This is some background I got on the history of Micro Finance in India from Mr Ghosh of Ujjivan (more on that later) and Mr. Singh from the Grameen Foundation.
There are over 1.2 billion people in India today. 40-45% of the population is below the international poverty line, meaning that they earn less than $1.25 per day.
Bangalore is an interesting example of life in India. It is a modern city that is growing exponentially. It is a great place to live and work for people who are well educated. The problem is that for the poor, there is absolutely no safety net. This means no housing, no water, sanitation, education, no nutritional help for children. Nothing.
In 1975 the national government privatized all banks in India. They did this to try to ensure that banks would care for the whole of the country not just the rich. They required banks to open 4 rural banches for every 1 urban branch that was opened. But still banks ignored the poor. In fact, by 1985, it was impossible for even the middle class to get a personal loan. That means no loans for cars, houses, education, etc. Consumer banking just didn't exist. CitiBank was one of the first in India to start focusing on consumer banking for the middle class.
A couple of things changed. In addition to CitiBank and others starting to provide consumer banking, the government made a number of changes that open the market. People started buying houses and other big consumer staples. This meant that by 1990 with consumer spending and governmental changes, the Indian economy was really jumped started.
Finally, two other things changed. The government started to require that banks lend 40% of their loans to help the society. The banks did not want to try to service the poor directly, so they looked for agencies who could service the poor. At the same time, the micro finance industry proved to be very successful in Bangladesh. Clearly poverty has not been eradicated in Bangladesh, but there has been a clear improvement in the last 20 years through micro financing. So banks began to provide loans to Micro Finance Institutions (MFI's).
Most of these MFI's focused on the rural poor. There are over 500 million poor in rural India. The MFI's were also fairly concentrated geographically, with a very large number of institutions in the Hydrobad area. There are over 35 large MFI's and over 300 smaller MFI's in this area. Micro Financing started to really take off in India.
Then came a period of uncontrolled growth in Micro Finance lending. With so many lenders concentrating in one area, people started to take on not 1 or 2 loans, but 5 or 6 loans all from different lenders. At the same time, private equity money started to flow into the MFI industry. This fueled the growth in lending and meant that some MFI's who were non profit NGO's were at times finding it hard to stay true to their vision. There was a real crisis in the micro finance industry between 2009-2010. People stopped paying their loans. Many MFI's went bankrupt.
Finally the government stepped in to require both interest rate caps and market requirement caps. They also severely limited the services that could be provided by MFI's. MFI's are now extremely limited by these new rules. While it has helped to stabilize the MFI industry, it is making it hard for MFI's to have a sustainable model. MFI's are now looking forward to a new bill that is waiting parliamentary review that may raise some of the interest rate caps as well as allow MFI's to offer services such as savings accounts and remittances (so that migrant workers are able to send money home to their families).
What micro finance loans are:
Micro finance loans are generally non-collateralized loans from about $100-500. They are mostly given to women who tend to both pay loans back more consistently, and they also tend to use the loans to ensure the betterment of their whole household with a special focus on children. In India, loans are made at a high interest rate of around 26%. This is due to both the high cost of borrowing for the MFI's from the banks, and the high cost of servicing the loans. This is also a much lower rate than the poor usually are able to get from money lenders.
Loans are generally given to a group of women collectively. This means that the group is responsible for ensuring the payback of the loan, providing a self governing mechanism for repayment. It also means that if one person in the group has a cash flow issue, other members of the group can ensure the monthly bill is covered. The incentive for loan repayment is the promise of additional loans in the future. MFI's will generally start clients off with very small loans, and only increase the loan amounts over time when a client has proven to be successful in loan repayment.
What really happens when someone accepts a micro finance loan:
The traditional idea of a micro finance loan is that a small loan is given to someone who starts a business. Then they slowly start to gain wealth and over time move out of poverty. The reality is a little more subtle. First of all, once the money is given, people will use the loan for whatever they need. Education is a common reason for lending.
If a domestic worker cleans 3 house a week and earns 6000 rupees (INR) a month, she may borrow 10,000 rupees for her children's education. If she borrows that money from a money leander, she will pay 5-10% per month. This means she will be paying the money lender 1000 of her 6000 INR every month. MFI's are able to offer her this same loan for a lower amount. And in fact, some MFI's work with foundations who assist with the interest payment for educational loans.
