The Economic System Of India

Published Date: 02 Nov 2017

The Indian Subcontinent or the old colonial British India is composed by Pakistan, India and Bangladesh. These old colonies have a common culture, economic and political history. In view of these similarities, such as the very high density of population, the high level of poverty and the accesses restrictions of traditional Bank services for the poorest, the microcredit success in Bangladesh was exported in India. Microcredit was the efficient solution to get out the country from his mess and poverty.

Microcredit came in India at the beginning of the 80’s with several governmental subsidies. The Government is committed in pursuing reforms to sustain growth, modernize economic structures and the fight against poverty. In India, as in many other parts of the world, microfinance is developing exponentially. While the program appears relatively positive results from a quantitative point of view, the quality of services remains poor. The total lack of professionalism and the excessive centralization of decisions prove difficult to reconcile with an offer tailored to the diversity of contexts and needs. As for the principle of group lending, its effectiveness in reimbursement rates is undeniable, but it has many limitations that are highly underestimated.

The Indian microfinance industry weights 6.7 billion dollars. India is the more important emerging market for microfinance. The Indian government evaluates that 300 (Source à rajouter) billion households are poor, whose barely 15% to 20% have access to the formal financial sector.

Nowadays, microcredit in India meets lots of issues and jeopardizes the whole system because of over debt, social pressure, which leads to suicides, piracy. From the Bangladesh experience, we can wonder if microcredit is sustainable in India. The analysis of the microcredit’s mechanisms and the Bangladesh microcredit system (I) will permit to understand the Indian microcredit case, analyze the microcredit crisis (II) and find potentials solutions to improve the microcredit system in such a poor country (III).

Understand Credit and microcredit aspects to analyse the Indian case

In India, like in numerous countries, microfinance acquires an exponential development. The object of this part is to study the positive aspects of credits and microcredit, then to have an overview on the Bangladesh system.

Mechanisms of microcredit

In which sense credit applied to little scale can make changes? The different economic mechanisms linked to the insertion of credit explain the positive economic consequences. The credit is above all a tool, creating value added and wealth. It is one of the main actors of every economy.

The credit is a mechanism by which a borrower acquires goods or money to a loaner in exchange of promise of a deferred payment of the counterparty, plus interests (1).

In theory, credit can create demand by the possibility to have a product before being able to produce yourself the equivalent. By this process, the borrowers create added value by investing and the loaner created money thanks to the reimbursement interests.

On a macroeconomic perspective credit provides a way of financing the economy and offers the same way to regulate it (2). In fact, a surplus of credit leads to a rise in money creation, which would result to an increase of demand therefore higher prices: inflation would cause a decrease of the purchasing power. The economy may be entering in a vicious circle of declining purchasing power by a substantial decrease in demand and production then employment leading to a further decline in the purchasing power etc.

Credit: an exchange where the creditor and debtor create each other value added.

The credit is by definition a " mechanism by which a debtor obtain a good or money from a creditor. In exchange, the debtor promises the creditor a deferred payment of the total amount of the money plus interests"(1). The Indian economy needs credit to create wealth.

Credit is a major tool of financing

In theory, "credit allows to dispose of a good, produce by others before having produce it oneself the equivalent: it makes real a demand until now virtual and foresee an upcoming production" (1). Thus credit and microcredit allows the debtor, thanks to the amount of money invested, to create value added. In the same way, the creditor supplies a service: an amount of money at a given time and creates wealth thanks to interests created. Moreover, from a macroeconomic point of view credit provides a financing tool for the economy and offer in the same way the tool to regulate it. Indeed an excess of credit leads to an increase of monetary creation having for consequence the increasing of demand, so a price increase.

So despite virtuous aspects of credit, it needs to regulate the credit in order to avoid inflation.

The multiplying effects of credit: how to create wealth

In September 2008, during the subprime crisis, numerous governments of hit countries decided with a mutual agreement to lower key rates of central banks in order to facilitate access to the credit for households and for companies: it is a recovery through investment. At this time states also launch big works to support the employment. To understand why states chosen this method to solve the crisis, it is necessary to return to the XXth century. The Keynes’ theories are essential to assess the Indian case.

Keynes multiplier

In 1929, the worst crisis of the century struck western economies. At that time, the American president Franklin Roosevelt launches his policy of "New Deal". It consists in a global investment or a direct injection towards the most hit classes with a main idea: " the expenses of some makes the income of the others "(2).

From the expense multiplier to the microcredit multiplier

Theorized in 1931 by Richard F. Kahn, the expense multiplier is a mechanism according to which: " a variation of the public spending, will provoke a higher demand variation because of a positive reaction from the investment " (3). It is the principle of the Keynesian multiplier. The multiplier effect is defined as " a process according to which a variation of an economic size within a specific time period produce an amplified change of an other economic size » (1). So, by applying this principle, the credit allow a certain category of entrepreneurs to develop themselves and allow also, a multiplying effect on incomes that result from these activities to a local level. Microcredit follows the same scheme as credit but it mostly concerns the working class. The lower classes have a low propensity to save; their incomes can go from one sector to another very quickly. Moreover, in India workers are less restricted by Low & Regulation than in the developed countries. It means that it is easier to start a business and to get working the expense multiplier. Thus, this aspect encourages the economic activity (2).

