What are unique features of micro-credit that has contributed to its distinctive success against not so successful performance of other forms of rural credit delivery systems like cooperatives, RRBs and commercial Banks? This question is answered in the article titled "Rural Banking: A feasible alternative" by Atulya Venkatraman in the website http://www.projectshub.com/projects/30017/30017.htm. According to the author the following are the strengths of micro finance.
"Support to income generation for enterprises operated from low-income households.
"Help in building self sufficient, subsidy free, locally managed institutions.
"Building up on old foundations i.e. micro finance provides services similar to those used traditionally in the rural sector but with greater flexibility and on a more sustainable basis
"Development of micro finance strengthens not only the rural sector but also the financial system of the country as a whole. There is increased potentiality for profitability in the rural areas for banks and financial institutions (FIs) through higher deposit mobilization and credit off take.
"Experimentation and innovation allow use of new financial products that are best suited for the local conditions and environment."
"Speaking about the other special characteristics of the structure of micro-finance, the author further says as under:
"Micro finance institutions can include NGOs (Non-Government Organisations), co-operatives, banks (commercial, RRBs, other nationalised and public sector banks) and NBFCs (Non-Banking Financial Companies). The NABARD felt that banks would be unable to efficiently organize such grass-root level groups and thus NGOs and Voluntary Agencies were introduced into the picture.
"New micro credit companies such as Basix and the SEWA-aided bank represent a primarily NGO-driven effort to charge market linked, risk adjusted rates of interest on small loans to small borrowers. At the same time they ensure hurdle free access to borrowers and high repayment rates for themselves.
"In addition to financial intermediation, many micro finance institutions provide social intermediation such as group formation, training in financial literacy and management capabilities. Micro finance is therefore not just a banking tool but also a development tool. Along with benefits to the rural population, the financial institutions advancing the credit also enjoy better recovery rates.
"Micro finance is thus a potent method of rural credit delivery with tremendous potential for serving the rural masses. The most prevalent method of providing micro finance in India is through Self-Help Groups (SHGs)."
Why does Micro finance work better?
"As commercial banks and RRBs have not fared very well in this area, most of the financial assistance extended by entities like NABARD and SIDBI (Small Industries Development Bank of India) are routed through micro credit NGOs such as SEWA. While RRBs reportedly had a 20% recovery rate and in 1997-98 suffered losses of about Rs. 430 crores, NGOs and micro credit companies enjoyed recovery rates hovering around 93-94 %.
"The main reason that micro finance institutions fare better than the public banks, despite charging higher rates of interest, is that the very nature of this sector - small loans to poor people for self employment projects for development of individual and their families - requires grass-root level involvement. In this respect, the NGOs outperform the RRBs where even simple efforts such as a bank official going down to the borrower are ignored. The personal involvement of the Voluntary Agencies may be the factor that distinguishes them the most from normal banking institutions.
Local involvement has to be encouraged to boost repayment levels in the absence of which the huge amounts pumped in by the Government for micro credit will have to be written off."
The article also lists the limitations/constraints of Micro finance system of credit delivery as under:
"Limitations/Issues to be addressed in Micro finance
"There are certain aspects of micro finance that cause concern and may mar the pleasant picture currently being portrayed.
"Absence of Partner NGOs:
"The growth of the linkage programme is dependent upon the initiatives and efforts of the partners. Non-availability of NGOs in different parts of the country has come in the way of the progress of the programme.
"Further more, NGOs need to have properly trained work force to take up group related savings and credit management activities on a large scale. In the absence of any organised training system for the field staff of NGOs in savings and credit management such training other experienced NGOs may have to fill the gap despite their limited resources.
"Sensitisation of bank staff:
"The rapid expansion in the micro finance area requires the bank staff to be sensitized about the needs and specific nature of these customers as against the traditional method of banking. Specific attention has to be paid to regional potentials, availability of experienced NGOs, periodic changes at field level etc.
"Target Syndrome:
"With the increasing involvement of a number of external agencies, there is a fear that the spirit of independence that SHGs seek to promote may be lost. It is also felt the target figures that are decided upon at regular intervals may affect the quality of work rendered by the NGOs.
"Slow Process:
"The micro finance and SHG programmes are not simple poverty alleviation steps. They form part of an ongoing process of socio-economic empowerment of the poor. The time, efforts and money required to be put in cannot guarantee to cure the problems such as unemployment, poverty or poor status of women. The "investment" may ultimately even prove to have no "return"."
