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Microfinance: Band-Aid on a fatal wound?

E Kumar Sharma     February 28, 2011
The setting up of the Rs 100 crore  "India Microfinance Equity Fund" with SIDBI announced by finance minister Pranab Mukerjee in his budget speech has been welcomed by the Indian microfinance industry.

"The government seems to have, in a sense recognised an alternate model of lending to the poor other than the government -backed Self-Help Groups,'' says Vijay Mahajan, the microfinance industry veteran and founder of one of the earliest NBFC MFI (non banking finance company microfinance institution) in the country. He is however disappointed by the fund size. "The fund size of Rs 100 crore is too small and is like applying Band-Aid on a fatal wound considering that in Andhra Pradesh alone (the hub of Indian microfinance sector) over Rs 5000 crore worth of loans would have to be written off following the new ordinance brought out by the state government in October last year.''

"While the amount may be small and should ideally have been around Rs 1,000 crore, we have to see this as a good beginning and perhaps given the size of the fund, the immediate beneficiaries may be the small and medium MFIs,'' says Vijayalakshmi Das, chief executive officer, Ananya Finance for Inclusive Growth and former CEO of Friends of Women's World Banking in India, which had played an important role by extending support in their initial years to some of the biggest names in Indian microfinance sector like SKS Microfinance and Spandana.

The finance minister also said a Women's Self Help Group (SHG) Development Fund is also to be created with a corpus of Rs 500 crore. A lot depends on how this fund is used, says Das. If it is meant to support capacity building for these SHG women then it would be a good initiative.

Also, despite the industry's stated hopes, the finance minister maintained his silence regarding the MFI's grant to banking licenses.  Perhaps, with good reason. 

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