Outreaching the poor under microfinance institutions in India: Rhetoric versus realities

• Published date: 01 November 2020
• Author: Sunil Sangwan,Narayan Chandra Nayak
• Date: 01 November 2020
• DOI: http://doi.org/10.1002/pa.2161

PRACTITIONER PAPER

Outreaching the poor under microfinance institutions in India:

Rhetoric versus realities

Sunil Sangwan|Narayan Chandra Nayak

Department of Humanities and Social

Sciences, Indian Institute of Technology

Kharagpur, Kharagpur, India

Correspondence

Sunil Sangwan, Department of Humanities and

Social Sciences, Indian Institute of Technology

Kharagpur, Kharagpur, West Bengal 721302,

India.

Email: sunilsangwan07@gmail.com

In India, microfinance institutions (MFIs) have made an impressive contribution in

achieving the financial inclusion. However, the peculiar features of MFI lending—the

uncollateralized small amount loans—raise doubts on their outreach and targeting

that whether the poor are really being served. This study based on a primary survey

ascertains that mere financial inclusion does not guarantee poverty outreach in the

context of India.

1|INTRODUCTION

In India, reports published on microfinance institutions (MFIs) many a

time tend to discover an impressive microfinance outreach and laud

MFIs' contributions toward serving the poor and the unbanked people

(Sa-Dhan, 2016). These claims seem to be oblivious of the realities

regarding the outreach behavior among the MFIs. There is no denying

that in the beginning of the microfinance era, MFIs while operating as

non-government organizations (NGOs) had the inclination, capability,

and reach to serve the poor in rural areas (Sriram, 2005). In course of

time, however, their focus has shifted to financial sustainability,

thanks to new regulations, increasing competition, commercialization,

financial liberalization, and access to external financing (Assefa, Her-

mes, & Meesters, 2013; Olivares-Polanco, 2005; Rhyne &

Otero, 2006). Such a paradigm shift in their outreach behavior is cur-

rently getting manifested in their unequal spread across various

income groups as well as regions (Sangwan & Nayak, 2019). In India, a

large proportion of MFIs' services is concentrated in the southern

region. Despite fourth/fifth of the country's poor residing in rural

areas, the rural share in the client base comprises only 38% (Sa-

Dhan, 2016). This possibly indicates a conspicuous bias against the

poor, reflecting thereby a conflict between poverty outreach and

financial sustainability.

Suffice to say, there are basically two schools of thought over

MFI outreach, namely, “financial systems approach”and “poverty

lending approach”(Robinson, 2001). The proponents of the former,

called “institutionalists,”put thrust on financial sustainability and

income generation goal of the MFIs. To them, large-scale client out-

reach necessitates financially self-reliant MFIs (Cull, Demirgüç-Kunt, &

Morduch, 2009; Ghosh & Van Tassel, 2008). Conversely, those pro-

pounding the latter, called “welfarists,”consider MFIs as prime

sources of assured micro-credit facilities to the poor for the genera-

tion of gainful livelihood opportunities (Banerjee, Duflo, Glennerster, &

Kinnan, 2015).

The empirical support for the adoption of poverty lending

approach can be found in different cross-country(Gonzalez-Vega,

Schreiner, Meyer, Rodriguez-Meza, & Navajas, 1997; Kar, 2013; Mer-

sland & Strøm, 2010), individual country (Kaur, 2016; Khandker,

Khalily, & Hussain, 2016), and MFI level (Hishigsuren, 2007) analyses.

Conversely, several studies (Hermes, Lensink, & Meesters, 2011;

Mia & Lee, 2017; Ramus & Vaccaro, 2017) have reported adherence

to financial systems approach in MFI operation. The prime factor

attributable to this is their commercialization. In particular, the NGO-

MFIs whose primary activities were traditionally directed toward the

poverty alleviation are now allegedly adopting commercial business

practices (Frumkin, 2009; Hermes et al., 2011). These MFIs used to

place greater efforts on outreach to the unserved markets. While

doing so, they seemed to have relied heavily on donated funds and

incurred rising operating costs (Cull, Demirgüç-Kunt, &

Morduch, 2014). In order to become self-reliant and independent of

the uncertain donor funds, they have gradually transformed into com-

mercial firms as non-banking financial company-MFIs(NBFC-MFIs)

(Armendáriz & Szafarz, 2011; Cull et al., 2014). Their commercializa-

tion is manifested in giving preferences to financial performance over

social performance (Hermes et al., 2011; Mia & Lee, 2017). Further-

more, the growing participation of the profit seeking investors and pri-

vate financial institutions prompt MFIs to emphasize on profitability

and growth targets (Srinivasan, 2014).

There is, however, a counter-viewpoint that commercial funding,

improved efficiency, and scale economies may result in low interest

rates and outreach to unexplored markets (Armendáriz &

Szafarz, 2011; Mersland & Strøm, 2010). Even studies (Cull

Received: 2 October 2019Revised: 1 March 2020Accepted: 22 April 2020

DOI: 10.1002/pa.2161

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https://doi.org/10.1002/pa.2161