Indian Budget: Microfinance fund allocation doubled to INR 4,000M

By Nagesh Narayana

Microfinance Focus, Feb 26, 2010: Presenting the Union Budget 2010-11 to parliament on Friday, India’s Finance Minister has reiterated the UPA government’s commitment to expanding financial inclusion and expanding the microfinance programmes, by doubling allocation to Micro-Finance Development and Equity Fund to Rs. 400 crore (INR 4,000 million).

He has also increased allocation by Rs 100 crore (INR 1,000 million) each to the Financial Inclusion Fund (FIF) and the Financial Inclusion Technology Fund — the two major microfinance funds created by NABARD to lend to SHGs. Another key focus in the budget is to provide banking to majority of rural people through the Business Correspondent model and extend the model’s coverage of products to insurance and other services.

Lead Bank Scheme:

Targeting the ‘Aam Aadmi’, the budget referred to the High Level Committee on the Lead Bank Scheme that was crucial to Business Correspondent model to reach the unbanked rural people and extend microfinance services. While operational modalities were not spelt out, the programme seeks to provide appropriate banking facilities to habitations with more than 2,000 population.

Another significant feature is setting a deadline, i.e., March 2012. While the deadline is not realistic, it denotes the seriousness to carry out financial inclusion drive. Secondly, it seeks to extend to other products like insurance and other services, which has long been the demand of the microfinance institutions. The target that the budget has set is to cover 60,000 habitations. With the RBI’s recent modifications in the proposed Business Correspondent model facilitating non-SHG microfinance institutions, this is possible but the industry’s demand to make it more liberal is yet to be answered.

Rural Employment:

Apparently, the finance minister is not inclined to have given enough allocation to NREGA, the much-talked-about rural employment guarantee programme. Renamed Mahatma Gandhi National Rural Employment Guarantee Scheme, NREGA has completed four years of implementation during which it has been extended to all districts covering more than 45 million households.

Last year, Pranab Mukherjee allocated Rs.39,100 crore (INR 391,000 million) in his 2009-10 budget, marking an increase of 144% over 2008-09 budget. Surprisingly, in 2010-11 budget, the figure has been rounded off to nearest figure at Rs.40,100 crore (INR 401,000 million) and no explanation has gone into the budget for this static figure. It certainly indicates that the government seeks to cap the rural employment programme at this level. Otherwise, those who have worked for more than 15 days during the preceding financial year under the NREGA have been extended the Rashtriya Swasthya Bima Yojana (insurance cover) under the budget which will benefit the below poverty line workers and their families in rural areas.

Financial Inclusion & Microfinance:
The microfinance programme this year received a boost in terms of more allocation to the twin-funds managed by NABARD for financial inclusion. Set up in 2007-08 the Financial Inclusion Fund and the Financial Inclusion Technology Fund, have been key in government’s actions programme to achieve financial inclusion. With an additional Rs.100 crore (INR 1,000 million) for each of these funds, the government has cleared the decks for functional phase of ensuing Business Correspondent model in rural areas.

In addition, the programme for linking Self Help Groups (SHGs) with the banking system, re-designated as the ‘Micro-Finance Development and Equity Fund’ in 2005-06 with a corpus of Rs.200 crore (INR 2,000 million) has seen doubling of allocation to Rs. 400 crore (INR 4,000 million) in the current budget. A positive delopment indeed but the focus is likely to be in the northeastern and eastern region, where many anti-poverty programmes have yielded little result in terms of improving the financial access norms to the poor and rural households.

Access to banking services:

One important point that the finance minister made in his opening remarks was to ensure the growth of  banking system to meet the needs of a modern economy, expansion in geographic terms and improve access to banking services. While the RBI is considering giving some additional banking licences to private sector players, Non Banking Financial Companies (NBFCs) could also be considered, if they meet the RBI’s eligibility criteria. While this addresses the long-time demand of NBFCs to raise deposits from the members, it is unlikely to help the microfinance sector’s emerging MFI-NBFCs which have been seeking similar privilege.

Unique Identification Authority:

Allocation of Rs 1,900 crore (INR 19,000 million) to the Unique Identification Authority of India as it enters into its operational phase and begin issuing UIDs next year, a long-term goal to achieve financial access for the poor and rural households will become a reality in near future.

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