Will Microfinance in India survive Covid 19 Crisis
Now corona crisis has given rise to a new question — can microfinance in India survive this massive crisis.
Given our experience in Bangladesh, the answer is a firm ‘yes’. Bangladesh goes routinely through floods and cyclones, destroying houses, possessions, animals, businesses, even taking lives. But microfinance always bounces back. Poor people’s lives are woven with endless disasters. Coping with disasters is an integral part of microfinance . Grameen Bank made sure its staff understood that microfinance is about people, not about money. Money is a tool to give the people a chance to fight for their lives.
Micro Entrepreneur Bank for Micro Entrepreneur Sector
Micro entrepreneur sector as a whole deserves a new class of dedicated financial institution, as Social Business Micro Entrepreneur Bank (MEB). Entire micro entrepreneur sector will dramatically change if it is created by passing a new law, if needed. MFIs and small finance banks can take up leadership role in creating social business MEBs. It will be made legally mandatory to make all MEBs as social businesses.
Social business is a business with zero personal profit, aiming at solving of specific problem faced by people. This is a very important feature to be built into any financial institution built for the micro entrepreneurs. Given the tradition of loan sharking, financial institutions built for micro entrepreneurs quickly start imitating loan sharks in their operations. If there is no bar on taking personal profit from MEBs investors looking for high profit will rush to it attracted by the size of the market. Safest thing to do is to close the door for personal profit by requiring by law that MEB to be social business.
Existing commercial banks, small finance banks, cooperative banks, any other financial organizations, NGOs, companies, individuals, MFIs may apply for MEB license as a subsidiary or as a new entity. MEBs may create Social Business Venture Capital Funds as their subsidiaries to provide equity to unemployed young people to become entrepreneurs
The goal of MEBs would be to free all micro entrepreneurs from loan sharks — formal, and informal.
Dedicated Regulatory Authority is Crucial for Success
Another important aspect to ensure success of MEBs is to create a dedicated regulatory authority. If MEBs are regulated by regulators who are not well-versed with the concept and the creativity needed for the operation of financial institutions for the poor, it will be doomed to failure. Unsympathetic regulators can destroy the entire possibilities of financial institutions for micro entrepreneurs. To achieve success the best thing to do is to create an autonomous regulatory authority under the chairmanship of the Governor of RBI. Bangladesh created a Microcredit Regulatory Authority as an autonomous entity headed by the Governor of the central bank, by an Act of Parliament back in 2006. It contributed significantly in the success of micro-credit system in Bangladesh.
MEB Should be Created as a Rural Institution
In order to make rural economies as independent economies one fundamental requirement would be to create institutions dedicated to rural areas. Historically urban institutions were extended to the rural areas to fill the need for institutional services to rural areas, ignoring the fact that urban institutions were not good fit for rural areas. They were not enthusiastic about doing this job either. As result rural areas never had the opportunity to grow in its own way.
MEBs could be the first step to create rural financial institution exclusively dedicated to the needs of the rural areas. To make it grow as a rural institution the headquarters of MEBs should be located in rural areas. It should mobilize rural and urban deposits to benefit the rural micro entrepreneurs, in contrast to urban-centric banks which mobilize rural deposit to transfer it to urban areas.
Government may encourage all commercial banks and financial institutions to create social business MEBs as rural subsidiaries serving rural micro entrepreneurs. To encourage them government may give incentives to banks and all financial institutions such as providing preferential treatment in their core businesses depending on the size of their MEB operations.
In addition to dedicated social business MEBs, there should be exclusively designed social business venture capital funds, social business investment funds, social business insurance companies, and so on.
Time is Right
Creation of Social Business Micro Entrepreneur Bank is the key to unleashing the entrepreneurial power of masses and creating the rural economy as a parallel economy to the traditional urban-centric economy.
Given the right conceptual framework and appropriate institutions and policies, rural economies can be strong economies dealing with the rest of the world. With information and communication technology covering all rural areas in India and cleaner air quality, if we can add good political leadership, presence of quality educational institutions and healthcare facilities rural areas will enjoy many advantages over urban centres as a choice of location for many businesses. Transporting unprocessed agricultural inputs and sending migrant labour to the cities can be made a matter of past. It is the new vision of rural economy which will make this happen. Time is right for this new vision.