Even though the government has tried unsuccessfully to pass a Microfinance Bill to provide a regulatory framework for the sector, so far no national policy on financial inclusion has been formulated like the UK government has. Don't you think in the present times, when financial markets can so deeply affect the economy and the workers, financial inclusion should be a matter of public policy?

It should be. Especially in the context of Indian situation, unless governed by an Act matters will not move. In a bureaucratic setup, directions are required.  Efforts are on for a regulatory body .The government is researching various issues like pricing controls etc, to understand the realities regarding regulatory controls and relaxations.

We do not require stringent guidelines. What we need are broad guidelines that do not interfere with day to day operations. Over 75 percent of our financial organizations are public sector. Most public sector undertakings are  bound by some kind of fear. Regulatory control will help bring in instructions and accountability.  As part of financial inclusion, the government has given clearance that by 2012 all villages with population of 2000 and more will have a bank branch. Now with information and communication technology (ICT) solutions, it is very easy .The situation is forcing the changes. It’s all coming.

The National Commission for Enterprises in the Unorganized Sector has made recommendations for helping workers in informal economy. Since microfinance institutions (MFIs) also target the same set of workers, don’t you think our understanding of the informal economy should be combined in thinking through a comprehensive 'economic inclusion' policy for the unorganized sector workers?

Yes. A comprehensive  structure is required for their inclusion.  Integrated and coordinated efforts will also help bring down costs for microfinance institutions. Otherwise there will be duplication of efforts For example, if I am an MFI for an organisation representing construction workers, I can easily open the bank accounts of its members and provide them finance services on the basis of a soft copy containing their data provided to me. Coordination is essential to speed up work without duplication. Financing people from the weaker sections, who don’t meet know-your-customers (KYC) norms and have an outstanding loan of less than Rs 50,000 each is our priority.

Why are public-sector banks not able to reach the financially excluded people despite their reach through regional rural banks (RRBs), at least in opening bank accounts that will allow savings? Why should there be a separate set of financial intermediaries in the form of microfinance institutions for those who are currently excluded from the formal financial system?

We tried this on a pilot basis. The government had asked us to certify that all villages were covered in a particular district. We opened accounts and gave them passbooks. After one year when the RBI did its service study, we discovered that all accounts had zero balance. The reason being that to deposit an amount of Rs 100 the villager has to travel a distance of  20-30 kms to the bank branch.

We realized that unless the distance is 2-3 kms, it will not work. Merely opening an account will not suffice.  Interface with the villager is very important.  Now due to ICT Solutions, business correspondents, MFI and NGO involvement, it is possible. Through these models they can open accounts, transact, remit, take a small loan of  Rs 2000-3000  initially without going to the branch. Financing through the MFI is safest. Their method of credit delivery and recovery is fantastic. They appoint a local person on a salary of Rs 3000-4000. Whereas our freelance person will cost us Rs 50000-60000 and still may not be able to look after the rural customers.

How is the Self-Help Groups (SHGs)-Bank-Linkage Program performing? Are there any constraints?
No. There are no constraints. This is the best model. It is a democratic way of lending. We do not dictate. About 10-20 persons form a homogeneous self-help group (SHG).  They start the group with their savings and we initially lend them Rs 50,000.  We give them 36 months for repayment and charge them interest at the rate of 10 percent. They further lend the same money at 24 percent interest to their members. If the demand is more they increase the interest rate. The margin remains with them and adds up to their capital.

In Hyderabad we financed one million SHGs. SBI alone has lent Rs 2,500 crores to 2.5 lakh SHGs which are all women groups. Recovery is excellent. Due to government involvement, there is more awareness in Andhra Pradesh. In other states, the involvement of the government and the NGOs has been increasing.  The World Bank is also interested in providing soft loans to this sector.

Due to the local environment and policies, microfinance has taken root only in certain geographies so far. Hyderabad is the hub of microfinance. This year banks are targeting lending Rs 10,000 crore to SHGs  for consumption activities In Andhra Pradesh.  Prompt repayments provide borrowers added benefits of payment of only three percent rate of interest against actual charge of 10 percent  on borrowings. They are issued certificates that entitles them to reimbursement of seven per cent interest. Which means, in effect they are paying only three percent interest. The government now wants to implement the same model across the country.

