In 1995, Vijay Mahajan was knocking on the doors of several public financial institutions with a Rs.100 crore investment proposal to set up a bank that would focus on people not covered by formal banking channels. His proposal was aimed at creating livelihood and employment opportunities for the poor. He offered to put his savings of about Rs.8 lakh in the venture, but expected financial institutions to help create an entity like ICICI, Housing Development Finance Corp. Ltd and Gruh Finance Ltd, owned widely and run by professionals.
Unfortunately, there were few takers for Mahajan’s proposal. He finally set up a non-banking finance company with capital of about Rs.11 lakh and soft loans from the Ford Foundation and Swiss Agency for Development and Cooperation. The first commercial-private sector-microfinance institution started in 1997.
In the 15 years since, much has changed in microfinance, which has drawn more attention than any other initiative aimed at the poor. Microfinance represented the first effort to find solutions to the problems of the poor in a commercial framework. Interest rates were not a holy cow; the poor were customers rather than beneficiaries. The talk was about scale and sustainability—the language of commerce. All other interventions aimed at the poor until then had been state-driven and welfare-oriented. For the first time, words like client acquisition, ticket size, portfolio quality, securitization, private placement, strategic investments, valuation, among others, were used in a business meant exclusively for the poor. For the first time, the private sector sensed the opportunity of a vast market among the poor that was eager to access financial services.
Like anything that grows rapidly and stumbles, microfinance too hit the skids. Mahajan’s BASIX, for one, has been a victim of the collateral damage from the turmoil that has roiled the microfinance sector in the past two years. So, does microfinance still hold out hope? Is there a future for financial services for the poor? Is there a future for microfinance institutions if the sector is rebuilt?
It appears that the state-led financial inclusion programme would follow the path of earlier initiatives. While the current set of state initiatives are significantly different from earlier ones, the approach is the same. The difference is in the methods. The current methods use technology; built on the benefits of computerization and machine-driven outreach. They rely on transmission of benefits (subsidies, welfare, wage payments) through the bank account. The old methods of subventions and grants continue in a new—and improved—design. Yet, the approach is similar to the earlier one—it disregards the business case for these initiatives. Any which way, it is impossible to deliver a comprehensive suite of technology-driven financial services to the poor with politically sensitive interest rates, write-offs and waivers. Reaching the poor costs money. Nobody knows how these costs could be met at scale.
What about private sector initiatives in microfinance? In a seminal article titled “Developmental Sequence of Small Groups” (1965 ), Bruce W. Tuckman identified four stages in building a high-performing team. The sequence was: (a) forming (b) storming (c) norming and (d) performing. We look at the microfinance sector from his lens. The stage from 1997 to 2004 was “forming”. In 2006, it appeared that “storming” happened when the Andhra Pradesh government came down on some MFIs. With a self-imposed code of conduct, it appeared that the stage of “norming” was quickly passed to the “performing” stage. But that was deceptive. What appeared to be “performing” was still in a stage of “forming”. The storming happened in 2010. With recommendations of the Malegam Committee and the Reserve Bank of India notification on the MFIs, there is legal “norming”. The sector is to perform. Perform as a mature player, showing restraint, subjecting itself to norms.
In the churn, organizations that did not deserve to survive have lived on, and some that deserved to exist are shaky. From a larger perspective, it is time for a mature and patient private sector to fill the increasing gaps that the welfarist state will leave. So the mature, understated, performing microfinance is about to come. The next decade might well be of private sector showing the state how to deal with the poor.
What would have happened if the financial sector had put faith in Mahajan and created a large, widely held bank for inclusive finance? The trajectory would have been significantly different, with a mature state, a forward-looking policy and a fulfilled and contented Mahajan. But that would be leap-frogging adolescence to maturity, never an easy call.
M.S. Sriram is visiting faculty at the Indian Institute of Management, Bangalore.