MICROCAPITAL STORY: Indian Politician Sharad Joshi Questions Track Record of NABARD and Microfinance in General

Sharad Joshi, founder of Shetkari Sanghatana (Farmers Movement) and Member of Rajya Sabha (the upper house of the Indian Parliament), questions the recent emphasis on microfinance by the Indian government. He contends that microfinance has not been a great success in India and that increasing government encouragement of microfinance is not justified. His words follow:

“Why this Obsession with Microfinance?

“1. Since the mid-1970s, the microfinance in Bangladesh is claimed as a great success. Muhammud Yunus has received many accolades and numerous international awards for his accomplishment, so much so that many believe that microfinance as institutions began only in the 1970s and that too only in Bangladesh. In fact, there have been earlier acclaimed successes. The Village Banking Movement of Wilhelm Reiffeisen in Germany and the Caisse Populaire of Alphonse Desjardins in France were amongst the notable instances where considerable improvement was brought about in the condition of the extremely disadvantaged people.

“2. The world over, a microfinance institution (MFI) is evaluated on the basis of five criteria:
(a) Has there been a significant improvement in the living standards of the people targeted by MFI?
(b) Has the MFI developed into a viable and sustainable institution?
(c) Does the MFI charge reasonable rates of interest?
(d) Does the MFI avoid coercive methods in recovery of loans?
(e) Is the element of governmental and/or non-governmental subsidy absent?

“3. In India, forming microfinance institutions (MFIs) and self help groups (SHGs) has become a favourite hobbyhorse of the governmental organisations (GOs) and non-governmental organisations (NGOs). Most of the MFIs and SHGs fail on all the aforementioned criteria. So far, there have been very few reliable studies that throw light on the change in the living standards of the people targeted by MFIs and SHGs. The viability and sustainability of MFIs and SHGs is still a question mark. Almost all MFIs and SHGs are beneficiaries of governmental and/or non-governmental subsidies. Most of them charge rates of interest as high as 36 per cent per annum. Most use coercive methods for recovery that had driven, in some cases, loanees to suicide. Further, the choice of the loanees and the loan products is far from transparent. It is believed that, in most of the cases, the loans given will become non-performing assets.

“4. The bureaucrats and their political bosses in the government are, however, bubbling with enthusiasm as regards the microfinance activity as if that will be the panacea for all the problems of rural credit and poverty. The National Bank for Agriculture and Rural Development (Nabard) is planning to start microfinance institutions to take financing to the poorest of the poor – not only in rural areas but also in urban areas. The venture will be launched in partnership with commercial banks. The Nabard intends to put 51% equity in the proposed MFIs and its partner commercial bank 49% equity. The Nabard will also launch a Financial Advisory Unit to help bring down the high incidence of farmers’ suicides. The Government is also proposing legislation on microfinance. The expectation is that the bill, as and when approved by Parliament, will usher in a legal framework that will regulate the MFIs to ensure fair, equitable, prudent and ethical practices. Under the Bill, Nabard, which is the regulator for the formal rural credit sector [rural cooperative banks (RCBs) and regional rural banks (RRBs)] for the past 25 years, will also assume responsibilities as regulator for all MFIs in the country. It is quite clear that the intention of the Government is to hand over the MFIs to those who have already failed in ensuring successful operations of the formal rural credit sector.”

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