Micro Credit – the missing link
Ashok 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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