Wednesday, February 8, 2012

Microfinance: Time to move towards financial inclusion

As printed in the Economic Times

The numbers that describe India's economy are mindboggling. Just one-tenth of the population participates in the formal economy. Of these, only about 35 million pay taxes. That's less than 3%.

No wonder then that our economy produced a GDP of only $1.42 trillion at last count, about the same as that of the city of Tokyo which has a population of 35 million. There are simply too few producing value and wealth in India and so there is not enough to go around.

The financial inclusion agenda so far has been largely focused on redistribution of wealth while what is required is inclusion in the creation of wealth. Financial inclusion so far has meant debt distribution and nofrills bank accounts.

Microfinance has been one major channel of debt distribution to the poor. While the original assumption was that these loans were for investment in micro enterprise, the Malegam committee report in 2010 indicates that 75% of the loans went towards consumption. Contrast this with the distribution of bank debt in India where less than 20% were consumer loans.