The microfinance sector is not only helping the poor in rural areas generate some income, but it also promotes entrepreneurship and help them come up as entrepreneurs, says Nobel peace prize winner and founder of Grameen Bank of Bangladesh Muhammad Yunus.
In a free-wheeling interview with CNBC-TV18, Yunus, who is known as a pioneer of the microcredit concept, said the microfinance sector in India would double the size in the next five years and become a significant economic entity.
“Rural areas always provided the labour to the city. I don’t think, after micro credit, that would be the scenario. The scenario will be that they would be dealing with their own economy, building their own economy as entrepreneurs. I think microcredit has transformed the whole idea of what the urban and rural relationship would be,” he observed.
Edited excerpts from the interview:
We would like to talk to you about the overall health of microfinance sector in India. This sector saw a growth of 42 percent in Q1 of FY20. The gross loan portfolio of India’s microfinance industry grew 38 percent in 2018-2019. The number of microfinance accounts grew 21 percent. Are these healthy trends at a time of economic downturn?
That reminds me of 2008, when the whole meltdown happened, everywhere a wave of meltdown; so many journalists asked me about its impact on micro credit. I said microcredit is sound, healthy and flourishing because they are not part of that economy. Their economy they are building up, their own economy, so that meltdown was felt only in big financial centres such as New York, London or Bombay, that kind of thing. Microcredit sector is far away from that and I am very happy they are providing the stability to the economy.
Coming back to the present situation in India, I will say microcredit sector is doing very good and I am very impressed looking at the numbers. They have come a long way, they have gone through lots of ups and downs, the sector has faced many crises. Today they are well-organised and their information flow is very clear. They are up for big changes and you are ready for doubling what you have right now after nearly 30 years of work. In the next five years, the sector will double the size. It will become a significant economic entity in the whole country. So that is where they are, a big change is happening in the rural economy.
Without going into specific issues that the Indian economy is facing what role can microfinance sector play in strengthening the fundamentals of an economy in the India context?
A very important role. It is usually said that it is money going to the poor for starting some income generating activity. Some define it as a kind of self-employment. I said no, self-employment is kind of minimising the importance of the whole thing as if they are job seekers, now they have employed themselves. I said no, you are missing the whole point. They are coming up as entrepreneurs, they are building their own businesses. Even if it is only a $200 loan, they build businesses, they sell something, produce something and plan for the next round, what they want to do and improve. Micro credit is not one-shot credit, it is a series of things, every year, every six months you are getting new loans, you are building up what you have built before. So it is an entrepreneurship that you are building up.
People never looked at the rural poor as materials for entrepreneurship. They usually got for low-income jobs -- either it is an agriculture labour or some industrial labour of low quality -- that is what the rural people usually get. Today it is changed, microcredit has transformed everything. They are emerging as entrepreneurs. Imagine if this generation is coming up as entrepreneurs what their second generation will do. Their second generation will have education, they will have all this learning process they have gone through in the family and they are getting ready for that. So, this is an outburst of an entrepreneurial activity in the rural areas.
Rural areas always provided the labour to the city. I don’t think after micro credit, that would be the scenario. The scenario will be that they would be dealing with their own economy, building their own economy as entrepreneurs, that is what the microcredit has given them. I think microcredit has transformed the whole idea of what the urban and rural relationship would be. Today they are the recipients of foods and other things coming from the cities. Tomorrow they will be producing and be selling to the urban areas because they will be coming to the stage where they will be processing those things, they produce rather than just supply the raw materials.
What are the issues that you see in the micro finance sector here in India, things that need to be improved according to you, a place where the RBI can play a role maybe?
The RBI has played a very important role that I must admire them. They are very patient, they want to make sure that they do it the right way and they did it the right way. Particularly the decision about small finance banks, this is a wonderful decision and NGOs given this licence to become banks for microfinance and then take deposits then that is the whole end of the idea of waiting for donors, waiting for others to give them the money so that they can lend to the poor people. They do it themselves.
The one important thing that the RBI could look at, I am sure they are looking at it but I should say it anyway, is that 80 percent of the money that goes out through the microfinance organisations throughout India comes from the banks, conventional banks. So the conventional banks themselves provide the money to the micro finance, which is good. But my point is why don’t the microfinance organisations given the ability to take deposits, given the licence to take deposits and then take the money.
Usually the rural money goes to conventional banks in the city and then conventional bank giving small amount of money back to the microfinance or coming back to the rural areas. Why can’t rural money stay in the rural area? Give them microcredit people, ability to take deposit and use it for the local people. The entrepreneurship really saluted, really applauded and they see that they can create their own local economy. Local economy dealing with the RBI economy as two partners rather than recipient of things that happen in the urban areas.
Demonetisation and the recent non-banking financial companies crisis have affected the economy. What was the impact of these two issues on the flow of microfinance and do you think the negative impact has been offset now?
I was told it is offset. Now they are back to normality. That is why they are very enthusiastic about celebrating the 20th year. They are now in full strength. Whatever slowness came into their sector has been overcome, they are now in the full speed ahead, so they continue to do that.