The term microfinance has been a part of the common man’s dictionary for quite some time now. Considering the exponential growth that the entire microfinance sector has shown in the past few years, I guess it’s time to take a good long look at this newest animal in the zoo after witnessing the innovative financial instruments of the financial institutions of the U.S. and the common currency economic model of Europe.
The concept of microfinance, contrary to the popular belief, is not new and it has captured the minds of many social reformers over the past few centuries. However, its first successful implementation was during the microcredit movement of the 1970s which was spearheaded by Muhammad Yunus and his Grameen Bank. This bank now serves over 7 million Bangladeshi women. Since then, the microcredit movement has gained huge momentum in S-E Asia and many other developing countries of the world. India is no exception.
In India, SKS Microfinance is the top institution in terms of loan amount outstanding. It has disbursed over Rs 10 billion till date and it raised Rs 1,654-crore through its IPO launched on 28th July. It has already roped in high profile investors like Narayan Murthy and the Quantum Hedge Fund founded by the billionaire investor George Soros. This is surely going to rev up the microfinance market. Another positive indicator for the microfinance in India is the Forbes Top 50 list of microfinance institutions. There are 7 Indian institutions in this list with Bandhan Society coming in at number two. If it looks all too well for the future of microfinance, then it must be noted that presently, a microfinance bubble is feared in South India as most of the MFIs are located in this region. In fact, a repayment crisis in Southern Karnataka has significantly dented some MFI portfolios in the region.
Though microfinance was once being hailed by many economists as the single handed solution to the problem of poverty, there are many issues when you take a broader perspective. Firstly, microfinance is looking increasingly unprofitable in regions with low population density. This is because of the fixed costs associated with maintaining a regional branch. Here, it’s worth mentioning that the main reason why traditional banks don’t provide loans to the poor is because of the fixed costs associated with maintaining an account. The revenues from a loan and the associated fixed cost incurred by banks match at one point and banks refuse to lend where the revenues are below that point. Similar problems are faced by MFIs operating in regions with low population density.
Secondly, microfinance is necessary but not sufficient to solve the problems of the poor. Poor needs micro-insurance and money transfer facilities as well. And then, in some situations, private moneylenders appear as a better option over the MFIs. The reason is that private moneylenders provide flexible repayment schedules and they almost never ask why the borrower needs that loan. On the other hand, MFI loans are mostly restricted to starting up small enterprises. So, people do shore up to moneylenders in spite of the fact that they charge considerably high interest rates.
So, though the future of microfinance looks bright, there are some issues that must be addressed along the way. However, if we can achieve a sustainable model for microfinance, then we will have a scheme through which the rich can alleviate poverty profitably. Combine that with other social policies like NREGA and what you get is growth for every section of the society.
