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Excluding the Poor from Credit
Andhra Pradesh and Telangana have become no-go areas for microfinance institutions due to the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Ordinance, 2010 and, later, the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act, 2010. Contrary to their laudable objectives, these legislations have neither served public interest nor improved access to finance for the underprivileged sections. Instead, access to finance has contracted, and financial distress and fall in consumption levels of underprivileged households have increased. The law has hit the poor and the marginalised, by constricting their choices in accessing alternate modes of non-collateralised credit.
Microfinance refers to small-scale financial services for both credit and deposits, provided to people who farm, fish, herd, operate small or micro enterprises, and to other individuals and local groups in developing countries, in both urban and rural areas (Robinson 1998). Microfinance in India, as in the rest of the world, exists as formal financial institutions are unable to reach borrowers whose credit needs are small and sporadic, and are unable to cross the psychological, geographical and institutional chasm that separates less-endowed borrowers from the formal banking sector. This applies equally to the joint liability group (JLG) model of microfinance institutions (MFIs) and the self-help group (SHG)-bank linkage model.
Since 2005, and more so after the Committee on Financial Inclusion (GoI 2008) made its recommendations in January 2008, both the central government and the Reserve Bank of India (RBI) have made financial inclusion the bedrock of their policy interventions. But, the thrust of financial inclusion efforts has been more on the deposit side, mainly by encouraging the opening of bank accounts. On the credit front, the polity has focused on subsidised credit and interest subvention rather than universalising credit access. The absence of focus on the credit side is clearly evidenced by the National Sample Survey Office’s (NSSO) 70th round survey. The results of the survey show that non-institutional agencies played a major role in advancing credit to households, particularly in rural India. The non-institutional agencies had advanced credit to 19% of rural households, while institutional sources had advanced credit to 17% of households. In urban India, the picture is slightly different; the institutional agencies appear to have played a major role, advancing credit to 15% of households against 10% by non-institutional agencies (GoI 2014). It is precisely due to these reasons of the prevalence of non-institutional agencies dispensing credit at exorbitant interest rates that a space exists for the microfinance sector to function and grow.
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