TECH TALK: As India Develops: Microfinance

Small businesses and the poor face a common challenge when it comes to getting out of the vicious cycle of stagnation and poverty: access to credit. While a business can turn to a bank for funding, the poor have very few options. They have little collateral or credit history which can convince a bank to give them a small loan. More over, their needs are fairly small, which makes it uneconomical for a bank to process the transaction. As much, for many, the only option is the local moneylender who exploits the situation by charging usurious interest rates.

Vinod Khosla outlined the problem in a recent interview with the Financial Express: Finance is still the biggest problem for development of rural economy despite it being innovative. People in the rural areas have no money and often tend to go for high-cost borrowings. No venture capitalists or funders have ever come forward to help those community with social obligations in mind. Who lends the money to those poor people without collateral securities despite having the entrepreneurial capabilities, innovativeness, creativeness and hard working abilities? It is a pity to say that in few districts where I visited, villagers happened to be bonded labourers to big money launderers due to high cost borrowings which has never been a easy task to repay.

The obvious solution for the credit problem in rural areas is microfinance (also called microcredit). Institutions like Bangladeshs Grameen Bank have done this successfully and profitably. India too needs its microfinance institutions. While there are many small ones operating at local levels in various Indian states, a concerted effort needs to be made to scale up the offerings and reach. There are indications that this is now beginning to happen.

Wrote Keya Sarkar in Business Standard:

If all goes well, ICICI Bank will close its accounts this fiscal with a microfinance book of close to Rs 400 crore. This will be up from last years close at Rs 150 crore. A big leap for the bank. But a far bigger one for microfinance. Considering annual disbursement last year to the microfinance sector by the banking sector as a whole totalled about Rs 1000 crore, ICICI Banks increased lending to this sector gains significance.

While its size puts ICICI Bank at one end of the spectrum, foreign bank ABN Amros efforts in this sector defines the other. The latter is likely to close this fiscal with a disbursement to this sector of close to Rs 6 crore. HDFC Bank, UTI Bank and a few other private sector banks are in the middle. These are a group of banks which have done their numbers and are looking at microfinance as more than what it has always been, merely a priority sector target.

So a combination of investment into child health, elementary education and microfinance (in loans of Rs 5,000 to Rs 20,000) might create a franchise for ICICI Bank in a hitherto untapped constituency. And as yet ICICI Bank is only talking rural microfinance. Urban microfinance can only see the potential balloon.

So at one level, more microfinance companies are being brought into the net for intermediation. But the route which is really likely to change the face of rural microfinance lending is what banks are terming partnerships. Similar to the concept of direct sales agents through which banks have been dispensing consumer loans and car loans for over a decade now, these partnerships will allow banks to lend in the rural areas without the money actually passing on to the books of these intermediaries. They would really be agents to identify borrowers and therefore be extended arms of the banks. ICICI Bank is already talking of over one lakh such agents and ensuring loan quality checks through different levels of loan loss guarantees by these agents.

Tomorrow: Microfinance (continued)

TECH TALK As India Develops+T

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Rajesh Jain

An Entrepreneur based in Mumbai, India.