It is not very apparent yet, but one of India?s fastest growing businesses is microfinance . In India, the organised microfinance industry is about ten years old. The most popular model for these institutions is the Bangladesh-based Grameen Bank. The micro entrepreneurs usually want to start ventures not amounting to more than Rs 10,000. The interest they pay to the money lenders make their borrowing completely unviable. For example in the wholesale vegetable market in Chennai, one can see people disbursing Rs 100 to various vegetable vendors in the morning. By the evening the vendors have to pay back Rs 120. This means they pay 20% interest every day. These are the vegetable, flower, fish vendors, tea stall and food stall owners who require funds and have no recourse other than the money lenders.
The micro credit institutions ( MCI) lend them this amount without any security. The MCIs prefer to lend to women rather than men. Some women give their borrowings to men in their family. But they make sure it is returned. In micro credit women make better borrowers. The interest rates are not low. Instead of 50% charged by the money lender it may be 38%. Still there is a saving. And the default rate is negligible.
A survey conducted by RBI finds that most borrowers say that it is easy or very easy to get a loan from microfinance institutions (MFIs). They have a close monitoring system which ensures that there are minimum defaults. MFIs have a good recovery rate. District administration received very few complaints against MFIs. Almost all the bank branch managers said that MFIs were good customers of banks and they could be used as business facilitators or correspondents.
However, micro credit is an operationally difficult concept. According to people in the business, if the loan amount is Rs 5000, the amount is collected over 50 weeks at Rs 120 per week. Usually five women join together to take loans. It becomes a collective liability. The field development officer holds a meeting with all of them before lending. Then the women pledge to pay back the amount and the institution starts lending. The officer goes literally everyday to follow up on the progress of a number of borrowers for whom he is responsible. Each branch of the institution has many such collection centres. Lending radius is usually within one or two square kilometers. And one has to get to know the people. Banks can never handle something like this.
In spite of these hurdles there have been quite a few success stories like SKS India which was launched in 1998. It is one of the fastest growing microfinance organisations in the world, having provided over Rs 6,212 crore and having maintained loans outstanding Rs 2,216 crore to 3,906,007 women members in poor regions of the country. Borrowers take loans for a range of income-generating activities, including livestock, agriculture, trade (such as vegetable vending), production (from basket weaving to pottery) and new age businesses (beauty parlour to photography).
Spandana founded in 1998 is also one of the fastest expanding microfinance institutions in the country. It is also one of the most efficient in the country with an operating expense ratio of 5.5% on portfolio. It now boasts of a client base that constitutes almost 1.5% of the BPL (below poverty line) population of India. Then there is West Bengal based Bandhan, Chennai based Micro Credit Foundation of India , all doing splendid work with women.
Once they are established MCIs can be channels for other products like mutual funds, insurance and so on. It is also possible to tie up these institutions with education and healthcare.Now that several success stories are emerging in this area, and the spreads appear good, many larger companies want to join the bandwagon. This worries existing players. The big groups they fear will push costs and salaries up which will defeat the purpose of microfinance. The industry also fears political interference, government interfering with interest rates and so on. Notwithstanding some problems many firmly believe that the future lies in microfinance.
?sushila.ravindranath@expressindia.com