The scheme below explain the process:

Virtuous cycle scheme of investment caused by microcredit (3)

Thus, the theory tend to prove that the utilization of microcredit to good use can be very fructuous for India to the extend that we apply a rigorous control, that the system doesn’t degenerate and where the money invested doesn’t go abroad.

Actors of microcredit

Microcredit organizations were initially created as alternatives to the "loan-sharks" known to take advantage from clients. Ironically, many microcredit organizations now function as independent banks. This is the consequence of charging higher interest rates on loans and placing more emphasis on saving programs.

Microfinance Institutions

Microfinance Institutions (MFIs) take little or no collateral securities for credit offers. People covered are mostly those who can’t make the most of loans from banks and other financial institutions (2). This phenomenon is due to the lack of ability to provide guarantees or collateral securities against the money borrowed. Although the amount of finance individually provided is little, around 5 or 10 thousand (1), they aggregate a substantial amount when the entire financial year is considered. The main reason, behind the banks failing to extend loans to this section of people is the high default risk for repayment of interests and in some cases, the principal amount itself.

Group lending

Individuals using loans from microcredit are generally divided into groups, each group consist of 5 members. One member of the group supervises the rest. The rest of the group members guarantee the amount that has to be repaid by every individual member. Four or five groups from one particular location form a batch, again headed by a leader who belongs to members of different groups.

A field officer, who is the MFI employee, is put in-charge of each batch. He conducts meetings periodically, about every week. He is in charge of collecting the money for the MFI. It is clear that the mutuality concept is used to the extent that groups of persons with a common objective and mutual interest are more involved. Applying more conditions further reduces the default risk.

Lending to groups is a key part of microcredit. Initially it was focused on lending to individual. It has been clearly identified that lending to groups is safer than to individuals because groups are more likely to reimburse the MFI than individuals due to the group pressure and the possibility mutual assistance between members.

Lending to women

Lending to women has become an important principle for microcredit, with banks and NGOs such as BancoSol, WWB, and Pro Mujer catering to women exclusively. The feedback shows that when women are offered responsibility of the microcredit they are more capable than men to support their obligations. Grameen Bank explains that women have higher repayment rates, and accept smaller loans than men (1). A lot of aid agencies, including the World Bank explain that" experience has shown that repayment is higher among female borrowers, mostly due to more conservative investments and lower moral hazard risk" (2). Subsequently, many microcredit institutions have used the goal of empowering women to justify their disproportionate loans to women. Women represent 73% (3) of total world loaners. Various arguments, which make connections as much with, offer as the demand in microcredit can explain the women targeting by microfinance organization.

Demand of services is higher among women for different reasons. In many countries, women are more credit constrained than men. They are more

restricted in their access to finance and control over land (4) and capital(5). Consequently, they are considered less solvent by traditional banks. Low education level, as well as a limited time and mobility hinder them to engage themselves with complex and long procedures usually asked by the formal banking sector

Muhammad Yunus: a source of inspiration for the Indian economy

India has to study the microcredit most known character, its outlooks and the system he created to improve the microcredit one.

Biography

Muhammad Yunus was born in 1940 in Chittagong, Bangladesh. He is a Bangladeshi economist and entrepreneur known to have found the first microcredit institution, for which he received the peace Nobel Prize in 2006. He is called « the banker of poor people ». (1)

The Jorba story

Muhammad Yunus was a brilliant professor of economy at the Middle Tennessee State University. After the proclamation of independence in Bangladesh, he decided to come back to his home country in order to help his compatriots. Later, when he was teaching economy at the Chittagong University, he was really touched by people dying of hunger during the great starvation in the country.

He said: « people were dying in the street, and I was still teaching elegant economic theories without any consideration of the reality » (2). At this time, Yunus started to go around Chittagong, visiting villages. In one of his visit in Jorba, he found a group of 42 women who made bamboo stools. Because they didn’t have their own capital to buy the raw materials, they had made a deal with local traders: they lent money to the women in order to allow them buying raw materials but in return they had to sell them all their produced stools with a determined price which was just above the raw materials’ price.

Those people exploited them. Professor Yunus was surprised discovering that the total amount of money they needed to develop their activity in an independent way was only 27$. He lent them this money from his own pockets, without any interests. He permitted to the group to sell their stools with a better price and going out of this debt cycle, which linked them to the retail traders. At this stage, the microcredit idea was born: make some loans to people who don’t usually have access to bank services without any guarantee. He realised that even with a very small amount of money poor people were able to start or simply to develop a business.

A model for India

Microcredit is linked to a certain way of life: a vital part for the Indian development

The microcredit method in Bangladesh integrates a base of 16 values established by Muhammad Yunus. They are moral, ethical and concerns daily life management (1). We will see later on in the Third part of the dissertation that these rules, which have made the Bangladesh microcredit system, a success has to be implemented in India. Then we will have an overview of the microcredit organization that is maintaining the Bangladesh microcredit system afloat.

We shall follow and promote the four Grameen bank’s principles: Discipline, unity, bravery and work in all circumstances or our life.

We won’t live in dilapidated houses. We shall repair our house and work for the construction of new houses as quickly as possible.

During the plantation seasons, we shall plant as many seedlings as possible.

We shall plan to keep our families small. We shall minimize our expenditures. We shall look after our health.

We shall educate our children and ensure that they can earn to pay for their education.

We shall not take any dowry at our sons' wedding; neither shall we give any dowry at our daughter’s wedding. We shall keep our centre free from the curse of dowry. We shall not practice child marriage.

The Grameen Bank adventure

Grameen Bank, literally « bank of villages » is a microcredit specialized bank. It was created in 1976 by Muhammad Yunus in Bangladesh. It owns almost 1 400 branches and work in more than 50 000 villages. Since its creation it spent 4,69 billion dollar loans. 94% of Grameen Bank is held by poor borrowers; most of them are women. The other 6% percents belong to the Bangladeshi government (1).

Grameen Bank: a new business form

Grameen Bank is not a traditional bank it’s a social-business. Muhammad Yunus didn’t want to establish a non-governmental organisation because he said that they are dependent on donation.

This amount of money is not constant so NGOs have some troubles to make any future plan. What about companies’ foundation were in the same case because they were dependent on the company’s communication strategy? So finally he created what Grameen is today: a Social-business.

What is a social-business?

Social business is a cause-driven business. Investors can only take their money back but they cannot earn any dividend from the company. The goal of the investment is to achieve one or more social objectives through the operation of the company. The company must cover all costs and make profit, at the same time achieve social objectives, such as: healthcare for the poor, housing for the poor, financial services for the poor, nutrition for malnourished children, providing safe drinking water, introducing renewable energies, etc.in a business way (2).

The impact of business on people or environment, rather than the amount of profit made in a given period measures the success of social business. Sustainability of the company indicates that it is running as a business. The objective of the company is to achieve social goals (2).

The Grameen Bank base principle

Grammeen bank extends banking facilities to poor men and women and eliminates the exploitation of the poor by moneylenders. It Creates opportunities for self-employment for the vast multitude of unemployed people in rural Bangladesh (1).

Bring the disadvantaged, mostly the women from the poorest households, within the fold of an organizational format, which they can understand and manage by themselves.

Reverse the age-old vicious circle of "low income, low saving & low investment", into virtuous circle of "low income, injection of credit, investment, more income, more savings, more investment, more income"

Grameen Bank doesn’t do charity. It collects interests, but they are indexed to inflation. Loans are repaid in 96,5% of cases (2). Grameen Bank generates profits in order to maintain its action. The bank shareholders won’t ever get any dividend; they can just receive the amount of money they have invested. Two thirds of the borrowers go over the poverty line.

Why Grameen Bank different?

The institution wants to establish credit as a Human Right. The Bank’s way of proceeding is totally different than other banks. Traditional banks follow the principle: « the more you have, the more you can get » (2).

Grameen is not based on assets; it is based on persons’ potentials. The bank’s founder says that poor people are not poor because they don’t have any potential but because society don’t give them the possibility to use it.

The rich, generally men, own conventional banks. Grameen Bank is owned by poor women.

Grameen Bank works on proximity, its branches are very close to the borrowers even in the rural areas, unlike the branches of conventional banks, which try to locate themselves as close as possible to business districts and urban centres. One of the bank’s principle concerns the bank’s staff action: they visit their clients at their place. 22,124 employees meet every week the 8.35 millions of borrowers at their doorstep in 81,379 villages (1).

One more fact is about the legal form; when a person wants to borrow money from the bank, there are no legal conditions. There is no external intervention with the Grameen banking system. If a borrower doesn’t pay back his loan, he cannot be taken to law for that. Moreover, if a client gets difficulties and cannot pay on time the loan will be rescheduled. At Grameen Bank, under no circumstance total interest on a loan can exceed the amount of the loan, no matter how long the loan remains unpaid. Interest are always simple, it avoids unexpected variation.

Grameen Bank is a very social implicated institution trying to reduce poverty in Bangladesh. The bank pays attention to education of children, housing, sanitation, and access to clean drinking water and have the capacity to deal with emergencies like natural disasters (2). Grameen system helps the borrowers to build their own pension funds, and other types of savings. At least, death insurance is included in the banking service: if the borrower died, his family doesn’t inherit of his liabilities. In Grameen Bank even a beggar gets special attention.

Microcredit affects 8 million families in Bangladesh and it is pursued in 58 countries. We saw in this part what was the starting idea of microcredit and its successful model in Bangladesh (Bangladesh Microfinance Statistics 2011.Published by: Institute of Microfinance (InM) and Credit and Development Forum (CDF)). We will see now its evolutions in India.

II- How is microcredit present in India and the crisis?

