MICRO FINANCE AND PUBLIC SECTOR BANKS

The concept of microfinance is finally catching up. Quite a few establishments have come up in the country. But a lot more needs to be done. For the reason that main line banking failed miserably in this vital sector.

The failure is there for every one to see. Borrowers wait in long ques in front of micro finance centres for getting loans as small as Rs 5000. The near by bank branch too is doing brisk business. But for a different set of customers. These small loans and their borrowers are not for the banks.

There is no doubt the small borrowers need to be financed. This segment now depends solely on private financiers called blade companies who charge exorbitant interest. One tragic fallout of this high interest rate is that the borrowers fail to generate enough income to repay the loans allowing the financier to step in and confiscate their possessions. Borrowers stand to lose whatever they have whether it is the small piece of land or the utensils . Many are forced to work as bonded labour till the debt is repaid which seldom happens.

It is apt to remember here that one of the motives for nationalizing banks was to stop this evil. So it is not the lack of motives or policy directives which is holding back the banks. In fact government repeat the guidelines at regular intervals and banks claim in reply that they are taking many steps in this direction. And banks are not lying. They are trying and failing continuously in this sector.

This article is an attempt to explore the real reasons for the repeated failures of banks in meeting the small but crucial financial needs of the poor people of the country.

Recovery is not the problem. Studies have repeatedly highlighted the excellent recovery percentage of small loans especially that of farmers and rural folks. Willful default is unheard of in this segment . Rural folks treat loan default as a shame. Even in the rare cases of default the bank can fall back on the insurance. And amount at risk is negligible when compared to any other sector. So it is not recovery worries which are holding the banks back.

Profitability is not the problem . There is a popular belief that banks are lending to the poor people at a loss. In fact the low rate is dictated by the government, loss due to which is borne by the government thru various means. Of course the government can do a lot more like tax deduction, lower capital adequacy requirements etc for lending to this segment . And the striking anomaly is that the poor people never asked for these subsidies. What they need is quick and easy loans at affordable interest rate.

Inadequate understanding of the ground reality is a problem. Yes the main problem is that banks do not care to understand the logistics of rural lending.

Documentation is a problem. Rural folks do not like paper work . They do not understand why banks ask them to put their finger prints on numerous sheets of paper filled with closely typed or printed lines in an unknown language which the bank call by names like application, agreement. pronote etc. In fact they are afraid of such documents based on which the local money lender took away their land and belongings in the not too distant past.

Procedure is a problem. Rural borrower fails to understand why he has to make so many visits to get a loan. Starting with a visit to the bank manager in his cabin followed by half a dozen visits to his office during which time the clerk asks for various documents and details.

Follow up is a problem. The small farmer fails to understand why the bank did not ask for the money when he sold his crops and instead sent him a letter when all the money was spent on exigencies. He does not understand why the bank refused to take his offer to pay back the amount during the next harvest but instead talked to him in jargons like non performing asset , revenue recovery steps etc.

So if the banks are desirous of making inroads into rural lending they can try the following steps

Lend personal. Meet the borrower. Study what he does for a living. Assess his needs. See if he can generate adequate income. Lend the money in cash on the spot. Take a half page letter in vernacular from the borrower as document.

Lend verbal. Tell him when he has to repay the loan and how. Tell the source from which he is expected to make the payment . Fix instalments based on the cash generation.

Recover personal. Visit the borrower and collect the dues when he has the cash. If he is out of cash for any genuine reason allow time till the next harvest.

Can this fit into banking ? Yes . With a little modifications to the rules. Like exclude small lending say upto Rs 10,000 from asset classification norms. Relax appraisal and

disbursement norms. Take a certificate that the lending officer is personally satisfied.

And of course provide trained dedicated officers for the job.

TO EXCEL IN MICROFINANCE LEND LIKE THE MONEY LENDER.