Prior to the introduction of “liberalization” in India in 1991, the provision of rural credit was the responsibility of the banking system. In fact this was one of the stated objectives of bank nationalization. And the banking system did not do too badly in this respect after nationalization. It is true that institutional credit may not have reached the very poor in the agricultural sector or in the rural economy as a whole, but the ratio of agricultural credit to the total credit of the banking system kept rising steadily until the end of the eighties. Since then there has been a complete reversal. The ratio of agricultural credit, strictly defined, to total credit, has declined sharply. But since priority sector lending “norms” are still in place, and this decline violates such “norms”, the government has been trying to “help” the banks to pretend that they are meeting these “norms” by expanding the definition of “agricultural credit” (which now includes all sorts of infrastructure projects).
This is the logic of neo-liberalism. Banks now finance stock market speculation, luxury consumer credit, credit card borrowings, and all other such “credit needs” which are lucrative for them. But they have been withdrawing from their social obligations. Neither the multinational banks, nor even the private Indian banks, were ever concerned about meeting priority sector targets; and the government had been turning a blind eye to their transgressions; but now, in the new ethos of profit-making even the nationalized banks have abandoned social and developmental banking. And their place is supposed to be taken in the current neo-liberal dispensation by NGO-controlled “micro-finance institutions”. Micro-finance in short is not some new innovation superimposed on the existing structure, but it is a replacement for the system of development banking. Instead of banks directly dealing with the borrowers, the NGO-controlled institutions act as intermediaries between the banks and the borrowers. They also collect savings from potential borrowers, and funds from other sources, including foreign funds, for redistribution as credit.
Microfinance institutions have the specific characteristic of being private, especially NGO-controlled. And they are supposed to stimulate “market-led growth”, leading to a privatization of the economy, which is why the World Bank promotes them assiduously. They are presented as being superior to the banking system for the purpose of lending to the poor, on two grounds: lower “transaction costs” and better recovery rates.
The first of these two claimed advantages however is a myth. “Transaction costs” refer to a whole range of administrative costs, namely, the costs of information collection about the prospective borrowers; the costs of screening projects; the costs of monitoring, supervision, and co-ordination; and the costs of collecting dues. Since banks enjoy substantial economies of scale, there is little reason a priori why the NGO-controlled micro-finance institutions should have lower transaction costs; and indeed several studies show that their transaction costs are comparatively much higher than those of the banks, which they cover in two ways: through charging exorbitantly high interest rates, and through the implicit subsidy provided by donors (especially foreign donors).
The second claimed advantage, better recovery rates, is also not firmly established. While some international studies do show high recovery rates, these are usually on very small loans, not given for income-generating projects. On the other hand, an NGO-controlled bank, the SEWA bank in India, has NPA ratios which are no lower than those of the public sector banks. So, when micro-credit institutions cater to needs similar to those met by the banking system, they face similar recovery problems.
An argument is sometimes advanced that micro-credit institutions can give loans without collateral and can have higher recovery rates, because they deal with borrower groups, or the SHGs. Loans given through SHGs to individuals put the onus of recovery on the SHGs, which can be relied upon to repay; and even loans given directly to individuals with the full knowledge and backing of the SHGs put an implicit pressure on the individual borrowers for repayment. This phenomenon is referred to as “social collateral”. Micro credit is supposed to rely on “social collateral” which increases its capacity to lend to the poor and to recover loans from them, as compared to the banking system which insists upon physical collateral.
Not only is the claim about higher recovery rate, however, a dubious one as we have just seen, but even this argument itself is spurious: there is no reason why banks too should not be able to deal with SHGs, which have a family resemblance to co-operatives, and why this should be an exclusive virtue of the NGO-controlled micro-credit system.
The high interest rates paid by the individual borrowers accessing micro-credit are the greatest drawback of this system. The high interest rates, higher than what the banks charge, arise for at least three reasons: first, they arise because, the micro-credit institutions themselves being intermediaries between banks and the borrowers, and having administrative costs higher than those of banks, any substitution of direct bank credit by micro-credit must raise interest rates. Secondly, since success in loan recovery itself is dependent on supervision over credit use by borrowers and on the follow-up of overdue loans, both of which raise administrative costs, to the extent that micro-credit agencies have higher recovery rates, their administrative costs get pushed up for this reason as well, and are covered by higher interest rates. And, finally, this sector is dominated by a host of unscrupulous operators, who are no different from the old moneylenders and who charge moneylenders’ rates which have nothing to do with administrative costs as such.
A NABARD study for Kerala showed that many individuals had made it a business to form SHGs and act as moneylenders to these SHGs on the basis of funds borrowed from the banks. In fact since there is no law against a person belonging to more than one SHG, they went from village to village forming such SHGs and expanding their money-lending empire on the basis of funds borrowed from public sector institutions. Such money-lending activity, masquerading as micro-credit, is of course not confined to Kerala. And in the context of the present agrarian crisis, it has already taken its toll in the form of suicides. In the worst such case reported, which was in Andhra Pradesh, sixty persons had committed suicide for not being able to pay back their micro-credit loans.
Micro-credit, it follows, is at best a fig-leaf to cover the dereliction of social duty on the part of the banks in the era of liberalization. More commonly, however, it represents the return of the old moneylender. Democratic mass organizations must struggle to ensure that banks are made to fulfill their social obligations for which they were nationalized, and that they do not withdraw from giving credit to the rural economy, and in particular to the agrarian economy. Multinational banks or private Indian banks should be made to forfeit their licenses for carrying on business if they are unwilling to meet these obligations. On the sixtieth anniversary of India’s independence, it is only legitimate to demand that everyone should have the right to access institutional credit. Micro-credit can operate, within a system of universal access to institutional credit, by providing even better services; but it cannot be a substitute for institutional credit.
Universal access to institutional credit alone however will not be enough. If peasants and petty producers continue to be engulfed by crisis, then the availability of larger institutional credit, instead of helping them, will only drag the lending institutions into crisis. The provision of universal access to institutional credit must be accompanied, therefore, by steps to overcome the agrarian crisis and the crisis of petty production in general. It is often argued that the overcoming of these crises is impossible without significant productivity increases in these sectors. But before any productivity increase can occur at all, it is necessary that the sector must first survive. For this, assured prices must be given to producers which make these activities remunerative even at the existing levels of productivity.