Microlenders have been helping farmers buy a buffalo and women set up weaving businesses for nearly three decades in India, most successfully in the wealthier southern states. Now, rapid economic growth and the entry of more foreign banks and private equity firms, coupled with improving infrastructure and new technologies, is encouraging large Indian and international lenders to enter the space.
It is easy to see why: defaults are few and the potential to sell other financial services is large. Plus, growing competition is forcing banks to look at India's underserved 600,000 villages. Even wealthy private investors are looking at microfinance, where in addition to the halo of a do-gooder, returns can be as much as 2 percentage points more than from conventional products.
"Time was when banks didn't take microfinance seriously, when they regarded it as corporate social responsibility rather than a serious commercial opportunity," said Siddhartha Chowdri of Accion Technical Advisors, a technical partner of Yes Bank India's for microfinance. "They realise now that the poor are good credit risks, and that they have a need for capital their whole lives."
India's microfinance market is estimated at 130 million homes, with money lenders and other informal sources accounting for more than 80 percent of borrowings. Informal credit in rural India is estimated at $5.4 billion, according to the All India Debt and Investment Survey. More than 40,000 bank branches have lent nearly $3 billion in the 10-year period to 2006, mostly to groups of poor women, it said.
State lenders including leader State Bank of India have a long record of lending to the poor to help meet a priority lending requirement, or 40 percent of all lending.
Private lenders ICICI Bank, HDFC Bank, UTI Bank and Yes Bank have launched microfinance arms recently. Global heavyweights, including ABN Amro, Standard Chartered Bank, HSBC Holdingsand Citigroup are also eyeing the space.
"We were the first organised lender here ... the moneylenders used to threaten my staff," said Anil Jadhav at Hindustan Cooperative Credit Society Ltd in Kurla, a Mumbai suburb.
HCCS, which has lent sums as small as 1,000 to 2,500 rupees ($23 to $57), sends an officer to the borrower's home to assess need and ability to repay, and the risk of default. Jadhav estimates overdue loans are 0.9 percent of all loans disbursed.
HCCS is backed by ICICI Bank, India's second-biggest lender, which partners 200 microfinance firms and expects to disburse $10 billion by 2010. It has tied up with venture capital funds to help microfinance start-ups and plans to launch savings, insurance and risk management services for its borrowers.
Yes Bank aims to lend 6 to 7 billion rupees ($134 million to $158 million) over five years with a focus on the urban poor -- who usually have salaried jobs -- with loans averaging 25,000 rupees to 50,000 rupees. But microcredit demands greater flexibility and imagination of India's private banks that peddle credit cards, car, home and personal loans to the increasingly wealthy middle class.
"It means recognising that getting someone in for a meeting could mean the loss of a day's income for him," said Nachiket Mor, ICICI Bank's deputy managing director. "That when they buy a buffalo, you have to allow relief from loan repayment for two months a year when the buffalo is dry."
And, despite the apparent compassion and the veneer of glamour after Grameen Bank's Muhammad Yunus received the Nobel Peace Prize in 2006, microlenders have long been accused of very high interest rates, harassment and not monitoring spending.
Chowdri blames politicians, who tend to forgive loans during elections to get votes, and points out that indebtedness usually arises from informal loans where interest rates are 100 to 150 percent per annum, compared with 20 to 30 percent in microloans. Mor also resists the pressure to broker social change.
"It is out of our depth to tell borrowers how to use the money, why they should not spend it on a marriage," he said. "They will say: 'But this is what I am working for'." Tamilarasi, who gave only her first name, was persuaded by her brother-in-law to take a loan of 50,000 rupees from HCCS to set up a corner stall selling eggs, potatoes, onions and snacks.
"I started by just selling eggs, and now I sell so many more things," the slight, neatly-dressed 29-year old said, gesturing at the brightly-coloured packs of chips, cookies and candy that hang from metal hooks. "I am confident I can do much more."
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