The lack of education is one of the biggest reasons that people stay poor. If MFI's are able to provide loans that can be used for education, more people will move out of poverty.
There are over 1.2 billion people in India today. 40-45% of the population is below the international poverty line, meaning that they earn less than $1.25 per day.
Bangalore is an interesting example of life in India. It is a modern city that is growing exponentially. It is a great place to live and work for people who are well educated. The problem is that for the poor, there is absolutely no safety net. This means no housing, no water, sanitation, education, no nutritional help for children. Nothing.
In 1975 the national government privatized all banks in India. They did this to try to ensure that banks would care for the whole of the country not just the rich. They required banks to open 4 rural banches for every 1 urban branch that was opened. But still banks ignored the poor. In fact, by 1985, it was impossible for even the middle class to get a personal loan. That means no loans for cars, houses, education, etc. Consumer banking just didn't exist. CitiBank was one of the first in India to start focusing on consumer banking for the middle class.
A couple of things changed. In addition to CitiBank and others starting to provide consumer banking, the government made a number of changes that open the market. People started buying houses and other big consumer staples. This meant that by 1990 with consumer spending and governmental changes, the Indian economy was really jumped started.
Finally, two other things changed. The government started to require that banks lend 40% of their loans to help the society. The banks did not want to try to service the poor directly, so they looked for agencies who could service the poor. At the same time, the micro finance industry proved to be very successful in Bangladesh. Clearly poverty has not been eradicated in Bangladesh, but there has been a clear improvement in the last 20 years through micro financing. So banks began to provide loans to Micro Finance Institutions (MFI's).
Most of these MFI's focused on the rural poor. There are over 500 million poor in rural India. The MFI's were also fairly concentrated geographically, with a very large number of institutions in the Hydrobad area. There are over 35 large MFI's and over 300 smaller MFI's in this area. Micro Financing started to really take off in India.
Then came a period of uncontrolled growth in Micro Finance lending. With so many lenders concentrating in one area, people started to take on not 1 or 2 loans, but 5 or 6 loans all from different lenders. At the same time, private equity money started to flow into the MFI industry. This fueled the growth in lending and meant that some MFI's who were non profit NGO's were at times finding it hard to stay true to their vision. There was a real crisis in the micro finance industry between 2009-2010. People stopped paying their loans. Many MFI's went bankrupt.
Finally the government stepped in to require both interest rate caps and market requirement caps. They also severely limited the services that could be provided by MFI's. MFI's are now extremely limited by these new rules. While it has helped to stabilize the MFI industry, it is making it hard for MFI's to have a sustainable model. MFI's are now looking forward to a new bill that is waiting parliamentary review that may raise some of the interest rate caps as well as allow MFI's to offer services such as savings accounts and remittances (so that migrant workers are able to send money home to their families).
What micro finance loans are:
Micro finance loans are generally non-collateralized loans from about $100-500. They are mostly given to women who tend to both pay loans back more consistently, and they also tend to use the loans to ensure the betterment of their whole household with a special focus on children. In India, loans are made at a high interest rate of around 26%. This is due to both the high cost of borrowing for the MFI's from the banks, and the high cost of servicing the loans. This is also a much lower rate than the poor usually are able to get from money lenders.
Loans are generally given to a group of women collectively. This means that the group is responsible for ensuring the payback of the loan, providing a self governing mechanism for repayment. It also means that if one person in the group has a cash flow issue, other members of the group can ensure the monthly bill is covered. The incentive for loan repayment is the promise of additional loans in the future. MFI's will generally start clients off with very small loans, and only increase the loan amounts over time when a client has proven to be successful in loan repayment.
What really happens when someone accepts a micro finance loan:
The traditional idea of a micro finance loan is that a small loan is given to someone who starts a business. Then they slowly start to gain wealth and over time move out of poverty. The reality is a little more subtle. First of all, once the money is given, people will use the loan for whatever they need. Education is a common reason for lending.
If a domestic worker cleans 3 house a week and earns 6000 rupees (INR) a month, she may borrow 10,000 rupees for her children's education. If she borrows that money from a money leander, she will pay 5-10% per month. This means she will be paying the money lender 1000 of her 6000 INR every month. MFI's are able to offer her this same loan for a lower amount. And in fact, some MFI's work with foundations who assist with the interest payment for educational loans.
The lack of education is one of the biggest reasons that people stay poor. If MFI's are able to provide loans that can be used for education, more people will move out of poverty.
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