crores per year.  There exist very 
            few financing systems for this sector, the largest ones being tiny 
            in comparison with the others. 
            These 
            include numerous mainstream financial institutions, including the 
            rural branches of nationalised commercial banks numbering in 
            the hundreds of thousands, Regional Rural Banks in the 
            hundreds, Local Area Banks in the dozens and Co-operative Banks in 
            the thousands – all with mandates to service the rural economy. 
            These institutions have a tremendous physical reach.  The record of 
            these institutions in providing finance for investment in micro 
            industries is, however, very poor. 
            The 
            main public sector agencies mandated to promote small and micro 
            enterprises work through intermediaries in the formal sector – 
            primarily by refinancing commercial banks or by lending at 
            concessional rates of interest to other institutions for on-lending 
            purposes.  The largest of these, NABARD, SIDBI, RMK and FWWB started 
            their micro enterprise support programmes around 1992.  Combined, 
            they have been able to facilitate delivery of micro credit amounting 
            to well under Rs. 100 crores – over the entire six year period. 
            It is 
            to cater to this critically important sector that Development 
            Alternatives, together with several other agencies, is promoting the 
            India Micro Enterprises Development Fund.  
            
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