The object of this part is to study specificities of the Indian microfinance sector, where the self-help bank linkages are a major actor of this system. While this programme displays relatively positive results from a quantitative point of view, the quality of the services offered remains humdrum. The total lack of professionalism and the excessive centralization concerning decision-making prove to be difficulty compatible with an adjusted offer to diversity of contexts and needs.

The microcredit institutions

Indian microfinance sector is the biggest one in the world (1). National Bank of Agriculture and Rural Development is the leading organism that promotes microcredit in India. His model, the Self Help Group (SHG) has created major opportunities for banks to lend to the poor. It has led to a campaign of encouragement of voluntary agencies, bankers, and "socially spirited" individuals, other formal and informal entities and also government functionaries to promote SHGs & Microfinance Institutions (MFIs) (2).

Dominant Models of Microfinance in India

SHG-Bank Model: Microfinance programs focus on organization at a base level through social mobilization that enables the poor to build Self Help Groups (SHGs) amongst themselves, consisting of 10-20 persons from the same village. They are able to fully participate and make decisions by their own. There is no intermediate between bank founds and loaners but the others members of the group.(3)

Self Help Groups are linked directly with Commercial Banks (Public Sector and Private Sector) at 58% in 2012, Regional Rural Banks (RRBs) at 15% or Co-operative Banks at 27. (3) Before making loans, the SHG have to spare money during an average of 6 months, in order to prove their capacity to save. (4)

MFI-Bank Model: MFIs combine the strength of informal sector: flexibility, sensitivity and responsiveness with the technical & administrative skills and financial resources of the formal sector. The MFIs Banks are ersatz to the traditional commercial banks. They are more "social oriented" than their formal sector’s siblings. They are also financed by Commercial Banks, Regional Rural Banks, or Co-operative Banks but without the obligation of sparing first and then loaning. (1)

MFIs can be assimilated to an intermediate between customers and banks. In fact, traditional banks(the financial institutions aka formal sector’s banks) are the money provider and the MFIs are the administration, doing the paperwork and are the guarantor to the bank.

Considering only the commercial banks and regional rural banks, the two other are not relevant enough, we can notice that from 2009 to 2012, the commercial banks linkage between those and MFIs are decreasing in terms of number of MFI partner and in terms of value of the loans.. But the regional rural banks, which has also known a decrease between 2009 and 2011, are gaining weight the two past years, rising from 9 to 113 MFIs and from just above 4 to more than 13 R core.

Microfinance penetration HID of India by states

In 2008 the microcredit has much more reached the south Indian’s states than the north, where there is low or even no presence of it at all. It did not change until now. The data didn’t change until now. Unfortunately, we can notice that the repartition of the microcredit penetration and HID do not match. Where there is a higher presence of microcredit, the more de HID is high. It would have been more logical that people using microfinance to be the poorest, those with the lower HID. This statement shows the first limit of the microcredit in India.

Whom for?

The typical client of microfinance services is a person whose incomes are low and do not have access to formal financial institutions due to his non-meeting of the conditions required by these institutions (identity documents, guarantees, minimum deposit, etc.). It usually leads a small income generating activity within a small family business. (1)

In rural areas, it is often small farmers or people with a small food processing business or a small business.

In urban areas, the clientele is more diverse: shopkeepers, service providers, artisans, street vendors, etc. As it is said in part 1, Women represent 75% of the total world loaners. (2)

The microfinance in statistics

Latest data for India:

(3)

Beside an slow down of the growth of loans outstanding, Indian microcredit has gained about 2,9 million new customers between 2010 and 2011 and even the average loan value has increase.

Number of active borrowers by MFIs in millions

(1)

All the figures are showing the same scheme, after an extraordinary and successful developpement of the microcredit in India, it is facing a slow down in 2009 and dive in 2010, 2011, and 2012.

Even if the the microfinance system in India is gaiging ground it is in a situation unknow for the past ten years, slowing down. We are now going to study why we can say that there is a crisis of the microfinance in India.

Factors responsible for the crisis

The Andhra Pradesh crisis

Microcredit has known a huge growth between 2005 and 2010.

It has been driven by a commercial bank financing which inherently gravitated towards structures "for profit." Thus, there was a trend across India to the transformation of MFIs to non-profit-banking financial companies (NBFCs) so that more than 55% of the 59 MFIs in the 2011 analysis of M-CRIL

(Micro-Credit Ratings International Limited)– all MFIs with more than 10,000 accounts of borrowers - are made ​​of these institutions.

Both transformed and new, MFIs were able to grow rapidly through better access to funding and by using the proven methodology of a mono-product offering rolled out over large numbers of branches, in diverse locations using standard processes. This was often at the expense of limited staff-client interaction.

The actual microcredit crisis is partly the result of this over-simplification. While large numbers may have been reached, the lack of concern on either side led to multiple lending. Some customers became over-indebt due to this transformation. (1)

In addition, on28 July 2010, SKS Microfinance debuted on the Bombay Stock Exchange. SKS's chairperson and founder, Vikram Akula, claimed that the Initial Public Offering (IPO) was to finance growth, enabling the firm to reach a larger number of poor people. This had as a result to increase politicians concerns about the bank. At the same time, media reveal the suicide scandal (see further), which was the tipping point to the State Government of Andhra Pradesh.(2)

So, Andhra Pradesh promulgates an ordinance (emergency law) requiring MFIs to provide information about their activities and take measures to provide any other drama (will be detail in part 3).

