Is Microfinance a 'silver lining' for the Indian poor?

India, presently the world’s second fastest growing economy is also one of the hottest destinations for investment, we have been developing at a very fast rate since a decade but still a major part of India still lives in poverty. There are more poor people in eight Indian states than in the 26 poorest African countries combined. The above facts explain why the country has seen such an explosion of microfinance institutions, which are usually set up by nongovernmental organizations. Ten years ago 400 institutions boasted 200,000 customers, today there are 1,000 that, together with 300 commercial banks, lend to 17.5 million people. Much of the lending is based on Yunus's original idea - making loans to groups of women and relying on peer pressure from the members to ensure repayment.

The concept of microcredit is the brainchild of Muhammad Yunus(Founder: Grameen Bank, Bangladesh), microfinance came into light when Muhammad Yunus and Grameen bank received Noble Peace Prize in 2006. It was the first time an organization was offered the noble peace prize. Microfinance is lending small amounts (`5000-`15000) without collaterals to the poor to help them start a new venture of their own or expand their existing operations

Microfinance was initially based on the ‘non-profit’ model but made a gradual shift to the ‘for-profit’ model. Although this change has had some benefits such as:

·         Operating profits implied the sustainability of the institution and made its independent existence possible

·         In search of higher profits, more and more firms got into the business which implied more competition and lower interest rates resulting in more savings more the poor

·         In search for greener pastures, these MFI’s(Microfinance Institute’s) ventured into the rural depths of the country where even banks could not reach, thus catering to the needy.

·         Stronger balance sheets helps these MFI’s to get money at cheaper rates thus enabling them to give it to the micro-entrepreneurs at lower interest rates.

 But MFIs’ super profits have attracted tremendous criticism. Social activists claim high interest rates charged by MFIs are exploitative and could trap borrowers into a cycle of poverty (a vicious cycle of debt). Another concern is pressure to boost profits could prompt micro-lenders to ignore the poor, failing the very purpose of its foundation.

The interest rates charged by MFI’s in India is between 20%-30%, which although comparable to global peers is still pretty high for the poor, the MFI’s are to some extent correct in charging these high rates because the cost of funds for the MFI’s is also pretty high and since the loans are provided against no collateral, defaulters have to kept in mind.

While doing some thinking on how to lower interest rates for the borrower, I had the notion that this could be achieved only if people or corporates make some contributions. Recently I came across an NGO that does exactly the same, Rang De, what it does is to bring the borrower’s request to the people and ask the people to make some donations to the needy. Well, this is not exactly a donation, although you give the money without any collateral but the default is less than 1% and you also get 3.5% annual interest. The financial compensation is negligible as compared to the personal satisfaction you get realizing the fact that you have helped in changing a person’s life and helped him get out of poverty. 

Please share any related ideas you have.