Wednesday, October 21, 2009

A Talk on Microfinance


Some time back I attended a talk on Microfinance by Kalpana Karunakaran*.

There were around 20 other fellow classmates, all post-graduate students, gathered in the little classroom at six in the evening. Curiosity about Micro finance brought most of us there, after a long day of difficult sessions.

Kalpana, an excellent facilitator – we were soon to discover, started the discussion by throwing an open question: What do we mean by Micro finance?
The answers that came up included almost all aspects of micro credit –people in villages belonging to the low income group have no access to any form of credit, so they form small groups and borrow small amounts of money.

But what did the poor need the money for and why banks wouldn’t help them, how SHGs came to their rescue, how SHGs are different from MFIs - were questions which set our grey cells in Brownian motion.
What resulted from the interesting discussion were simple answers to the above questions. The following points summarize my learning from the talk:

What do the poor need loans for?


According to me, the main reasons why the villagers would need money would be issues that were comparatively expensive like buying farming equipment or marrying their daughters or emergency health related issues.
On the contrary, I learned that the low-income group families in villages mostly need the money for existence, survival and subsistence. The money that they borrow is used to buy food primarily (daily rationing), next for children’s education and medicines. In short, the money raised from credit is used for consumption-smoothing mainly. Investing in land, equipment and other assets or saving up for the daughter’s marriage comes much later on.
The next question on my mind was this:

Are banks really anti-poor? Why?

I used to think that less number of branches in rural areas is the biggest hindrance to most modern banks reaching out to the poor. But I figured out that it was not a major reason why banks and the poor didn’t fit into a single frame, at least not in the 21st century. In fact, one of the most important consequences of bank nationalizations that happened over two decades in India (1960-80), is rural branching.
Apparently, a bigger problem for the banks is the burden of managing numerous loans of small amounts. Also, there are numerous social issues. Gender becomes an obstacle for lending money as majority of borrowers in villages are women. Their lack of experience in filling up forms, operating and managing bank accounts further discourages banks from lending. Illiteracy and male-dominance in decision-making within the households of the patriarchic societies in villages act as further deterrents.
In short, large parts of India’s population, who make a significant contribution to the country’s economic growth, are financially secluded.


Self-help Groups to the rescue


Self-help Groups or SHGs is the way in which the poor come together and open up to demand loans from banks. A Self-help group essentially is a small neighbourhood group generally consisting of 15-20 women.
The first thing an SHG does is to make a saving. Every member contributes an amount to form a collection. A group leader is then selected on the basis of age or basic education. A bank account is opened next which is managed by the group leader. Members deposit their savings in the common account from time to time.
Soon after, they avail for a loan from the bank to be given to the neediest member of the group. A member is eligible for a loan if her need is greater than the cash in her hand.
Isn’t it ironical that the same bank that refused to lend money to a poor woman obliges willingly to do so once she is a part of a SHG? Not quite. In fact SHGs are valuable assets to many banks nowadays.

Why do banks need SHGs?

Firstly, the saturation of urban markets has forced banks to hunt for new markets. The rates at which banks lend to SHGs are much higher than the rates in the urban areas.
New Government Policies on Priority Sector lending makes it mandatory for banks to lend up to 40% of their credit.
Most importantly, SHGs almost never default as the bank is their life-line. And so they do not need collateral. All this combined with their high repayment makes SHGs a market of good business.

The Glamorous Microcredit

Microcredit is a service for poor people who are unemployed, entrepreneurs or farmers who are not bankable. Reasons why they are not bankable include the lack of collateral, unsteady employment, inconsistent income and a non-verifiable credit history. Because of this reasons they can´t even meet the minimal qualifications for an ordinary credit. Microcredit gives them more available choices and opportunities with a reduced risk. It has successfully enabled poor people to start their own business over the years, helping them generate and sustain an income which often begins to build up wealth and helps them to exit poverty.
3 promises of Microcredit (global foundation of Mohammad Yunus’ work)
• Alleviation of poverty
• Empowerment of women
• Viability of the lending institutions

The Grameen Model vs. SHGs

SHGs are user-managed, cohesive groups often promoted and even sponsored by NGOs and MFIs. The intervening NGOs educate the members about managing their money, and also take care of their account management and auditing.
In the Grameen Model MFI’s take the important decisions. They are the financial retailers. An individual can approach an MFI unlike a SHG which always works in groups only for the members who are a part of it. Besides microcredit, MFIs also offer other financial services like micro insurance, money transfer vehicles and micro savings for the low-income group.
In Mohammad Yunus’ own words:
“(Microcredit) is based on the premise that the poor have skills which remain unutilized or underutilized. It is definitely not the lack of skills which make poor people poor….charity is not the answer to poverty. It only helps poverty to continue. It creates dependency and takes away the individual’s initiative to break through the wall of poverty. Unleashing of energy and creativity in each human being is the answer to poverty.”

How do MFIs operate?

Sources of MFI Income include subsidized funding from MFI wholesalers (FWWB, etc.) and Commercial banks. The poor are not all equally poor and MFIs classify them as the following groups:
• Core poor
• Moderate poor
• vulnerable non-poor/upper poor
MFIs lend money to these different groups at different interest rates and survive on the operating profit margins. The fact that the interest rates are extremely high (up to 34%) leaves us wondering whether these MFIs leave the poor worse off than they already were before taking the credit.


*Kalpana.K is a senior researcher in Center for Development Finance, IFMR in the fields of Rural Infrastructure and Governance. Her area of expertise includes qualitative and ethnographic research and topical knowledge of SHGs and microcredit.

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