Microfinance in India: More Than Just a Loan
Why the vilification and collapse of microfinance in India is no less than a tragedy for society
The impact of microfinance on the poor has been tremendous; helping to empower individuals economically, socially and politically. According to a report released by the Microcredit Summit Campaign, by participating in microfinance schemes, nearly 9 million Indian households, including approximately 45 million family members, rose above the World Bank’s $1.25 a day poverty threshold between 1990 and 2010. Unfortunately, legislation passed by the Andrha Pradesh government, following arguably unjustified and vilifying allegations, has effectively caused the industry to shut down and the poor to continue to be poor. A huge loss to all of us who want to see the end of poverty.
Microfinance works by providing small loans to the poor who otherwise have no access to traditional means of credit. The loans are intended to allow the poor to invest in such things as tools, inventory and livestock in order to start or expand businesses and generate enough income to bring them out of poverty and create better lives for themselves and their families. As in any business, borrowers will require larger loans as they expand, so on repayment of their loan they become eligible for one. This ensures repayment for the microfinance institution (MFI) without holding any collateral from the borrowers or having to resort to coercion and gives the village more freedom to regulate itself. Many larger MFIs have also introduced insurance products such as for health and endowment as well as other key products to ensure security for borrowers’ families.
The rapid expansion of microfinance in India has been driven by NGOs using the aforementioned “Grameen” model pioneered by Nobel Prize winner, Muhammed Yunus in the seventies. This model has eclipsed government Self Help Groups which generally require individuals to first make savings before becoming eligible to borrow. Despite this extended reach, a 2008 World Bank Study “Access to Finance” estimated that in India only 10% of the $60 billion demand for such services had been met.
The results are truly phenomenal. A study was commissioned by the Small Industries Development Bank of India, an independent financial institution aimed to aid the growth and development of micro, small and medium-scale enterprises in India. It showed that borrowers benefitted significantly from microfinance. Amongst the findings were that 76% were able to increase their income through MFI assistance, 66% improved their food consumption, 56% could improve their housing conditions and 77% could provide better educational facilities. However, it is not until you witness the impact firsthand that you really understand how such loans are able to transform lives and entire communities. I recently visited several villages in Karnataka which have benefitted from loans distributed by SKS Microfinance, India’s largest MFI. When I asked the women (SKS only lend to women as part of their model) how their lives have been affected since taking loans, they all smiled and wiggled their heads. Some told me of how they were able to set up new businesses and others of how they can now afford to send their children to school. “This tin roof I purchased using my new savings. Before it was only made of straw” a new kirana (village) store owner told me. The more villagers I spoke to the more humbled I became as it was clear the benefits had extended beyond just the borrowers themselves. As I learnt more about their lives and their communities, I found that these women had grown in more ways than one. Their confidence had soared as they were now able to provide for their families and in turn, gained respect within their communities. SKS places great emphasis on this social empowerment aspect and I believe it is a huge stride forward for India.
Alarmingly however, in the past year, allegations have been spread, including claims that MFIs use excessive pressure to enforce payments, charge extortionate, non-transparent interest rates and overextend borrowers. Politicians such as V Vasant Kumar, Rural Development Minister of Andhra Pradesh (AP), in whose jurisdiction most of the major MFIs are based, also claim that MFIs are to blame for a series of suicides by borrowers. The reality is that in India, suicides unfortunately are not uncommon; for example, only recently forms of pesticides were banned after it was found some farmers had used them to poison themselves. The complex issues behind each suicide cannot be attributed to a single cause, especially when the accused has possibly helped others in similar situations actually pull away from further tragedies. If these loans have been shown to help the poor create better lives for their families, are MFIs not in fact helping stop suicides?
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