Financial Literacy and Microfinance Institutions

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“We must remember that the purpose of microcredit is to eliminate poverty in the shortest possible period of time” – Mohammed Yunus.

Union Rural Development Minister Jayram Ramesh made a statement in the recent Microfinance India Summit at New Delhi that microfinance has raised more questions that it has answered. Somehow, there is building a consensus that microfinance institutions are not being able to deliver the desired outcomes. Does the government has been able played its desired role to make the microfinance industry as an agent of social transformation or the microfinance institutions have been diverted to hardcore profit making entity? The Andra crisis has taught us that making profit out poverty is not only unethical, it is dangerous too! Hence, where is the way out? Is re-designing of microfinance intervention is need of the hour? If that is, what should be done? What should be incorporated with the present setup? Financial Literacy can be one of the most promising tools to socialize the microfinance interventions.

Last year, “Organization of Economic Cooperation and Development (OECD)” held an workshop on financial literacy in New Delhi and observed that Financial Literacy is a combination of financial awareness, knowledge, skills, attitude and behaviour necessary necessary to make sound financial decisions and ultimately achieve individual financial well being.

The significance of Financial Literacy is being gaining momentum globally. Most recently, countries like USA, UK, Czech Republic, Netherlands, New Zealand, Spain and India have come up with detailed strategy for financial literacy. Last year, Credit Card Company VISA has also conducted a survey to know the state of Financial Literacy. The “VISA Global Financial Literacy Barometer Survey” covered 28 countries and India stood at 23rd position. The survey report reveals that only 35% of Indian is financially literate and ignorance is more among the women.

Many organizations in India too have been taking Financial Literacy initiatives. RBI has their “Project Financial Literacy”. This project is being operationalized through films, comics in English as well as in other vernacular languages. They are organizing quiz programs among school student to aware them about the financial ecosystem. SEBI has also initiated the their financial literacy program as a part of the investor education plan. IRDA and PFRDA also have initiated financial literacy programs. Interestingly, private company like Money Wizard has also started an economically viable model of financial literacy.

The present state of Financial Literacy shows that the steps taken by regulatory bodies like RBI, SEBI etc or banks (Financial Literacy and Credit Counselling Programs) are not being able reach the masses. And most importantly, these initiatives are least successful to cater the most vulnerable section of the society. A few months back, RBI has organized quiz among the school students. I got the opportunity to be present in one of such program held at District Library, Guwahati. Most of the students are from the reputed private English medium schools of Guwahati. Question arises, what will be outcome? Will it reach the marginalized section of the society? No doubt same thing is being repeated in the maximum programs of SEBI, IRDA, and PFRDA etc. These programs are not being able to reach the most needy target group. To reach this target group MFI may be the most viable channel.

Microfinance institutions should take the Financial Literacy initiatives not only to benefit the customers, but for their own prosperity too. It is always less risky to lend money to a financially literate customers. The financial literacy among the microfinance clients may minimize the risk of over-lending, ghost loan and NPA. Proper loan utilization is a major challenge in this vertical. Financial Literacy may help the MFI to overcome the challenge. Another major challenge of microfinance operation is credit appraisal. It’s like the challenge faced by a vetenary doctor. If financial literacy can enable the clients to assess their own creditworthiness, it become much easier for the microfinance practioner to provide the credit remedy as like as a physician. Financial Literacy can be a game changer for the MFIs in terms of efficiency and profit maximization. If the clients can be motivated to open bank accounts and disbursement can be done in cashless mode, a number of benefits can be garnered. Cashless disbursement will not only minimize the paper work and TAT (Turn Around Time) but also it can almost zeroed the cash-in-transit risk.

Ujjivan Financial Services Pvt. Ltd. one of the best MFI of country has initiated financial literacy holistically. In the first phase they screened a video film called Sankalp on debt management, ghost loan and credit bureau to their all customers in vernacular languages across the country. In second phase they have started a five module Diksha program. They have targeted to impart financial literacy to more than 10 lakhs clients. After successful completion of the training, they are coordinating with the bank to open the savings bank accounts for the graduated customers. Now, they are using those accounts to do cashless disbursement. The result so far is inspirational.

These developments may give a change re-think on the significance of Financial Literacy to the microfinance institutions, development practioners and policy makers as well.