Entering the debate, media and local politicians advised the public, so the borrowers to stop to repay in order to force the MFIs to act as the State Government said.(2)

Microfinance virtually stopped in Andhra Pradesh, which represent 25% of the global Indian microfinance. But other borrowers were still coming and the MFIs and SGHs had to carry on.

Even if this governmental decision helps Andhra Pradesh borrowers it may be detrimental to the rest of India's borrowers. Indeed, the MFIs and SGHs will maybe amortize costs on other state's customers. (1)

Pirates of the microfinance

There are two types of sharks: the classic and the undercover

The first type of loan shark resembles a traditional lender and acts the same. A few minutes before the meeting credit centre, it offers money to borrowers in need of cash in order to pay the first loan drafts, usually between 200 and 400 rupees [from 3.30 to € 6.60] and demand repayment in less than a week. Bright, discreet, he practiced exorbitant rates. The borrower now has two loans. He is over-indebted.

The second category of usury is more difficult to uncover: it is a woman who seems to be a normal client of MFIs. Before the start of the meeting, these "infiltrators" discreetly distribute cash to those who need it. Of course, it also leads to a new loan. The borrower is also over-indebted.

The presence of this pirates micro-lender is not really unusual. In Andhra Pradesh, many borrowers deal with three or four loans at the same time, which mean they are always in a need of fresh money to reimburse drafts.

This way of acting might be very embarrassing when they are working in a sector rules by the seasons. So they do not have a regular cash flow and even they had refund their first loan, the pirate loans still remain to be paid. (2)

Repayment difficulties and seasonal production

Every borrower knows that the weekly group reunion will not be ended until everyone has reimbursed their drafts. So, for those whose job induces a working hours salary, the shorter the reunion is, the better. For them, time is money. So, the gate for pirates is open. They need to pay draft in order to end the reunion so they accept the pirate's offer. But those who work in such sector are also depending on weather conditions and seasons. As mention above, they will need money even if they already paid the first loan. They now enter in a vicious circle. (1) (2)

Enormous pressure on borrowers

The borrowers, even if they do not encounter such problems as told above, will ensure huge pressure from both MFIs and society.

The pressure from the need of money is a classic style of stress, which is similar to developed country situation. The borrower also has to figure out how he will ensure his drafts payment, or his multiple loans, which increase the weight on his shoulders.

But there is also a very particular style of pressure, due to the characteristics of the microcredit layout. The borrowers are surrounded by others borrowers and by friends and family. They can't fail in reimburse their draft or the will be discredited and dishonoured. They will also be very afraid of asking for help from friends and family. That is a symbol of personal failure. (2)

Suicides

At the end of the year 2012, many poor borrowers are under water. A wave of suicide puts microcredit under the spotlight. In effective, with the increase of the interest rate which leads to an excessive debt and a high social pressure for borrowers. These cannot get by and make end meet. During the months of September and October 2012 politicians from the state of Andhra Pradesh have held micro lenders responsible for the suicides of 57 Indian people. 17 of the 57 women who killed themselves were SKS clients. (3)

That’s why these tragedies make government and banks open their eyes and reduce the pressure. SKS shaved two points off their loan rates in Andhra Pradesh, where they have 2.2 million of borrowers. The string of suicide have a real impact on the sector and following this wave, the local government has passed a law severely convict the "harassment" of agents of credits toward borrowers. Some psychological groups and self-help support group were created to encourage interactions and support between inhabitants and borrowers. This social dimension is essential for their mental and resentment. Just one suicide can affect a huge group and question them to give up everything. That’s why it is very important to have supports to prevent from abandonment and suicide. (1)(2)

III - Potential solutions to improve the Indian microcredit system

The microfinance sector was born thirty years ago, dubbed with the mission to fight against poverty. Providing microcredit to marginalized women to help them starting their own business seemed to be a compelling solution that created effective results at the long term and sustainable institutions. The eyes were diverted from the beneficiaries to focus on microfinance institutions (MFI), which should be profitable and view portfolios of loan with excellent quality. Excessive interest rates, debt crisis (Andhra Pradesh), abusive collection practices, many cases, which came tarnish the image of the sector and should urge us to study again the promises of its founders. That’s why, a booster shot seems necessary to put consumers at the core of the thoughts.

Restore the image – Put the costumer at the core of the project

1) Understand the borrowers’ needs

The first objective is to put the consumer at the core of the microfinance. First of all it means understanding the poors’ financial needs. They not only need short-term productive microcredit to finance the working capital for their micro-company but also access, thanks to informal channels, to savings, consumer credit, insurance, transfers and payment systems (1). Like every borrowers, they optimize funds and do not hesitate to deviate them from the stated objectives to meet their needs, as highlighted Murdoch and Rutherford in "Portfolios of the poor; How the World’s Poor live on $2 a Day". Financial products, delivery, payment and refund mechanisms have to be adapted to costumer’s specific needs.

