Rakesh Magotra
Last year in December, there was a news article tucked in the inside pages of several dailies that financial institution named North East Development Finance Corporation Limited (NEDFi) was going to enter the Microfinance sector in the North East region “to make formal credit facilities available to the last mile at low interest rates”. While it is a commendable move and would go a long way to alleviate poverty in the North East region, it also makes one wonder the lack of such initiatives in Jammu and Kashmir, and Ladakh.
There is a dire need for a robust Microfinance institution in the Union Territories. As per the Multi-Dimensional Poverty Index issued by the NITI Aayog last year, over 12.5 per cent of Jammu & Kashmir, & Ladakh’s population is “multi-dimensionally poor”.
District-wise, Ramban has the largest proportion of population (35.26 per cent) that is multi-dimensionally poor, followed by Doda (28.92%), Rajouri (27.52 per cent, and Udhampur (26.83 per cent). This begs the question that how the socio-economic profile of such a huge section of the population can be uplifted and brought out of poverty. It has been proved time and again that subsidies and direct benefits, although important, cannot eradicate poverty completely and from its roots, but can only provide temporary relief. The surefire and robust way of achieving the goal of ending poverty is through creation of productive employment opportunities for the youth, creation of infrastructure and other such social interventions. By creating productive employment opportunities, growth can be fuelled, assets can be created and overall economic condition of the poor can be improved. Moreover, such kind of growth through productive employment creates a multiplier effect having far reaching impact on the lives of the people.
This is where Microfinance comes in which focuses on helping the poorest aka bottom of the pyramid sections of the society with small loans, often called micro-credit. From helping the poor get over the short term liquidity crises due to financial shocks, to help them grow their tiny businesses, Microfinance has proved its ability to engage people in productive activities in several countries, and even in various Indian states. In Jammu and Kashmir, however, Microfinance is at a nascent state with only certain banks partaking in the activity. Lack of a full-fledged Microfinance institution with its sole focus on poor families and tiny businesses, has left a huge gap in financial inclusion in the state. According to the Government think-tank NITI Aayog, only around four per cent of the population in Jammu & Kashmir, & Ladakh, is deprived of bank accounts and credit for a massive financial inclusion in J&K and Ladakh goes to the flagship financial institution of the JKUT. However, those without access to formal credit would be manifold and would number in millions.
One of the main agendas of the current government is financial inclusion through creating an environment where poor across the country have open, safe, secure and affordable access to various financial products. Microfinance is a tool which can achieve this goal through providing financial services not only limited to credit but also savings, insurance and even financial literacy. In J&K and Ladakh, microfinance services are being provided to only a few thousand Self Help Groups (SHGs) by commercial banks, District Cooperative Societies and regional rural banks.
Since Microfinance includes small-ticket loans to low-income clients, including those who are self-employed, that too without a collateral and at low interest rates, formal commercial channels hesitate to actively underwrite such loans. And because of this hesitation, a large section of the society remains deprived of these services. So a farmer is left to fend for himself, or borrow from money lenders, if he/she faces a crop failure or the shock of losing his/her cattle stock due to a disease. A small street-hawker has no access to credit if he/she wishes to expand his small business by adding a new product which requires a small investment. A carpet-maker cannot take a large order because of lack of funds to buy raw material. It is only through a full-fledged Microfinance institution dedicated to serve this section can the goal of financial inclusion be achieved.
The good news is that the efficacy of this model has been proved time and again. Dr Mohammad Yunus, who brought this innovation in Bangladesh as a Grameen Model, received the Nobel Peace Prize for founding the Grameen Bank and pioneering the concepts of microcredit and microfinance. His idea of Microfinance as a tool to give loans to entrepreneurs to poor to qualify for traditional bank loans revolutionised the rural economy in Bangladesh. Latin American countries followed suit and have been successfully implementing the model.
In India, way back in 1974 in Gujarat, Microfinance as a pilot project was started when Shri Mahila Self Employed Women’s Association (SEWA) Sahakari Bank, registered as an Urban Cooperative Bank, started giving banking services to poor women employed in the unorganised sector. Over time, Microfinance evolved into the concept of informal SHGs, and then to dedicated MFIs with some of the MFIs graduating to become commercial/small Finance Banks (Bandhan Bank, Equitas SFB, Jana SFB, Suryoday SFB etc.). Today, it is further evolving through the innovation of mobile phones which is increasing being used as a banking channel in the Microfinance market around the world.
Moreover, data suggests that Microfinance loans have the highest repayment rate. Lately, Indian Microfinance industry has been growing faster than Bangladesh, as well as Latin American countries where the concept is quite popular. It has also proved to be an effective tool to reduce gender disparities with women being major borrowers of Microfinance around the world. Also, majority of borrowers traditionally belong to rural areas.
With such strong evidence to support the veracity of Microfinance as an effective tool to eradicate poverty, reduce gender gap and bridging the rural-urban divide, it is quite evident that Jammu and Kashmir, and Ladakh, would benefit immensely from introduction of a robust Microfinance mechanism in the region. It is fair to say that the region desperately needs a strong Microfinance institution which can cater to a significant unserved and underserved population. The time-tested model of MFI in India and across the world is viable and profitable with salubrious uplifting impact on the economic health of people. It is waiting to happen and is just a nudge away!!.
(The author is an Assistant Vice President in JK Bank and an EMBA student @ IIM Amritsar)
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