Future of microcredit is part of the broader question of the future of financial system itself. Microcredit in India is still at an early stage of expansion, yet to overcome doubts and hesitations. Ultimately, the entire informal sector has to be addressed by microcredit, because there is no other financial service available for it. It should expand itself to formal labour, too, offering housing, education and insurance.
Access to financial services can dramatically change people's lives.
The mainstream financial system has turned into a vehicle for wealth concentration. It provides financial facilities to those who are already financially fortunate. It doesn't intend to get involved with financially unreached people.
Grameen Bank in Bangladesh challenged the system. It pointed out that the problem is not in the credit-worthiness of the people, as is usually explained. It is because of the absence of people-worthiness of banks. It developed a daring concept of banking - banking without collateral, defying existing banking norms. This came to be known as microcredit or microfinance. India adopted it and expanded to make it the largest microcredit programme in the world. Two basic features of microcredit were skipped in India, a) taking deposits, b) running it as a social business (i.e. a business without any intention to make personal profit out of it.) Now is a good time to integrate these two features in the Indian microcredit world.
The coronavirus crisis gave rise to a new question. Can microcredit in India survive this massive crisis? Given our experience in Bangladesh, the answer is a firm 'yes'. Bangladesh goes routinely through floods and cyclones, which destroy houses, possessions, animals, businesses, even takes lives. But microcredit always bounces back. Poor people's lives are woven with endless disasters. Coping with disasters is an integral part of microcredit. Grameen Bank made sure its staff understood that microcredit is about people, not about money. Money is a tool to give the people a chance to fight for their lives.
The coronavirus crisis revealed another aspect - helplessness of people in the so-called 'informal sector'. They constitute majority of the work force of India. With the attack of Corvid-19, income of daily earners disappeared, millions of migrant workers had to head home, thousands of miles away, on foot.
Economic theory has nothing to offer to people in the informal sector. Grameen Bank gave me the realisation that economic theory went completely wrong in understanding the people outside the formal sector. It saw them as people in the waiting room. I see this 'waiting room' as the powerhouse of the economy. I see the 'informal sector' as the 'micro entrepreneur sector'. This sector, consisting of both active micro entrepreneurs and potential micro entrepreneurs, is a hub of throbbing energy of human beings. It is the seed-bed of natural entrepreneurship.
Since micro entrepreneurs have never got recognition from academics, they remain unrecognised by political leaders, legislators and policymakers. On the other hand, labour got full attention from all sides.
They got their legal and political rights established long back. They even have the Ministry of Labour headed by a full minister. Nearest that micro entrepreneurs got was to have some limited recognition as 'self-employed'.
Covid-19 revealed how vulnerable micro entrepreneurs become in a disaster situation. It is very urgent to give full academic and political recognition to micro entrepreneurs. This is the base of the entrepreneurship pyramid of the economy. It should be seen as a part of the continuum of entrepreneurship, not a random piece. If we recognise it as such, then we have to extend all the legal, financial, institutional and policy support that is given to the rest of entrepreneurs in various layers of the same pyramid, by creating an appropriate delivery structure.
Lives of the most micro entrepreneurs start with loan sharks, since they cannot bring their own capital into the business. Once you get your business started with capital from loan sharks, you can hardly grow out of it. It turns out that under the cover of business, you become a slave of the loan shark. No matter how big the microcredit sector has grown in India, it is still touching the tip of the iceberg.
The entire micro entrepreneur sector will dramatically change if the RBI starts giving licences to set up social business small finance banks. In addition, the RBI may encourage all banks to create social business small finance banks as subsidiaries in each state.
In addition to social business small finance banks for micro entrepreneurs, there should be exclusively designed social business venture capital funds, social business investment funds, social business insurance companies, and so on, all dedicated to serving the micro entrepreneurs.
Micro entrepreneurs will have to be brought under a very friendly regulatory system step by step. Many micro entrepreneurs disappear from the market because they cannot cope with the existing legal and regulatory system designed for formal businesses. The government may come up with micro entrepreneur versions of all regulations so that they become appropriate for their levels of business. Parallel to creating a new regulatory system for micro entrepreneurs, there should be a separate government agency dedicated to helping micro entrepreneurs cope with all government agencies. This newly created government agency, which may be designed as the 'Agency for Assisting and Promoting Micro Entrepreneurs', will be dedicated to protecting the rights of micro entrepreneurs. If any micro entrepreneur or group of micro entrepreneurs have any problem in dealing with any regulation or any government office or agency, they will bring the problem to this office. This office will interact with all government offices on behalf of micro entrepreneurs. The staff of this agency should establish themselves as friends of micro entrepreneurs. They'll be two-way interpreters, so that communication between the government and micro entrepreneurs never becomes a problem.
Following the business practices, micro entrepreneurs will create their own 'Chambers of Commerce and Industry' for the micro entrepreneur sector to promote the interest of the sector, to negotiate with the government and other sectors of the economy, and propose appropriate policies for all tiers of the government.
The Ministry of Labour was created as a political and economic commitment for labour. It is very important to create a Ministry of Micro Entrepreneurs for exactly the same reasons. After all, they constitute more than half of the workforce of the country.
A Ministry of Micro Entrepreneurs will be responsible for bringing social and economic transformation of the sector. This ministry will also remain responsible for making sure that gradually all members of this sector graduate out of receiving any kind of traditional welfare payments for the poor.
Creation of the Ministry of Micro Entrepreneurs will be a strategic step in building the rural economy as a parallel economy.
It will help create an environment in the rural economy to slow down the migration of people and integrate women and neglected segments of the society into the mainstream economy.
This ministry will give a very important message to the nation about the commitment of the government towards bottom-most people - men, women, and particularly the youth.
Microcredit has a much bigger role to play in building a people-friendly economy. Now is the time to get it ready by sorting out all institutional issues.