Banking the missing middle

"Banking the Missing Middle" in India:

Symposium Focuses on Challenges in Involving Commercial Banks in Microfinance
By Seema Desai, Programme Director, Emerging Economies, Foreign Policy Centre, London

Indian Finance Minister Shri P. Chidambaram
On September 8, 2005, the Foreign Policy Centre, in collaboration with Standard Chartered Bank, held a one-day conference in New Delhi on"Banking the Missing Middle: Strategies for Expanding Microfinance". The Confederation of Indian Industries (CII) was also a partner. We set out to understand how to improve access to finance of microenterprises, which are often excluded from conventional microfinance initiatives as well as mainstream commercial bank lending.
Over 80 delegates from Indian microfinance institutions, commercialbanks, national and international NGOs, the Reserve Bank of India (RBI), the National Bank for Rural and Agricultural Development (NABARD) and the World Bank attended the conference.
The event began with opening remarks by the Indian Finance Minister Shri P. Chidambaram. He spoke about the phenomenal development of Self-Help Groups (SHGs) in the past two to three years. These are better known as SHGBank Linkages, as they are credit-linked to banks. The Finance Minister highlighted the SHGs' remarkable rates of recovery - 98-99% - showing that their credit rating and ability to absorb credit and repay has increased. In his words, "most importantly, microfinance has created not just debt but an asset base: land, consumer durables and livestock increased over a three-year period".
Thesession following the opening remarks was titled "The Challenges Facing the Missing Middle". The panel included Christina Barrineau, Chief Technical Advisor to the International Year of Microcredit, Lakshmi Venkatesan from Bharatiya Yuva Shakti Trust (BYST), an Indian NGO, Priya Basu from the World Bank in Delhi, Sandeep Farias from Unitus and Udaia Kumar from Share Microfin. Ms. Barrineau spoke aboutthe lack of statistical validity of data sets, so that there are few reliable indications on the reach or quantity of microfinance. The UN, in collaboration with the World Bank, the International Monetary Fund (IMF) and the UK's Department for International Development (DFID) is working on constructing a headline indicator for access to microfinance.
BYST is a not-for-profit organization thatprimarily assists disadvantaged Indian youth in developing business ideas into viable enterprises under the guidance of a mentor. Its founder, Lakshmi Venkatesan, spoke about the potential danger of a "microcredit trap", where sustainable businesses do not emerge and recipients do not graduate from vegetable selling or livestock. BYST believes that mentoring from the business community is critical,as enterprise growth is about much more than providing credit; it is also about financing a viable business idea. The importance of partnerships between the public and private sector, as well as between social entrepreneurship groups and microfinance institutions, was emphasised.
The next speaker, Priya Basu from the World Bank, explained the distortions that government macroeconomic policycreates in bank lending to microenterprises. Despite a vast network of rural cooperative credit banks and commercial bank branches all over India, access to formal finance is extremely limited. Public sector banks in India operate in poor institutional frameworks, so that many rural banks in India are not in a position to lend. Interest rate controls that the government imposed on small banks havebackfired, leading to credit rationing. The result is that funds are not reaching poor borrowers.
This was followed by an interesting presentation by Sandeep Farias of Unitus, which describes itself as a global microfinance accelerator. Unitus' view is that the biggest challenge facing the microfinance industry is to develop a systematic growth mode. He outlined two main reasons for weak growth of...