Over these years, no other form of financial services has had the kind of far-reaching impact, in terms of fostering financial inclusion, as microcredit has.
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Access to small, collateral-free loans for economically productive purposes has helped transform the lives of millions at the bottom-of-the-pyramid—especially women. It has helped free them from the clutches of informal moneylenders who would charge exorbitant rates of interest, usurp collateral in the form of land, gold or other assets, and perpetuate a cycle of indebtedness and poverty.
That microfinance ably serves its purpose is evident from the fact that despite several challenges along the way, the industry has not only survived, but grown significantly. Over the past decade, India’s microfinance industry has grown at a compound annual growth rate of 26% to reach ₹2.36 trillion.
It has helped 50 million economically vulnerable Indians, 99% of them women, live a life of dignity and financial independence. Assuming that these 50 million people who took a loan to start a small business employed at least one other person, it translates into 50 million additional jobs in the country.
This creates a ‘network effect’ that has a social impact at scale. Is there any other industry that could have supported these people—who are poor, have little or no assets to their names, and no proper documentation needed for traditional credit—in the manner that microcredit did? It’s doubtful.
Sure, there have been hurdles along the way. But the industry’s inherent resilience, which it draws from robust demand among people at the grassroots looking for some handholding to shape their lives, has made it stronger. Several events over the years—a crisis in Andhra Pradesh in 2010; demonetization in 2016; cyclones and floods in various Indian states—have failed to dent the industry, which continues to serve a vital need.
Recommendations of the Malegam Committee constituted by the Reserve Bank of India (RBI), which became regulations, and practices such as relying on credit bureau data to assess a borrower’s creditworthiness have helped the industry immensely. The vital role that microfinance plays in the last-mile delivery of financial services was acknowledged, and that is why an institution like Bandhan Bank was given a banking licence. Subsequently, eight out of the 10 small finance bank licences granted were also given to microfinance institutions.
Like everything else in life, the microcredit sector is evolving. It is indeed heartening to note that RBI has sought to undertake a comprehensive review of the sector again, after 10 years, to better align the regulatory framework with the sector’s current realities.
Going forward, entities engaged in microfinance need to focus on a few specific tasks for the holistic development of the sector. One of them is to promote financial literacy through group meetings of borrowers. Second, organizations should complement their microcredit operations with social development projects and community-connect initiatives. Third, prospective borrowers’ indebtedness and ability to repay dues should be assessed properly. Fourth, loans must be given only for income-generation purposes. Fifth, every microfinance organization should devote time and resources for capacity building at the grassroots. And last but not least, rather than focusing on taking over the existing debt of a borrower, or lending to her further, institutions should focus on bringing new-to-credit customers into the fold.
There is no better feeling than to see smiles on the faces of people whose lives have been improved by access to organized-sector finance. But the journey has only just begun, and there is much more that we, as a nation, collectively need to do in order to bring a vast population of unbanked and underbanked Indians into the fold of formal financial services.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.