Rampant Growth of Fake Financial Institution in Assam and Role of Financial Literacy

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Assam is going through a very tough time. The devastating flood has washed out everything of the farmer of the state. The GS Road molestation case has made the Assamese ashamed and the violence in lower Assam has created a humanitarian crisis. All along this, relentless blow from the fake financial institution has created havoc in the state. The gravity of the issue pulled out the masses to the street and compelled the government to disclose the list of 119 NBFCs operating the state along with fake financial institutions in the state assembly.

The issue of fake financial institution has been grabbing the headline for the last couple of months. It came to light that as many as 29 NBFCs were taking deposit from the customers, violating the RBI norms. Taking the advantage of poor governance and careless attitude of RBI these fake financial institutions collects huge amount and disappears all of a sudden.

It is observed that the victims of these financial frauds are basically poor men and women of the state. Now, question arises, why the government is not being able to protect the hard-earned money of the poor people of the state or why the RBI being the watch dog of the financial sector seems to be blind to these issues and surprisingly why the people do deposit their money to these institutions. The last question, isn’t more thought provoking?

Yes, the poor people of the state are compelled to go to these institutions to meet their need of various financial services. Dr. Ela Bhatt, founder of SEWA (Self Employed Women’s Association) and known to be the mother of microfinace observed that financial services are to be treated as fundamental need of a human being. But when this fundamental need is not addressed by the state and its concerned agencies, the poor are compelled to knock the door of the fake financial institutions. The rampant growth of fake financial institutions is fuelled by lack of financial inclusion.

Study shows that financial inclusion can bring prosperity and also can work as a powerful weapon to alleviate poverty. But the scenario in the state and in the country as a whole is not encouraging at all. More than 50% people of the country are still outside the ambit of mainstream financial system. These excluded people are the bottom of pyramid. They excluded as the mainstream financial institutions like banks treat them unworthy to bank upon! The situation in Assam and North Eastern states are more pathetic. The data shows that India has 90 un-banked blocks and it is unbelievable that out of these 90 un-banked blocks 80s are in NE states. RBI has introduced policy to compensate revenue loss of the commercial banks for five years to open new branches in the region to minimise the gap. But no result observed so far.
Best way to check the financial fraud is to educate the people about their financials and the eco-system as whole. Till date government has not taken remarkable financial literacy initiative in the state, besides cautious advertisement in the newspapers, which causes negative impact on the target group. They become more conservative as far as financial risks taking are concern. On the other hand RBI regional office’s role in financial literacy is more pathetic. An NBFC named Sunmarg Microfinance Institution had collected lakhs of amount from the people of Assam and now the company is on its way to abscond. The same company was barred to collect deposit from public in West Bengal. So called watch dog RBI’s regional office at Guwahati couldn’t trace out the smell of fraudulent activities of the said company in this region. The FLCC (Financial Literacy and Credit Counselling) programme in the state has become a white elephant. The PSU banks attitude seems to be reluctant as earlier. They seem to be overburdened!

On the contrary, ray of hope is being shown by some private companies in the region. Most recently, Microfinance Company has taken massive financial literacy drive in Assam and North Eastern states. RGVN (Rastriya Grameen Vikas Nidhi) in collaboration with CRISIL has started their financial literacy programme called Pragati in Assam. Dr. Amiya Kumar Sarma, Executive Director of RGVN is optimist that Pragati will make a positive impact on the society. Another leading microfinance institution of the country Ujjivan Financial Services Pvt. Ltd has also taken a huge financial literacy programme in Assam and Meghalaya. They have already educated around 10000 women in Assam and Meghalaya through multimedia training programme called Sankalp in collaboration with Unitus and Lok Foundation. Mr. Samit Ghosh, Managing Director of Ujjivan Financial Services Pvt. Ltd. says that Sankalp has played a tremendous role in the field of financial literacy. He also added that copy of Sankalp has been provided to BRAC to do financial training in Bangladesh. This month Ujjivan has started another financial literacy programme called Diksha through a well trained and well equipped dedicated team in Assam.

The poor people of the state only can be protected from those fake financial institutions by educating them and bringing them under the umbrella of organised financial system. The failure of the mainstream financial institutions to embrace the bottom of the pyramid literally strengthens the need of a specialized limited liability banking model in India too. Such low cost banking models are viable and working fine in countries like Indonesia, Philippines, Bangladesh etc. But the commitment of our government towards financial inclusion and poverty alleviation seems to be illusive!