India needs a microfinance policy that is holistic, futuristic and yet practical in terms of satisfying unmet ground-level financial needs of low-income and excluded people. It should be developed through a truly bottom-up and democratic process with widespread stakeholder input and consultations

The ongoing crisis with regard to the MFI modelⁱ  in India and the attendant problems associated with the SHG bank linkage programmeⁱⁱ  leave very few options for low-income people in terms of their accessing institutional/quasi-formal financial services. Almost 60 years after Independence, this is indeed a very serious issue and one that requires appropriate and immediate attention of the stakeholders concerned including the regulators.

In recent months, there has been a lot of talk about microfinance and financial inclusion in India and the discussions have centered around having an appropriate regulatory framework for microfinance, scaling up financial inclusion, the need for a sole microfinance regulatory authority and the like. As before, all of those (and this writer included) who have been talking about these aspects, have provided their rather divergent and diverse views. But it seems to me that we are once again running around in circles without serious thought to a very fundamental issue—the lack of a comprehensive microfinance/financial inclusion policy for India. And even as the proposed Microfinance Bill in India continues its journey and could eventually land up in Parliament to become a saviour for MFIs, we need to ask the question of whether or not India needs a comprehensive microfinance/financial inclusion policy first. Such a policy, if it were to be framed, must answer questions like (but not limited to) the following:

•    What (financial services) do we see as part of financial inclusion and/or microfinance in India and why?
•    What has/has not worked on the ground with regard to financial inclusion and/or microfinance in India and why/why not?
•    Going forward, what is our vision with regard to the various financial inclusion and/or microfinance services/initiatives in India?
•    What do we hope to achieve with scaling up financial inclusion and/or microfinance in 5 years, 10 years, and 20 years from now, and so on?
•    And other questions as appropriate…

Unless we have a clearly-defined national microfinance/financial inclusion policy answering the above and other questions, our responses to delivering/scaling up low-income financial services will continue to be kneejerk and piecemeal. Interim solutions are undoubtedly necessary as life has to go on, but we need to critically look at medium- and long-term issues as well and address various issues in a comprehensive manner. Otherwise, we will face the prospect of remaining stagnant in our journey of promoting financial access for low income/excluded people and integrating them meaningfully in the overall growth process.

Therefore, even before we look at building a permanent regulatory architecture for all of microfinance/financial inclusion (through some mechanism and/or a Bill, etc), let us first look towards devising a national policy for microfinance and financial inclusion—a policy that is holistic, futuristic and yet practical (in terms of satisfying unmet ground-level financial needs of low income and excluded people) and developed through a truly bottom-up and democratic process with widespread stakeholder input and consultations. The aspect of having a bottom-up and democratic process is very critical to creating strong ownership for the policy and adherence to its vision during implementation.

Further, such an approach cannot be a mere document—conceived in New Delhi or Washington (with all due respect) and—produced through field-visits by a few important consultants/agencies to select field areas. It has to be truly national in character and must be backed by public interactions with low-income people in all parts of the country apart from state level, regional and national level consultations with various stakeholders. It has to be comprehensive enough in terms of bringing together different and competing models with alternative aspirations. And last, but not the least, it must be grounded in reality so as to make a solid difference to the lives of the people for whom it is being framed in the first place. In other words, it cannot just remain a paper tiger and/or a mere writing exercise

It is about time that we follow the lead of many other (and especially smaller) countries that have genuinely tried to frame appropriate microfinance/financial inclusion policies through a proper process. That alone can ensure the orderly/sustainable growth of the Indian microfinance/financial inclusion sector and simultaneously enable low-income people to become a real part of the inclusive growth story. The key question here is whether we have the commitment and courage to undertake such an important and urgently required task in a voluntary and selfless manner. Time alone will provide the answers.

 ⁱ http://www.moneylife.in/commentary/ramesh-s-arunachalam 
ⁱⁱ  http://www.moneylife.in/article/microfinance-industry-where-is-the-self-help-group-bank-linkage-model-headed/20381.html

(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments).