Default rate among micro entrepreneurs is almost zero, despite high interest rates of 17-32 percent they pay for getting small loans. In comparison, well off people and industrialists get loans at a fraction of this rate, and they still default

In India, people from different strata are treated differently in all matters, even when it comes to accessing funds for development.

While big corporates get the required finance at anything between 10-14%, those from the marginalized sections can get microfinance of a few thousand rupees at rates 24-32%. There are also microfinance institutions (MFIs), which provide finance at somewhere between 17 to 23 percent. However, time and again, unconfirmed news keep appearing that some MFIs charge as high as 50-60%. Though its degree is probably milder to what moneylenders used to charge, this also looks ‘usurious’.

MFIs have their own logic for charging high rates, but there is no plausible explanation why some of them make healthy profits even at relatively cheaper rates of 17-21%. Since collateral is not asked for extending microcredit, there is a general perception that these loans are risky. Records of repayment over the years prove otherwise. Default rate is less than 1% in most cases—something big industrial houses cannot boast of.

Despite high profits MFIs make and the impressive growth of over 20% the sector has sustained over the last two decades year-on-year basis, benefits of microfinance have still reached barely 25% of the target population. According to Bharat Microfinance Report 2008, prepared by Sa-Dhan, benefits of microcredit reached over 33 million people in 2007-08, up by 9 million over the previous year. The report acknowledges that women have benefited in the areas where microfinance has reached people. Some four out of five clients in India are women.

This article will look at the various models of microfinance and investigate why many MFIs extend loans at higher rates.

Different models
A MFI can be a non-banking finance company (NBFC), a non-government organization (NGO), a charitable trust, a company registered under section 25 of the Companies Act 1956, or a cooperative registered under the Cooperative Society Act. There is no one agreed model of disbursing microcredit, though these are disbursed through self-help groups (SHGs). The most popular model in India is that of commercial banks lending to poor people through their own promoted SHGs or those promoted by SHG promoting institutions, as Dr L H Manjunath, executive director, Shri Kshetra Dharmasthala Rural Development Project (SKDRDP), says. This model is generally referred to as the SBPL model. In this case banks deal with the SHGs directly for all kinds of operations. According to the Bharat Microfinance Report 2008, of the total outstanding microcredit portfolio of Rs 22,000 crore (in 2007-08), 75 percent was accounted for by this model alone.

The second model, which has inspired many Indian MFIs, is the Grameen Bank model, pioneered by the Bangladeshi Noble Prize winner Mohammad Yunus. Under this model some 50-60 people gather at one place on a given day in a week and constitute 5-6 groups within themselves. A group representative then goes to the bank, collects money and disburses loans. Repayment also takes place through the group representatives.

The third model, which SKDRDP follows, involves the formation of a field office in a village. Instead of the workers going to SHGs, the group representatives come to SKDRDP field offices, take loans and also deposit repayments.

There is a fourth model, which Accion International, a Mexican international MFI, has started implementing in India in collaboration with Yes Bank and other MFIs. Under this model, loans are forwarded to individuals directly and they are also solely responsible for repayments. One drawback noticed with this model is that its benefits go to those relatively well off in rural areas. The poorest of poor are not able to get loans under this scheme. This system is, however, nothing new, as Manjunath says. Commercial banks and cooperative societies always extended similar loans. The logic behind loans being forwarded to a group of people and not individuals is to let a peer pressure and joint responsibility mechanism come into effect, which ensures repayment is prompt. Mohammad Anas, who is a senior area manager with SKS Microfinance in Delhi, says, “Nothing works better than joint responsibility and peer pressure.”

MFIs are for-profit organizations and, like normal financial institutions, they provide credit to SHGs only after due diligence and compulsory group training. Loans are forwarded for ‘ready’ activities, that is, activities that can start yielding revenues immediately. The loan period varies with the kind of loan product, but to begin with, loan repayment is normally spread over 48 to 50 weeks.

Anas says,”SKS Microfinance loans need to be repaid in predetermined equated weekly installments over a period of 50 weeks.”

Loan amount
MFIs have different loan products, with credits ranging from anything between Rs 2,000 to Rs 100,000. Loans can be extended for emergency causes (like school admission, hospital expenses, etc), for creating income and livelihood activities—agricultural or non-farm activities—for housing purposes, and for starting or expanding a group enterprise, where the group as a whole is given the loan amount.

Most MFIs give anything between Rs 2,000 to Rs 25,000 as the first loan amount, which can be increased to anything between Rs 15,000 to Rs 50,000 in the second year for those with a good track record. SKS Microfinance, for instance, Anas says, provides a maximum loan of Rs 12,000 initially. If repayment is prompt, the loan amount can be increased to Rs 16,000 in the second cycle. The company, however, does not mind providing emergency credit of up to Rs 11,000 in between. SKDRDP, on the other hand, starts with Rs 10,000 to those who are enrolled with it for at least three months. This can be increased to Rs 50,000 in the second year. The trust, which operates in six districts in Karnataka, does provide housing loans up to Rs1 lakh, which can be repaid over a period of 520 weeks.

Comments (2)

Subscribe to this comment's feed

education loan
written by mohd yameen ali, June 28, 2010

I NEED FINANCIAL AID FOR HIGHER STUDIES AND I AM UNEMPLOYED.

report abuse

vote down

vote up

Votes: +0

Mulnivasi Mukti Manch
written by Madavi L K, March 15, 2010

Dear Sir,

“MULNIVASI MUKTI MANCH ” [English name -- “ Indigenous People Liberation Forum”] is a non profitable, Indigenous / Tribal people’s NGO registered under Society Act bearing Regd. No.273/2001 is working for poor tribal people of India. We have no financial source from other side. We are spending money from our own pockets for the organization on the principle of “Pay back to Society”. This NGO is the tribal / indigenous people’s NGO, for the tribal people by the tribal people. The tribal people are heritage of the Harappa Culture, originally inhabitant of the land of India. The tribal people have not defined in Constitution, not recognized as Indigenous people, no separate law on the basis of customary and culturally identification. We are ADIVASI literary indigenous people but, in the Indian constitution have not recognized us as Adivasi, and enlisted our races as scheduled tribes without any parameters and universal definition in constitution of India.

Our Aims and Objects

1] Awake the tribal people on their human rights,
2] Increase the education in primitive tribal women where is the below 10%
literacy,
3] To introduce the cultural education and prevent from mis-education amongst Tribal people.
4] Education for children, street children, child boursrs, bonded child labor, poor
Tribal children from the families living below poverty lines.
5] Health problems of tribal people, those who are living in remote tribal areas,
below poverty lines, naxel effected areas, areas of malnutrition and starvation
amongst tribal children.
6] Welfare of children, child workers, female children and poor tribal people.
7] Running the training centers, nursing centers, girl’s hostels, schools, collages,
health care centers, cultural institutes, education institutes etc.
8] Protection and prevention from sexual exploitation of minor girls, students in
Ashram schools, women in working places.
9] Prevent from trafficking of tribal children, women.
10] Prevent from dying the tribal children due to malnutrition and starvation.
11] Awaking amongst the un-married mothers those who are giving the birth new
Babies without their father.
12] Prevent from killing tribal by the tribal people on the name of naxelite struggles.
13] Settlement of widows of naxelite tribal people and police.
14] Resettlement of tribal families who displaced due to projects, dams, mines.
15] Establish the cultural identity; codify the customs and customary law.

Our Achievements

1] Arranges the seminars, workshops, conferences on the indigenous issues and problems in tribal districts of Maharashtra State,
2] Training programs on education for students, teacher education, nursing trainings,
3] Arranges the campus for employees, officers, social workers, on the above objects,
4] Efforts taken for provide the employment to students, poor people living below poverty lines,
5] Make the competent the tribal people to evolve in decision making process,
6] To make the try to bring the tribal people in Nation Development Flow.
7] Awake the tribal people on their human rights
8] Taken the issues of definition, cultural identity, customary law for tribal people
before competent authorities,
9] Represented in international conference of UNO in Durban [ South Africa ] on the subject of Racial Discrimination in 2000 and sub-commission of Human Rights in 2001 in Geneva [ Switzerland ] and placed the issues of our NGO
10] Implemented the project no. 101[3] approved by the High Commission of Human Rights of United Nation, and celebrated the world’s decade of ‘‘International Indigenous People’’ in India during the year 2005.


We are specifically focusing on the children of tribal / primitive tribal people residing in remote tribal areas and isolated from urban areas…..

1] Bonded labor, minor labor, ,
2] Female labor’s exploitation on the working spots,
3] Transportation of labors from one state to another.
4] Education in tribal children where is 10% below education i.e. in primitive tribes
5] Education for youth those who are out of school,
6] Reduce to illiteracy in tribal belt
7] Tribal girls education.
8] Resettlement of naxelite widows and children those who are died in conflicts.
9] Resettlement of un-married mother’s children,
10] To prevent the Tribal youth from unconstitutional movements i.e. naxelite,
11] Culture education for tribal youth
12] Prevent from miss-education
13] Sexual exploitation of girls in school in government hostels.
14] Prevent from prostitution of minor girls which resulted to un-married mother problems,
15] Vocational education for tribal girls,
16] Prevent from killing the tribal to tribal youth on name of naxelite.



Prayer:-
We need of supports for poor tribal children, women, and we also requested to consider us for seminars, conferences, meetings, trainings, on the trial / indigenous issues as well as grants, financial assistance for projects etc...

Yours sincerely,

Madavi L. K.
President
Mulnivasi Mukti Manch

report abuse

vote down

vote up

Votes: +1