Microfinance in the empowerment of Scheduled Tribes

& Women
- Livinus Kindo

1. Approach

Micro-Finance has proved extremely effective in providing an informal and non-

conventional credit mechanism to act as a better channel of credit dispensation and
mobilization to the needy and the deprived sections of the society. Micro-Finance
credit channel touches more or less the same sect of clients and borrowers that the
traditional Money Lenders touched in the Tribes dominated areas of Odisha and of
Sundergarh district in particular. The reasons that compelled the tribes to borrow
from the Money Lenders, namely consumption and emergency needs, continue to
dominate the financial market in the areas and the private Money Lenders do operate
in these areas. Micro-Finance credit mechanism has identified the clients via such a
need-based approach, no doubt, but canalization of credit to the clients has been made
production oriented and sustainable to enable the clients to repay the loan through
value addition. Thus, the Tribal clients learnt productive use of loans through the
personal approach and persuasive methods of Micro-Finance units operating in the
areas.

Tribal Women played a silent and subordinate role in the family as regards money
management by the family tradition. They played the role of custodian of fund not
handling the use of the same either productive or otherwise. Money lenders never
took the tribal women as stake holders in the loan transactions. Since ornaments are
rare as an apparel among tribes, the first charge on the defaulted loan of the Money
Lenders was the utensils and immediately the other movables. Through the training
and persuasion by the Micro-Finance units, most of the tribal clients consisted of
women who were handed over loan as cash, took decision on investment, took stock
of value addition and directly made the repayment of the loan. This process of stake
holding by the women of the client’s family has had unprecedented socio economic
empowerment of the women in the tribal society.

Women empowerment is also evident in the non-tribal society as well and researches
in the field have proved it.

Looked at from this positive angle, micro-finance in the tribal areas has become
indispensable both for credit-widening and credit-deepening among the tribes. Mega
banks have favourable ‘profit-orientation’ in the ongoing market dominated
structured economy and only the Micro-Finance can ensure them a relationship of
‘preferred clients’. The tribes believe and thrive on personal relationship among
themselves as also with people outside. Mega banks both public and private are
through and through commercial and therefore by virtue of the very charter they are
entrusted with, cannot expose themselves to the vulnerable class of the society who

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don’t have ostentatious collateral for availing loans of any size, as all loans to tribes,
women and other underprivileged class become highly ‘risk-sensitive’ loans. Only
alternative for the Scheduled Tribes to avail loan will therefore be the usurious
Money Lenders.

2. Organizational Structure of Micro-Finance

In India, Micro-Finance units; in the nature of Registered Societies(NGO), Non-

Banking Finance Companies(NBFC), Section 25 of the Companies Act, Trusts etc, all
function as individual entities rather than as combines or federates as interlocking
operations units. They work out their viability on single balance sheets and are
evaluated through RBI norms as independent business entities. The clients are
motivated through training to work as group entities jointly liable for the fund
management through peer-function and peer pressure. No collateral is kept as
bank/credit guarantee like the mega banks, save the proof of residence and some very
rough evidence of business. Micro-Finance is given to the clients almost in ‘good
faith.’ Personal relation in the day-to-day working of the financial operation binds the
lender with the borrower. In other words, unlike the mega banks, Micro-Finance
entities treat every client as ‘preferred client’. Every field officer knows the clients
through weekly contacts.

3. The ‘credit delivery system’ in the Micro-Finance structure is

vastly improved

Compared to any other in that in the otherwise utopian paradigm of ‘service to the
doorstep’ of the Government in all the slogans, MFIs do deliver credit to the door step
of the client. In this process of dispensation, clients are not required to stand in queue
to avail service. Moreover, they are saved of the ‘transaction cost’ that has become
almost unbearable in the Government and mega banks credit delivery system. This
sort of modus operandi in any financial dispensation/banking structure will be
certainly a ‘prized possession’.

4. Operational structure of Micro-Finance

As the groups are formed in manageable numbers of 10, 15 or 20, each member
knows her peer personally in terms of reliability and therefore, member contact
becomes the key instrument in the operation of the Micro-Finance units. Though
several MFIs engage intermediaries in advancing and collecting of loans, the social-
investment oriented MFIs supervise their financial operations through their own
Finance Service Officers(FSO). This involves a very high order of transaction cost
that allows profit only on attaining the ‘economies of scale’. This is a catch that the
Malegam Sub-Committee has to recognize.

