A few years ago, when I was working for an NGO in Bengal, I traveled deep into the state and talked to economically backward people in rural areas and tried to understand the challenges they faced. On one such visit, I met a woman living in a mud house, even cooking while I was talking to her. I tried to make her aware of the benefits of health, hygiene and education, but she was not interested in what I had to share. After a while, I was surprised to ask her why she was not paying attention. While she was cooking, she said her daughter had been looking for some fish curry and rice for the past few days and she could not afford it because she had no money. What she could think of at the time was a new excuse for failing to fulfill her wish again.
This meeting, and my whole experience of seeing the plight of poor people, made me realize that social development can only be pursued once people have the opportunity to build a sustainable livelihood for themselves. With this goal in mind I established the Bandhan two decades ago for the twin and interconnected benefits of women’s empowerment and poverty alleviation.
During these years, other types of financial services have not had as far-reaching an impact in terms of promoting financial inclusion as they have micro credit. The pyramid of access to small, collateral-free loans for financially productive purposes has helped change the lives of millions — especially women. This helped to free them from the clutches of unauthorized moneylenders, who charged high interest rates, seized the collateral in the form of land, gold or other assets and perpetuated the cycle of indebtedness and poverty.
Microfinance Abi offers its advantage, despite many challenges along the way, the industry has not only survived, but has grown significantly. Over the past decade, India’s microfinance industry has grown at a compound annual growth rate of 26%. ₹2.36 trillion. It has helped 50 million economically disadvantaged Indians, 99% of women, to live with dignity and financial independence. If uming thinks that these 50 million people who have taken out a loan to start a small business will give at least one job, this translates to 50 million extra jobs in the country. It creates a ‘network effect’ that has a social impact. Is there any other industry that supports these individuals who are poor, have little or no assets to their names and do not need proper documentation for traditional credit, in the manner of micro credit? It is doubtful.
Sure, there are obstacles along the way. But the inherent resilience of the industry, which draws from the strong demand among grassroots people looking for some handhold to shape their lives, has further strengthened it. Many events over the years – Crisis in Andhra Pradesh in 2010; Demonetization in 2016; Cyclones and floods in various Indian states have failed to inundate the industry, which continues to be an important necessity.
The recommendations of the Malegam Committee, set up by the Reserve Bank of India (RBI), have become the norm and methods such as relying on credit bureau data to assess a borrower’s credit value have greatly helped the industry. Microfinance was identified as playing a key role in the final mile delivery of financial services and hence a banking license was granted to an institution such as Bandhan Bank. Subsequently, eight of the 10 small finance bank licenses granted were also issued to microfinance institutions.
Like everything else in life, the micro credit sector is booming. It is heartening to see the RBI conducting a comprehensive review of the regulatory framework 10 years later, in line with the current realities of the sector.
Going forward, companies engaged in microfinance need to focus on certain tasks for the overall development of the sector. One of them is to promote financial literacy through group meetings of borrowers. Second, organizations should complete their micro credit activities with community development projects and community-connected programs. Third, the prospective borrowers’ tidiness and ability to repay arrears must be accurately assessed. Fourth, loans should be given only for income-generating purposes. Fifth, every microfinance institution should allocate time and resources to build capacity at the grassroots. And last but not least, companies should focus on bringing new-credit customers to the fold, rather than seizing the borrower’s current debt or lending more to her.
The two decades I have spent in development finance have been very fulfilling. There is no better feeling than seeing smiles on the faces of people who have improved their lives by accessing organized-sector finance. But the journey has just begun, and as a country we have a lot to do collectively to bring the large population of non-bank and non-bank Indians into the fold of official financial services.
Chandra Shekhar Ghosh Bandhan Bank Managing Director and Chief Executive Officer.
These are the personal opinions of the author.