Its notable feature is the viability and sustainability of lending to poor women; as many as 100 countries have adopted the model

Why did the Grameen Bank concept originate in Bangladesh rather than in India? One can only speculate on the reasons.

THE BELATED award of the Nobel peace prize to Bangladesh's Muhammad Yunus and the Grameen Bank set up by him bring into focus the status of micro-credit in India. The practice of "dispensing tiny'' loans through a commercial bank is not alien to India and many other countries. However, it was because of Prof. Yunus and the Grameen Bank that micro finance, as an institutional arrangement, came to be conceptualised and implemented with a high degree of success and replicated in many parts of the world including India.The difference then lies in the way the Grameen Bank pioneered the idea of lending to poor Bangladeshi women on a sustainable basis. Until recently, in most developing countries, lending to the weaker sections, if at all, especially to a target group of women, had been a peripheral activity for banks.The Nobel citation says: "Lasting peace cannot be achieved unless large population groups find ways to break out of poverty. Micro credit is one such means.'' Indeed, the Grameen Bank's success lies in its business model: the recovery rate is said to be over 96 per cent; these short-period loans are dispersed without any kind of collateral (but backed by group guarantee) and borrowers are required to save some amounts. Hence, over time many borrowers are able to escape poverty.At an interest rate of around 20 per cent these loans do not come cheap. The positive feature is that even with its high cost, the Grameen Bank concept does not admit of any type of subsidy. Also, since borrowers are required to save, rewarding those savings with a reasonable interest rate will not be possible if the loans are subsidised.With negligible security, these relatively high cost loans have been repaid in large measure. The bank is able to recycle the loans. That explains how the bank has grown over 25 years to have more than 1,000 branches and an estimated 6.5 million borrowers. As many as 100 countries are reported to have adopted the concept. Even advanced countries such as the U.K. and the U.S. are turning to micro credit to address issues of poverty and deprivation.The success of the Grameen Bank's experiment is often cited to support the currently fashionable but broader goal of financial inclusion. There is, of course, much more to inclusion than micro credit but the success in Bangladesh shows that even the more difficult inclusive practices — such as viable lending to the poorer sections — can be implemented with a high degree of success.It may be worth wondering why India, rather than Bangladesh, did not pioneer the Grameen Bank idea. There is plenty of evidence to show that the Indian financial sector has been quite innovative. After all, the State Bank of India and a few other government owned banks pioneered lending to small-scale industry and agriculture. Though such institutions cannot be placed in the same league as the Grameen Bank with its success in micro credit, these are stupendous achievements by themselves. Even the practice of lending with low or nil security has not been uncommon here.So why did micro finance have to wait until the rest of the world started emulating Bangladesh? One can only speculate; it is quite likely that the obstacles before Indian banks have all been practical.For instance, it has been very expensive to "scale down'' a typical bank branch at the rural level and that is where the Grameen Bank model seems to have scored. Much has been written about the attitudes of the largely urban -oriented Indian bank staff being an obstacle to micro lending in rural areas. These may be true but were by no means insurmountable.

Late realisation

In any case, over the past few years at least the idea has caught on. Many banks, including the bigger foreign banks, are into micro credit in a big way. Quite significantly all these banks are viewing micro lending as a commercial proposition, one in which they can earn money. There have been some very successful attempts in different parts of the country to dispense small loans to groups of people including women borrowers. But impressive as these attempts were, they have not been translated into national level programmes worthy of emulation by other banks or, more importantly, adopted by policy makers.

MFIs as intermediaries

The biggest challenge has been to reduce costs. Direct lending can be prohibitively expensive. Banks have therefore been refinancing the micro-finance institutions (MFIs). The orthodox way of dispensing such credit by MFIs has been in conjunction with self-help groups (SHG) and non-governmental organisations (NGOs). Since February 2000, when the Reserve Bank of India gave priority status to loans provided by banks to MFIs, the activity has been mainstream. In 1991-92, the National Bank of Rural Development pioneered a model of linking each SHG with a bank, considered one of the better methods of micro lending. The recognition that MFIs can be a useful intermediary between a bank and the rural poor has spawned a number of welcome steps. MFIs can be appointed "banking correspondents'' for providing a range of para banking services. They can also sell micro insurance products. However, the idea of delegating banking functions to "outsiders'' is a contentious issue, even if it is confined to rural areas and is meant to make micro lending viable for mainline commercial banks.What the RBI has called a movement, spreading to most parts of the country, has naturally invited scrutiny. Interest rates on the loans are high, above 20 per cent in many cases, despite the fact that commercial banks are willing to refinance the microfinance institutions at much lower rates. Recovery methods adopted by MFIs in some parts of the country, especially in Andhra Pradesh, have been criticised.The case for regulating micro credit institutions looks strong. However, being a localised activity, it may be difficult to frame uniform rules across the country. At this stage, plenty more inputs are needed to enable the RBI and the Government to frame suitable policies.C. R. L. NARASIMHAN