Wednesday, August 23, 2006

Microfinancing continues to spread

This article in Businessweek tries to make the case that microfinancing in India is slowly going mainstream. For more details about the concept of Microfinancing check out the Wikipedia entry or better still go to the Grameen Foundation website. In short it's a system in which financial institutions give very small loans ($20, $100 you get the idea) to people who wouldn't normally be given loans by banks because they are too poor. This idea originated from the efforts of Dr. Muhammad Yunus to extend credit to poor women in Bangladesh. Grameen Bank, the bank he founded for this purpose continues to be the biggest microfinance institution around.

Anyway, back to the Businessweek article. According to the article mainstream banks like ICICI, HDFC, HSBC etc. have started concentrating on this sector as the urban markets are getting saturated. The good news is that this push is not being driven by lofty ambitions but rather by pure financial needs. This is good because if banks can indeed profit from microfinancing, then it will spread way more rapidly than if it were a social service initiative.

The scale of the microfinance market is so big that banks, even big ones like ICICI cannot possibly handle it on their own.

"Since 2003, ICICI has doubled the size of its rural banking activities to about $3.44 billion and has outstanding microloans of some $538 million.

FIVEFOLD GROWTH. It has set up more than 100 tie-ups with small-town lending specialists and has about 3.2 million low-income customers. HDFC hopes to follow suit. Earlier this year, it created a microfinance unit with more than 100 employees and aims to double its lending levels in rural India to $22 million."

Therein lies the potential problem. As the article states, banks are relying on 3rd party agencies to reach out to people because they simply don't have the infrastructure to do it themselves. Whether or not microfinancing will be able to make a positive difference will depend to a large extent on how closely these small agencies are monitored by the banks. Because it would be very easy for local money lenders to form an agency, keep charging exorbitant rates and maintain the depressing status quo. This is one of those places where access to information is so vital. That way the end consumer can shop around for rates and not be beholden to the local agency.


Kuriakose said...

I spoke to someone from Bangladesh recently. He mentioned that interest rates at GrameenBank were in the order of 30% p.a. I shudder to think the kind of rates that the alternate sources were demanding in order for 30% to seem resonable.

On another note, attempts to opensource the supply side (where the cash comes from) of microfinance have also started. is one such effort - looks like its targeted toward the US market. - looks like it targets the developing world.

Smruti said...

Yeah, even I had that thought. How could 30% interest rate be reasonable? But it looks like the unorganized money lending sector in India (the evil bania of hindi movies) charges between 50-100%. Even in the US the payday loan companies can charge upto 60% under certain circumstances.