The microfinance boom

The microfinance boom

India’s financial sector could be on the cusp of a major power shift.

A Wall Street Journal report published by this newspaper on Tuesday cites a study by a New Delhi non-profit that says the number of clients serviced by microfinance outfits soared 60% in the 12 months to 31 March, even as the formal banking sector increased the number of poor customers they serve by a more modest 15%.

N. Srinivasan, the author of the report, also made the rather stunning forecast that microfinanciers are likely to lend more money than the formal banking sector a few years down the line.

This report has been released in the same week when the Reserve Bank of India once again noted that growth in bank finance from the beginning of the current fiscal year has been anaemic. Much of the worries about low credit growth are focused on the needs of companies. But it now seems that the poor have a more benign lending market than companies have, at least as far as lending volumes go.

This newspaper has been sceptical about some of the more grand claims about what microfinance can do as a panacea for mass poverty. We continue to believe that the best way out of mass poverty is to shift people out of low-productivity jobs (mainly in the farm sector) and into more productive jobs in modern industry and services. That process will be built on capital investment, technology, large projects and intelligent use of national savings.

But microfinance has a big role to play in the long transition, since it gives the poor and vulnerable a chance to smoothen their cash flows and invest in their small enterprises. Large banks find it difficult to service this clientele profitably, not necessarily because they do not want to. A useful model then would be for large banks and microfinanciers to work together, with the former having access to cheap funds and the latter having a better ability to assess the risks involved in lending to the neighbourhood artisan.

There have also been fears that the rush into microfinance could lead to a bubble that will eventually hurt the poor who are being enticed with loans. It is too early to say what could happen, but there is undoubtedly a potential downside to the current micro-lending boom.

Can microfinance effectively eradicate poverty? Tell us at views@livemint com