I. The flow of fund to the MFIs is dependent on the evaluation of the MFIs on
profitability based on ratings. The social evaluation of a credit to the
distressed and under privileged borrower is still not based on ‘quality of life

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 index’ and therefore the ratings down play the MFI that has improved the
production orientation of a loan or improvement of the family health due to
intake of better nutrition etc.
II. Group oriented structure of the MFIs, being the strength of the institutions
against normal security and collaterals has to be retained to enable the poor
and marginal borrower to avail finance in the affordable scale. The group
oriented financing structure should be retained.
III. Engagement of ‘agents’, ‘intermediaries’, ‘middlemen’ etc in financial
dispensation by the MFIs is a necessity in the economizing of ‘operating
cost’ of the big MFI companies in order to ensure profitability in evaluation.
But, this entails an insurmountable risk of ‘distant management’ of the
clients treating them as ‘non-preferred’ borrowers. This phenomenon
alienates both the lender and borrower from each other. Agents of any sort
should be discouraged.

5. Cost of credit and the Rate of Interest

In any credit delivery system, cost of credit determines the demand-supply equations
depending on the ‘ceteris paribus’ axiom. Never has free credit been dispensed to
attain the desirable end of credit dispensation. Therefore, every credit has to have cost
to benefit both the lender and borrower. Cost of credit is an important element in the
price of liquidity preference called ‘rate of interest’. In the real cost of credit the
incidence of ‘transaction cost’ is added to determine the actual rate of interest. In the
MFI credit dispensation, there is a constant complain of ‘high rate of interest’
compared to mega banks. There is a demand for ‘capping’ of interest of the MFIs. To
appreciate the need for higher rate of interest, one should understand that such a need
arises to meet the cost of borrowing credit, the transaction cost, the administrative
cost of the credit deliver system and the profit margin of the MFI.
As explained, the MFIs have to deliver credit at the door of the client, absorb the risk
element of the collateral security in the peer function of the group lending and incur
high transaction cost to establish personal lender-borrower relationship, and therefore,
the rate of interest has to be higher than mega banks till the credit transactions reach
the level to reap the benefits of ‘economies of scale’.
In the analysis of the rate of interest, only alienable element that can be varied is the
‘margin’ appropriated by the MFIs to increase their profit. This element is variable
and with the attainment of the ‘economies of scale’ the flow becomes automatically
proportionate to the volume of business. Until the volume of business is large enough
to reap the ‘economies of scale’, no interest capping is possible as the MFIs will
provide service at the door of the clients with heavy loss.
Once the MFIs reach the level of ‘economies of scale’, let us say with an outstanding
of Rs 20 crores, the maximum rate of interest can be 25%. The next possible strategy
to impose a cap on the rate of interest could be to subsidize the cost of fund by
Government or RBI through ‘risk stabilization fund’ to be given to the public sector
mega banks.

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The third area in which frugality can be practiced is imposing a self restriction on the
margin by the MFIs themselves. The sub-committee may consider one or two of the
options leaving the third to the MFIs.

6. Loan Recovery System

The MFIs normally realize loans through a well set training structure in which the
clients agree to commit themselves in the periodicity of repayment. It is based on
persuasive strategy. Now it is weekly installment for a good reason that the ‘impact’
of loan repayment is not felt as arduous mental burden though the ‘incident’ in terms
of loan amount is transparent. Reduction of the periodicity to monthly repayment will
create mental resistance in terms of the ‘impact’ of the loan incidence. The percentage
of repayment will reduce to take advantage of the ‘pleasure of default’ by the
unwilling clients. The sub-committee may not consider altering the periodicity of
repayment unless sounder logic is propounded. No coercive tactics should be allowed
in loan recovery and complains on this account should be severely dealt with.

Summary

Micro-Finance has to play the role of the most efficient credit dispenser for the tribes
and tribal women.

i. to ensure production oriented credit end use, changing their mind set from use
of credit as only for consumption and emergency,
ii. to ensures a cordial lender-borrower relationship through ensuring credit
deliver at the door-step of the client,
iii. to save them of harassment and heavy transaction cost by dispensing the
collateral security necessary in the bank loans through group functions that
generate peer pressure,
iv. to ensure empowerment of the tribal women by making them stake holders as
clients who take loan related decisions themselves,
v. to ensure unit viability by weekly repayment schedules that reduce the
‘impact’ of the loan burden of the clients

……who make repayments in a disciplined manner.

(About the Author- Sri Kindo is a retired IAS officer, presently Chairman of
Sambandh Finserve Pvt Ltd. He was Registrar Cooperative Societies, Orissa)