2) Replace the social mission at the heart of the microfinance

The principal limit is that Indian microcredit mainly finances family activities with a slow growth instead of businesses. Only one loan out of eight leads to the creation of a new activity. Moreover the interest rate is slipping, reaching to 25% hardly justifiable face to the social goal predefined and increase the number of over-indebtedness cases. A study from the French government highlighted the transformation of microfinance institutions into joint stock companies, and some of them, their initial public offering (IPO) that encourage the question of their ability to balance social and commercial objectives. Putting consumer at the heart of microfinance involved to replace the social mission at the core of MFI activities. "The client protection in microfinance campaign" promotes seven basic principles, which should be followed by all practitioners. Among them, transparency of costs and reasonable billing of services are significant in establishment of a confident link between consumers and institutions. Other international initiatives are going to be applying in Andhra Pradesh like the "Social Performance task force" (2). The goal of its organization is to verify that MFI set up procedures and tools in accordance with the social mission. Without the regulatory requirement, cross-section initiatives may slow down. Regulators have to aware of the specificity of microcredit: a financial service but also as a development tool offered to poor people, which are vulnerable.

3) The key-role of the shareholders

The role of shareholders is predominant to replace the client in the centre of the social mission. The analysis of clients repositioning on the profile risk and profitability of the IMF provides an interesting focus, true plea for a reinforcement of the social approach.

In crisis situations, like the one in Kosovo, clients repay first the IMF which bring them the most adapted range of financial services (including saving products) and with which it establish a relationship of trust. Then, the institution go through difficulties, while maintaining a portfolio of bad debt significantly lower than these of its competitors, which would not be able to serve these two key objectives. Indeed, the share of credit having a payment delay over 30 days can goes from one to three according to the institutions. In other words, placing the client at the heart of the IMF activity can improve significantly his profile risk. Moreover, the economic model of the microfinance and the weakness of the sector regulation can achieve two contradictory objectives: the access of financial services for vulnerable population and the profit maximization. This situation leads to put the profitability before the consumer development (1).

The consequences draw by some anterior crisis, show that the profitability maximization strategy is not permanent and can be damaging for vulnerable borrowers served. Repositioning of the consumer in the core of the project implies the strengthening of the social mission of MFI, as well as reach profitably for the shareholders equivalent to banking sector’s one. Moreover, with the experience of the Procredit Group, this profitability is more sustainable and stable.

Necessity to act in the long term

1) Give back a sustainable power to borrowers

Responding to a wave of suicides which have shocked both the politics and public opinion, Andhra Pradesh State, in which are gather half of the Indian micro-loaners, issued the October 15th, 2010 a law to protect women from being exploited by abusive practices of private companies. This law is born in a poisonous atmosphere between local government and the microcredit agencies. The government accuses them of extorting the poor and that he already temporarily closed 50 of them in Mach 2010. Aware of the dramatic situation of those voters, politician encouraged borrowers to stop any reimbursement, making the recovery rate fell from 90% to less than 20% and so jeopardizing the system (2).

This law is a declaration of war on private microfinance for which it make development condition drastic. It gave two month all the MFIs to register in a newly created dedicated unite that will now allows to grant microcredit and collect the refund. This new unit was also given the power of retrieve permit of performing microcredit related activities whenever it wants on the Andhra Pradesh territory.

In the same state it is now forbidden to the staff responsible for collection of repayments to visit borrowers and raise funds outside the offices selected by the authorities. These reimbursements are now monthly paid when weekly previously. Every second microcredit given to one who already contracts a loan has to be ratified by state agents. Interest rates on microloans are now limited. In order to show the seriousness of their involvement few days after the law became operative, Andhra Pradesh state arrested employees of two of the largest IMFs for harassing borrowers on its territory (1).

Indian banks fear a contagion of the same type of measures adopted in Andhra Pradesh to other states that might be tented to restrict to a threatening point the activities of microfinance as it is developing in all the country. The Indian central bank has also issued a circular in December 2010 urging banks to continue lending money to microfinance institutions through consortia regarding to the role now played by them in Indian economy, especially in rural areas.

2) A long-term consideration

Two years after the crisis began, we find that it has altered the running of the sector and harmed many borrowers. Indeed the new restrictions, compound with less funding, put a lot of MFIs under pressure, threatening the survival of the smallest. Nearly 30 of them in Andhra Pradesh had to close.Moreover, the crisis has led 71% of the customers to returnmoney lenders. However, these times of trouble, has also allowed a real consolidation of the microfinance sector in India. A series of measures is being implemented to improve governance, MFIs’ operational efficiency and provide social mission. Finally, a draft law on microfinance was introduced to the Indian parliament in July 2011, to remove MFIs from the list of "loan shark financial activities".

