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Micro Credit: The Missing Link

Ashok Khosla, September 1998

Despite considerable policy-level recognition in India of the importance of the micro and small industrial sectors, formal mechanisms to provide financial support to it are quite limited. Even where such supports exist, they are further limited in scope to financing very traditional economic activities such as purchase of cattle for dairy or traction, tailoring, retailing and equipment servicing. Most of these activities offer almost no possibility for generating surpluses, savings or investments in improved productivity of better income opportunities.

On the other hand, technology-based micro-industries, being unfamiliar to most lending agencies, find it far more difficult to raise financing, even though they are manifestly more profitable, less risky and better in tune with the needs of an economy pursuing sustainable development.

The large industrial enterprise (with capital investment over 10 crores) has access to an extensive pool of financial resources. The commercial banks alone lend more than Rs. 160,000 crores ($ 40 billion). The other sources, including financial institutions like IDBI and ICICI bring the total equity and debt financing available to the large industrial sector to the region of Rs. 300,000 crores each year.

Small and medium enterprises (which have a capital investment of 20 lakhs to 10 crores) are able annually to raise financing to the order of Rs. 40,000 crores, most of it going to the larger firms in this group. Most of this money comes from banks in fulfilment of certain lending norms to which they are subject.

At the other end of the spectrum, low-income individual or household industries - with capital investments below Rs. 10,000 - are eligible for numerous loans for amounts up to Rs. 10,000. A few lending programmes even have limits of up to Rs. 1 lakh. The term "loan" in this context is a bit of a euphemism because most of the borrowers - and lenders - don’t expect them to be paid back. They are loans given out by government agencies and nationalised banks which are "refinanced" (essentially reimbursed) by various government schemes such as the Integrated Rural Development Programme, the Prime Minister’s Rozgar Yojana (employment plan) and various Scheduled Caste and Scheduled Tribe funds. The total funds sanctioned under the various schemes of government add up to several tens of thousand crores (i.e., several tens of billion dollars).

The second set of sources of micro credit in India are in the informal sector. These include moneylenders (whose interest rates can be as high as 200% per year), middle-men, "chit funds" that pool contributions from members, and family and friends. Loans from moneylenders and middle-men are usually exorbitantly expensive and carry the risk of creating a state of permanent bondage for the borrower. In any case, no financially viable production capacity can be built up while servicing debt under such conditions.

The third source, which is gradually growing, is from formal institutions such as banks, cooperatives, and NGO credit facilities. These include, for example, the Self-Employed Womens Association, Working Women’s Forum, various Grameen banks and Self-help Groups providing credit to the very poor, particularly to women and the marginalised. All of these have had an unquestionably deep impact on the lives of people. Literally millions of people have moved from survival to subsistence, which is no mean achievement.

However, it is difficult with such small capital to generate the surpluses needed to invest in improved productivity and continuing rise in earning power that is the hallmark of genuine economic development. For this, somewhat larger enterprises are needed: micro enterprises.

The micro enterprise sector, as defined here (Rs 10,000 to Rs 10) gets, collectively throughout the country, well below Rs. 100 crores per year. There exist very few financing systems for this sector, the largest ones being tiny in comparison with the others.

These include numerous mainstream financial institutions, including the rural branches of nationalised commercial banks numbering in the hundreds of thousands, Regional Rural Banks in the hundreds, Local Area Banks in the dozens and Co-operative Banks in the thousands - all with mandates to service the rural economy. These institutions have a tremendous physical reach. The record of these institutions in providing finance for investment in micro industries is, however, very poor.

The main public sector agencies mandated to promote small and micro enterprises work through intermediaries in the formal sector - primarily by refinancing commercial banks or by lending at concessional rates of interest to other institutions for on-lending purposes. The largest of these, NABARD, SIDBI, RMK and FWWB started their micro enterprise support programmes around 1992. Combined, they have been able to facilitate delivery of micro credit amounting to well under Rs. 100 crores - over the entire six year period.

It is to cater to this critically important sector that Development Alternatives, together with several other agencies, is promoting the India Micro Enterprises Development Fund.

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