The economic reality is cleary pointing toward the need for evolving a model based on individual lending alongside the accepted model based on joint liability. The reasons have been laid out in my last blog but for the sake of smooth flow of reading let me reiterate my position as it would be important for my argument in favour of the need to create specialised microfinance bank.

As I have been arguing and pointing out for some time, driven by the market reality there is a clear widening of spectrum of opportunities. When the microfinance movement started, the opportunities were limited and the enterprise windows were not as diverse as they are now. With limited diversity in opportunities for enterprise, the diversity of risk was also limited and understood by everybody. Therefore the group could be easily sold on a business proposal. But with the risk spectrup widening with the days in sync with opening up of new business opportunities, it is turning out to be difficult for an enterprising customer to convince a group on the bearability of the risk associated with his business poroposal. In short, it is the fear of unknown that acts as the strategic barrier to individual aspirations within the conventional joint liability group model. This reality obviously argues in favour of an individual based model, not so much as total replacement to joint liability but as a second model on offer.

But this is not all. Availability of finance needs to walk hand in hand with accumulation of savings. Within the existing microfinance model the industry is working more as an extension of banks rather than as an independent resource generator. Within the existing model, the microfinance industry is working as an extended JLG to the bank as it were. Banks are providing the funds to the industry. The industry is bearing the risk of micro lending.

Now if we just for a fleeting second remember that risk is priced as interest, the existing model tends to multiply risk with the resultant obvious impact on the cost of fund. On the other hand there is the issue of helping the customers save within an institutionalised structure. With the microfinance units not being banks, in order that they may help the customers access the financial market 360o , the units again act as agents of banks or other financial institutions.

The Grameen Bank experience and its success has a lesson for microfinance as a tool for poverty alleviation and development in a country like others. As a bank, the Grameen Bank in Bangladesh and then in the USA could fashion products in a manner that helped people within their locality to leverage local needs as business opportunities. Micro savings provided the funds that in turn got channelised into loan to help fund business plans. The concept helped cut out the intermediation model as it has evolved globally and in India. Grameen Bank was into intermediation but not as agents of other bigger financial institutions. It provided faster response to the local needs in an innovative way paving the way for more fluid development dynamics.

In India, the time has probably come for us to think along similar line and create microfinance banks for a faster traction than what is availble within the current model.