At the same time, we are witnessing the testing of a new partnership model involving local groups of borrowers (self-help-groups), banks and NGOs, the latter being responsible for ensuring the creation, training and group supervision. In a few years the supply growth is considerable. In 2007, with an average of 15 people per SHG, this program would involve more than 16 million people (2). The idea of this partnership is supposed to ensure efficiency and quality of services. If we measure efficiency in terms of number of groups created (almost 3 million groups in March 2007), growth rate (between March 1993 and March 2006, the program displays an average annual growth rate of 82 % in terms of customers and 110% in terms of amounts granted) and reimbursement rate (nearly 90%), the results can be considered as positive. The enthusiasm of banks, which far exceeds the regulatory injunctions, is a sufficient proof. However the issue of quality of service still remains.

3) Transparency of microfinance

Microfinance has now a strong will to show it has started its introspection and that it did not take too much time to draw conclusions about how it should treat customers from now. This

self-regulation establishes the principle of consumers protection through a code of conduct that companies are invited to sign. In parallel, financial education initiatives for clients were also taken. A guide for microcredit companies staff and their customers has been established with the dual objective to train and inform all stakeholders of the microfinance sector.

In order to add more credibility to its speech on awareness of its own failures, MFI’ professionals introduce the concept Smart Microfinance. Specifically, the Smart Microfinance intends to be fully transparent in terms of prices, terms and conditions of sale of the offered services. It wants to be pickier on creditworthiness of borrowers and will not provide customers services they do not actually need. It promotes high ethical standards in its practices of collecting repayments of its customers, as it must be now listening to the complaints of its to serve them more effectively. It ensures the confidentiality of client’s data as it ensures a protection among all stakeholders of that sector (1).

Nevertheless it is not the first time such an exemplary code is put forward by the Indian microfinance. In 2009 the 44 largest companies had formed the Network of Institutes of Microfinance, giving them self-regulation as an achievement to reach. The draconian measures taken by the end of 2010 by the Government of Andhra Pradesh show that these companies, as laudable that can be their ambitions of self-regulation, can hardly do without the law to feel obliged to honour their commitments in the absence of sanction’s mechanism against offenders.

Even if the fierce competition that engage the public and private sectors biases reforms from biased politician, microfinance as a whole would benefit from measures taken to control its survival and the well-being of its fragile clients. Its requests to expand its jurisdiction such as the right to receive as savings banks could be satisfied. It would also benefit from much better media coverage by showing transparency in its rates and in its practices of repayment collection (2).

Some analysts plead for the establishment of an organism that would be responsible for supervising the activities of microcredit, monitoring consumer complaints and a rating of companies based on other criteria than profitability. Financial performance of these companies could be linked with their ability to actually get their clients out of poverty. If these intentions are translated into action, and then the Indian microfinance crisis could prove beneficial for the profession and serve as an example to other countries.

Enhancement of the standard of living

Credit with education

There is a growing recognition of the fact that financial education is an important tool to overcome poverty among vulnerable populations and reduce the crisis of the Indian microcredit. Financial education enables individual’s to increase their capacity to have a better control of their financial resources management.

According to the Unicef, 37 % of the Indian population is illiterate in 2010 (1). Because of the culture and the need to feed their children, women have not received bases of Education. That’s the reason why half of illiterates are women. This is a real issue since they are a large number of borrowers. Some associations like the European Microfinance Network (EMN) tried to solve this problem by establishing some Micro-credit Education.

The EMN has been established to bring together microfinance actors and all organizations interested in the activities of this sector to promote microfinance, self-employment, micro-companies, give off good practices and develop the framework at once in the European Union and in other countries. Furthermore we can notice the self-help group "Freedom from hunger" with propose programs with dialogue-based adult education in India: credit with education. This innovation in partnership with some MFIs, consist in meeting the unique needs of poor women in rural areas (2).

Credit with Education participants can receive different types of trainings to manage better their revenue. The education program proposes some modules with staff people who are able to speak and understand the culture and customs of the women. This kind of dialogue based on learning sessions includes different type of communication. Women don’t need to write and read to understand the content. They use role-play, demonstration, discussion and song to make them understand. The different topics approached are for example: risk management, financial mathematics, outstanding debt management, and family planning. Moreover, this type of organization arranges debates and conferences with professional and experienced borrowers. Local partner organization staff people are able to speak with them and understand their culture and customs (3).

The benefits of this type of modules are numerous. Women, who participated in Credit with Education, acquire a greater sense of personal empowerment to make decisions, and better approach of their financial management. Furthermore, they are able to manage their business better and earn more money. They can also educate in return their entourage (children, family and friends) that will probably use microcredit in their future. It will have an efficient impact on the increase of the standard of living and the city development.

Health education and other services to prevent diseases and malnutrition

A large number of modules are also concentrate on the Health care and the nutrition. Indeed, the Indian government is really slow in their heath-policies. 42 % of children under the age of three are malnourished and the infant mortality rate is too high (1). The microfinance has a powerful tool in the fight of poverty and hunger. But all positive implementations of microcredit can slump when a borrower or a member of his family falls ill. In fact, it generally leads to late payments. That’s why some organization like the Microfinance and Health Protection (MAHP), launched in 2006 by the Freedom from Hunger, paired microfinance with health access. They educate women and initiate them to build sustainable health protection of their children and entourage (2).

Thanks to the help of Bill & Melinda Gates foundation, the MAHP managed to combine credit, saving services with education on health and other topics of vital interest to poor communities. At the same base as the Credit Education, women can learn and follow different modules on child health and nutrition or breastfeeding.

To permit a sustainable service, MFIs created a partnership with the MAHP. The goal is to offer them financial products to improve their access to health services and permit to prevent from dangerous diseases. This health education is essential for the survival of their business and their family (3).

In this map, we can see that thanks to this type of modules and health helps, the standard of living has increase in regions where microcredit is very well implanted. These kinds of programs have a very high potential. Indeed, they have small costs but high impacts. A research from Freedom of Hunger has proved that these programs cost only $1.59 per client per year, even in rural areas, with significant improvements in health protection services as we can see below (4).

Part of the population (in %) who undergoes privatization on :

If case of treatment needed, women have access to health loan, health savings or linkages to health micro-insurance programs to help them pay the services

Two other solutions to consider

Another solution related to the mechanism of the microfinance system itself could be the intensification of the found flow between the informal sector, SHG and microcredit’s dedicated organization, and the formal sector. It will increase on a long term the amount of deposit of the informal sector and therefore they would be able to use more self-found. Using self-found enable the organization to lend at a lower interest rate to members. The amount of money used from the organization will not suffer from transaction fees owe to commercial banks and will enable the organization to amortize the rest of the fees on it. This solution would also help to increase the competition in the sector, but of course it will only be positive if it is a competition based on the number of helped people instead of profit amount. The formal sector will take advantage of the lower transaction costs and risk, and the members who will be help by the microcredit will in the long term switch from informal to formal banking solution.(1)

Furthermore, the creation of associations that would gather the strength of NGOs and the expertise of financial institution could also be a solution. The NGOs’ skills are the accuracy in comprehension of people needs, their social and non-profit goal, their independency from government and their knowledge in how to address to the population; and those of financial institutions are the huge money’s deposit and expertise in how to manage the financial aspect of credit. Such an organization would be able to lend only the right amount to members of SHG or independent borrowers and so help them to avoid borrowing useless found that they would have difficulty to repay. It could be partially community based which could help to understand even better the needs of the population. The creation of alike institution could also help to reinforce the penetration of microcredit in rural areas, where the microcredit is the less developed. (1)

Conclusion

The unique point of this dissertation is to explain how to improve the social benefits of the Indian microcredit system. Microcredit has a lot of social benefits if it is correctly implemented. As an angle of attack, we chose the successful Bangladeshi microcredit system as a base in our analysis.

The self-help-groups bank linkage, key program of the Indian public microfinance, deserve credit to have allowed a massive development of the microfinance offer. Even if the not covered demand is still considerable, amounts at stake and the number of concerned families are not trivial any more.

To bring back together massive offer and quality services turns out to be much more problematic. This is only an additional illustration of the failures of the public intervention. However the whole part of the private sector, the one that developed recently on a large scale, doesn’t do better, even if the pursued objectives are from another nature. The crisis that has burst in spring 2006 in Andhra Pradesh (first State for the number of customers, in terms of SBL or about the private microfinance) illustrates perfectly ambiguities and limits of the development of the sector (1).

Beyond the drama experienced by families, public/private dissensions crystallize the main part of the discussions. The public organizations are accused of populism and demagoguery, the private of greed and commercial aggressiveness. Retail banking against commercial niche: this type of debate is classic, in the Indian context and in particular in Andhra Pradesh, it takes disproportionate proportions.

On the private side, the massive refinancing banking from which organizations benefit since few years brings the inevitably to increase in a exponential way their clientele. The most important of them have, for example multiplied their number of customers by 5,10 or even 20 during the last three years.

While being generous regarding amounts (loans on average are superior to 10 000 Rupees), these organizations apply interest rates relatively high, on average 24% Annual and methods of recovery that are sometimes effectively doubtful (2). Concerning public, the SBL program of the Stateoffer lower amounts, but very competitive conditions regarding interest rate: the equivalent of annual 3% at the time of the crisis. Latent since on 2004, date in which the new government had decided a first reduction in rates, the crisis has highlight a fundamental problem: the frenzy of private and public actors, all preoccupied by the maximization of their market shares, but little worried about the quality of their services.

This crisis could have been an opportunity to wonder about dysfunctions of the sector and about the real nature of the demand. A code of conduct was elaborated, but the concerns continue to be focused on the extension of the offer: the real nature of the financial needs for the population and the question of the quality of the services do not always seem to be a priority.

The Indian microcredit system is not a failure but it is sustainable under certain conditions. The client has to be put in the center of the system and. Social goals have to be preserved. The Indian government has to learn from the lessons of the Andrea Pradesh crisis and modify microfinance law and regulations with a long-term perspective. Education and health are two key point on which public authority have to focus on.