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Financial Services for Low Income Families

Volume 15, Number 2 Article by Sanjay Sinha June, 2003

Financial Services for Low Income Families: An Appraisal :

The ineffectiveness of the vast network of banks and other financial institutions, the failure of poverty-alleviation programmes, and that of primary cooperatives and Regional Rural Banks, specifically established to meet the needs of the rural sector and the poor, led to the entrance of non-government organisations (NGOs) into microfinance.

The delivery methods that most MFIs follow — the dominant Self-help Group (SHG) model, consisting of 15-25 members; the Grameen model, with smaller, joint-liability groups, the Individual Banking Programmes (IBPs) providing financial services to individual clients; or mixed models _ aim to facilitate frequent and micro loans and savings transactions to low-income client groups.

Micro-Credit Ratings International Limited (M-CRIL), which pioneered MFI rating services in India in 1988, analysed the performance of 69 MFIs to provide a broad picture of microfinance in the country. M-CRIL's analysis reveals that microfinance in India, characterised by a small number of large MFIs that are relatively strong and a large number of small and weak organisations, reaches some 1.4 million families. While MFIs are increasingly aware of the need to obtain resources from members, donor funds are still the pre-eminent source of financing and MFIs still prefer to obtain resources from development loan funds on `soft' terms. Savings services have much potential for improvement and Grameen-type MFIs are the best in portfolio quality. IBPs fare better in portfolio management and come closest to achieving full operational self-sufficiency. While Indian MFI operating efficiency compares well with international best practice norms, the portfolio yields are very low.

While a positive trend in terms of sustainability and growth is discernible, several institutional and systemic issues such as mediocre staff, too large a scale of operations and geographical spread, want of basic management information systems and poor financial accounting systems, and the welfare orientation of most MFI CEOs, constrain the sustainability of MFIs.

Yet, for the first time in the history of Indian development a serious effort is being made to provide systematic financial services to low-income families and a new economy of financial intermediation is starting to emerge. Thus, concludes Sanjay Sinha, MD of M-CRIL, the foregoing concerns would, in the long run, be no more than a documentation of the growth pangs of a new economy.

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