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Microcredit makes mega business sense

india Updated: Nov 27, 2006 03:04 IST
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Newspaper columns on poverty invariably sound preachy. Mohammad Yunus, this year’s Nobel Peace Prize winner, has partly solved that problem by making poverty mitigation a sound business proposition.

With disbursements worth $5.72 billion so far, and $15.21 million in profits last year, no one doubts the viability of his Grameen Bank. It has 7.6 million clients together with Bangladesh Rural Advancement Committee (BRAC). These two microfinance institutions (MFIs) have made group lending- and recovery- an art form while keeping transaction costs absurdly low.

Economist Jeffrey Sachs cites the observation of Dr Allan Rosenfield, Dean of Columbia University’s Mailman School of Public Health, that most women participants of MFI in Bangladesh followed the two-child-norm in 2003, against six to seven children in the sixties. Their independence and empowerment seemed a by-product of their successful micro-enterprises. Bangladesh’s fertility rate has come down from 6.6 in 1975 to 3.1 in 2000. Sachs believes that the modest rise in household incomes, as a result of family planning, will get invested in health and education.

In a 2004 paper, Fazlul Hoque, a senior BRAC associate concedes that the Bangladeshi poor are still largely excluded from development management process but gives evidence of a modest, positive change in the countryside.

The basic idea of microcredit is to make the poor bankable. The MFIs turn a normal bank’s business upside down. Conventional banks disburse large sums to solvent people, mostly men, against collaterals. The MFIs lend small sums to poor people, mostly women, without collaterals. Grants or subsidies often form the basis for the MFIs’ seed capital but, eventually, the whole operation has to run profitably.

It is ironical that the poorest often pay the highest rates of interest. The moneylenders in India charge a minimum of 50 to 75 per cent annual rate of interest. A labourer pays a fee of Rs 50 per thousand for sending a money order home. The annual interest/transaction cost comes to 60 per cent whereas millions of rupees can be electronically transferred for no fee at all. It is common for street vendors to pay five to ten rupees per hundred for a one-day loan, which translates into a bizarre one thousand per cent or more in annual terms. A corporate loan comes at an average cost of below 6 per cent.

It is also well known that many goods and services also cost more in slums than in affluent areas. Management guru C K Prahalad describes it as “poverty penalty.”

The biggest criticism of microfinance is that its operations are too small to make a big difference but many innovative ventures have proved that the customised MFI services enable the poor to invest in themselves. Piyush Tiwari and S M Fahad of HDFC Bank conclude in a recent paper that flexible microcredit instruments work wonders in the housing sector. HDFC’s recovery of low cost housing loans has been an incredible 100 per cent.    

The other write-ups on this page show that tiny loans go much beyond two square meals. It has a spillover effect on the local economy and a positive influence on infant mortality, family planning, sanitation, children’s education and the individual’s enhanced sense of worth. If the government can muster the political will and act as a real facilitator, microfinance networks can become the next big thing in India’s most backward regions.

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