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Excerpts from the Inaugural address by Kishori Udeshi, Chairman, Banking Codes and
Standards Board of India, at the Sa-Dhan Annual Conference of Standards and
Capacity Building at Chennai on September 25, 2008.
Code for Micro Finance
I feel both happy and honoured to deliver the Inaugural
address at SA-DHAN’s annual conference of Standards & Capacity Building.
It is a well accepted fact that the deprived and dispossessed segments of
society are invariably denied credit from the organized banking system. Despite
all the stipulations on directed credit to the weaker sections the credit
availability remains inadequate. Thus, this segment necessarily has to seek
credit assistance from the unorganized financial sector at astronomical rates of
interest. In a decade of its existence, SA-DHAN has been successful in providing
sustainable micro-finance services to the rural and urban poor. Its objective of
setting standards to facilitate the adoption of practices that ensure good
governance, management, reporting and transparency within the macro-finance
sector, are praiseworthy and I cannot help but feel its strong commonality with
the role of the Banking Codes and Standards Board of India (BCSBI).
I am, however, aware that these efforts fall short of the
ground reality of initial inaccessibility to finance. How does a cobbler, a
handcart puller, road side vendor, self employed mechanic, carpenter,
electrician, etc. get accessibility to bank finance, other than through SHG
linked bank programmes.
The Reserve Bank has been continuously endeavouring to
improve credit delivery and make available hassle free basic banking services to
the larger section of society at the bottom of the pyramid. Among the several
initiatives, one important one was to revise the guidelines on priority sector
lending to include micro-finance as one of the activities eligible for priority
sector classification as micro-finance has emerged as one of the potent tools
for poverty eradication and livelihood generation. For mainstreaming micro
finance and enhancing their outreach, banks are permitted to choose any
conduit/intermediary for extending micro-credit. While no criteria for selection
of micro-credit organizations is prescribed RBI has suggested that micro-credit
organizations having proper credentials, track record, system of maintaining
accounts and records with regular audits and manpower for closer supervision and
follow up, should be preferred.
It is in this context that SA-DHAN’s role in setting
standards and in facilitating wider exposure to its members to the national and
international best practices is to be appreciated. The Bharat Microfinance
Report 2008 reveals that there has been about 72% annual increase in the
outstanding micro-credit portfolio of SA-DHAN’s member Micro-finance
institutions and about 40% annual increase in their client outreach over the
last financial year i.e. 2007-08 which is a phenomenal growth rate by any
standard. These figures also lend strong credence to the ground reality that
availability of finance is a far bigger concern to the urban and rural poor than
the cost of the loan. Accessibility, adequacy and timeliness of the loan are
their requirements and it is through meeting these requirements that
micro-finance institutions have been able to grow so rapidly.
It is appreciated that micro-finance institutions do have to
take into account risk of default but the big difference between the traditional
money lender and the micro-finance institutions is that the micro-finance
institutions can price their risks without being usurious, by moderating rates
of interest somewhere between the banking sector and the money lender. The
micro-finance sector thus has a niche area which has tremendous potential for
development.
According to the Bharat Microfinance Report 2008, a total of
33 million persons have been extended micro-credit as at the end of the
financial year 2007-08. When we juxtapose this with the scenario of about 240
million people living below the poverty line without any access to credit from
the formal sector, we can visualize the tremendous potential that exists for
even further exponential growth of micro-finance institutions. If one sees this
as a pot of gold one should also see the underlying concern of responsible
lending to the sub-prime sector.
The First All India Rural Credit Survey published in 1956 had
incorporated the pithy saying that “credit supports the farmer as the hangman’s
rope supports the hanged”. Are we then galloping ahead in this century and
becoming a nation living well beyond its means? Is the pace of literacy (let
alone financial literacy) growing in tandem? Is there a safety net of Credit
Counselling in place for this underprivileged and illiterate sector? These are
uncomfortable questions. The responsibility of not adding to the financial
burdens of the financially illiterate is tremendous and SA-DHAN has done well to
bring out a Code of Core Values in Microfinance for its members on the sound
belief that their “clients deserve fair and efficient micro finance services”.
The concept of ‘fairness’ is flexible and dynamic and it is not possible or
useful to produce a definition of fairness. What fairness means may vary
depending on the business and its clients but whatever the business or client
base, we must proceed on the a-priori principle that the fairness needs
to be evident. Moreover, fairness should be perceived by the user of the credit
and not the purveyor of the credit which brings the issue of code compliance
into centre stage.
The BCSBI has restricted its membership to only scheduled
commercial banks. These are all under the regulatory and supervisory purview of
the RBI and the latter draws supervisory comfort from their membership with the
BBSBI and compliance with its Codes. SA-DHAN has an enviable membership of 223
Micro Finance Institutions which is growing robustly from year to year. Ensuring
compliance with their Code provisions in letter and spirit will be no mean task
for SA-DHAN.
Micro Finance Institutions serve a noble cause and if the
deprived segments of society have to be extricated from the poverty trap it is
essential that the micro-finance institutions lend responsibly in adherance with
the core values enshrined in their voluntary mutual Code of Conduct. I am sure
that the micro-finance institution members of SA-DHAN will be in the forefront
of this vital micro credit activity. I wish SA-DHAN success in its endeavours.
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