Two kinds of SHG-Bank Linkage Programmes are going on in the country, primarily in the south which is characterised by more awareness and involvement of NGOs. One is direct linkage, which is driven by the government and NGOs. The other is called Swarnjayanti Gram Swarozgar Yojana (SGSY) scheme with a subsidy provision of Rs 1.25 lakh. Almost all banks are able to achieve their targets through SHG -Bank linkage programme. Government is encouraging formation of SHGs, facilitated by the NGOs. This is the best model of lending. I prefer an SHG federation than a MFI which is more commercial.

It seems many of the MFIs -- especially the fast-growing ones -- have drifted away from their social mission of helping the poor. They seem to have been focusing too intensely on expanding their operations. For example, SKS Microfinance has raised capital from the market in order to expand. It would now be hard to distinguish SKS from any other profit-making company. There are also concerns that the interest rates charged by MFIs are always inching up. What do you have to say on that?

It is common perception among people that there is competition amongst MFIs for expansion and not quality credit. MFIs are ‘credit plus’ companies. Without doubt, for penetration into all geographies they need to expand as it may not be possible for small NGOs to deliver. Financing through MFIs is the safest mode. Their method of credit delivery and recovery is fantastic. Whereas our freelance person will cost us Rs 50000-60000 and still may not be able to look after this segment properly. Unlike a moneylender, the MFIs train their potential borrowers for about two days and instill in them a sense of responsibility towards repayment before lending.

The cost of lending is high and there is nothing wrong in commercializing them. They do not take collaterals. They appoint a local person on a payment of Rs 3000-4000 who goes house to house, often travelling distance of 45-100 kms, for delivery and recovery. The MFIs make profits in some states, and losses in others. Since it involves huge expenditure, they are mulling making profit-making companies to work as business correspondents. MFIs lend in group mode as well as individual mode.

What will it take for banks to reach the unbanked? Is Business Correspondent model working? What are the constraints?
We do not have the capacities to have an interface with the unbanked. They need handholding. Business Correspondents (BCs) are the best model and the only model that works. Instead of people travelling to a bank, a BC will bring services to the people. The only constraint here is the viability of the model itself as there is an investment of Rs 25,000-30,000 for the purchase of laptop computer, mobile phone, etc., for the BC.

The government is considering helping BCs through the microfinance fund and appointing a committee to look into various issues surrounding the BC model.  Once people have more confidence in BCs’ services, more services like insurance could be added to this mode. Section 25 of the Companies Act, 1956, specifies stipulations to qualify as a BC.

NABARD has come out with a training schedule where you have to pass an exam and they reimburse Rs 4000-5000 to the trainers.  In fact, banks are contemplating vesting BCs with portfolio management, which means educating the customers about various schemes and reminding them of repayments, etc. A lot of this will happen because we now have technology to take advantage of.

Do you think the states should pass progressive laws to promote cooperative institutions for financial inclusion? Shouldn’t states try to make it easy for federations of self-help groups (SHGs) to be turned into cooperatives?

The government should play the role of a facilitator that shuns interference in the affairs of microfinance organizations. Government interference will lead to all kinds of controls, undermining the autonomy of the microfinance organisations. There is no doubt, however, that facilitation by the government like legislating Mutual-Aided Cooperative Society Act (MACS) will give a long way in turning SHGs into cooperatives. In such cooperative bodies, government interference is minimal except for facilities like registration, etc. Some states have already enacted the MACS legislations.

How can money transfer, insurance and financial advisory services be expanded to help the financially excluded? What should be the role of the post offices?

I believe that post offices are the best medium for these activities in Indian conditions. The only issue is that public sector organizations do not efficiently utilize their capacity and adequately reward good work. I hope the government will institute better systems in post offices and expand their reach. Along with post offices, BCs and NGOs are other reliable mediums.