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IT is suggested that the investors' stake should be 25 per cent, while 75 per cent may be owned by the clients making them the shareholders. The overall governance should be made pretty fair so that the management cannot hog the small clients with a view to cheating them. The microcredit banks will carry on daily savings and other credit transactions in addition to introducing various savings products.
Microcredit banks may perform the retailing or wholesaling separately or in tandem. They will carry out leasing and factoring and provide concessionary loans under the programme for the hardcore poor through cross subsidising the interest rate. In addition, they can have a cutting-edge in supporting microenterprise over the micro-finance institutions (MFIs) in the rural areas for employment generation. The government might hive off some of the functions of agriculture banks and bestow these upon the microcredit banks for dispensing and recovering credit to marginal and small farmers. Hopefully this will yield good outcome.
The microcredit banks can also be used as arms of the commercial banks (dealing with remitting money) for sending remittances to the people including the poor households in the far-flung areas. Such banks may borrow money from overseas financial institutions and also, through issuance of bonds in the local market, invite equity and participate in the call money market. Microcredit banks should be allowed to operate in the places where the public and private sector banks have no presence or places where these banks are plagued with inefficiency and not performing well.
Microcredit banks can offer better governance. In the traditional banks, if the chairman or the board member(s) or the managing directors are removed or dismissed, the bank does not wobble at all. No adverse impact falls on the customers. Everything runs fine. It is due to the banking management system and control of the central bank that gives protection to the banks. Coming or going of the top-notch officials does not affect the banking functions, whereas, in the case of the NGOs it matters most.
Even if, the NGOs become formal MFIs, the situation is not likely to improve much. Unlike the NGO governance (generally considered rubber-stamped and pompous), the microcredit bank's overall governance and corporate set-up would have to be transparent, sound and must have a chain of accountability. NGO governance is known to be very fragile and is generally based on the charisma of a single person. If anything goes wrong with him or her, it might bring disaster to the institution. The Chief Executive Officers (CEOs) of the NGOs are generally founders. Due to this reason, the NGO Board cannot generally remove the CEOs even if it becomes necessary. The retirement age of the CEOs just lies in paper. He or she will remain as a CEO probably until death. Microcredit banks can offer responsible governance to obviate this issue.
To a common man, the image of bank is higher than an NGO/MFI due to its corporate features and legal perspective. The people would have more confidence in a bank rather than an MFI. So, one way or another, the government on its own should encourage setting up of microcredit banks like Grameen Bank. Apart from vast multitude of poor people, the rural small entrepreneurs and the marginal farmers will access the services of microcredit banks.
Microcredit banks should handle an optimal number of branches, each branch having a limited clientele base in order for the management to cope with the complex operations with ease. Otherwise, the operations may become unwieldy resulting in financial loss. The Grameen Bank could not still declare dividend to the millions of poor. It is to be noted that just increasing the client outreach aggressively may not proportionately swell up the profit volume in offering the tiny investors any meaningful gain. Earnings per share may fall and the clients may eventually go home with nothing in hand.
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The writer is a microfinance specialist
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