Micro-finance growing the fastest in the East (India)

Chennai-based Centre for Micro Finance (CMF) has said the micro-finance sector is growing at the rate of 82% in the eastern part of the country, the fastest rate in India.

Also, there exist a great disparity in the penetration of micro finance within the region, with Orissa and West Bengal witnessing high levels of penetration, and states like Assam, Bihar and and Jharkhand lagging behind.

A proposed Micro Finance Bill 2007 is yet to be passed by the Parliament as there is no consensus on several issues. Most notable being on limiting the interest rate charged by the micro-finance companies. The article also talks about this.

Speaking at a seminar on micro credit organised by the Confederation of Indian Industries (CII), Abhijit Banerjee of Massachusetts Institute of Technology (MIT), said "Putting a ceiling on the rate of interest charged by the micro finance institution would not be a good idea, more so on this juncture when the economy is passing through a high inflationary regime."

According to him, "One should look for a couple of years before putting a cap on the lending rates, with the increase in competition the interest rate might even moderate. Moreover, in the current inflationary situation, it would become all the more difficult for these MFIs to sustain".

...

Generally a borrower repaid the loan weekly and so for a annual loan of Rs 5000, a collection officer had to visit 52 times, pushing up the transaction cost per loan.

"Hence the interest rate is higher," he explained.

Pragati Gramodyog Sansthan (PGS) - helping bonded labourers

An article on slavery talks about the brave work done by an Uttar Pradesh based entity helping former bonded labourers benefiting from micro-credit.

Gonoo lives in Lohagara Dhal, a forgotten corner of Uttar Pradesh, a north Indian state that contains 8 percent of the world’s poor. I met him one evening in December 2005 as he walked with two dozen other laborers in tattered and filthy clothes. Behind them was the quarry. In that pit, Gonoo, a member of the historically outcast Kol tribe, worked with his family 14 hours a day. His tools were a hammer and a pike.

...

Every single man, woman, and child in Lohagara Dhal is a slave. But, in theory at least, Garg neither bought nor owns them. They are working off debts, which, for many, started at less than $10. But interest accrues at over 100 percent annually here. Most of the debts span at least two generations, though they have no legal standing under modern Indian law. They are a fiction that Garg constructs through fraud and maintains through violence. The seed of Gonoo’s slavery, for instance, was a loan of 62 cents. In 1958 his grandfather borrowed that amount from the owner of a farm where he worked. Three generations and three slave masters later, Gonoo’s family remains in bondage.

...

Among the Kol of Uttar Pradesh, for instance, an organization called Pragati Gramodyog Sansthan (PGS)—the Progressive Institute for Village Enterprises—has helped hundreds of families break the grip of the quarry contractors. Working methodically since 1985, PGS organizers slowly built up confidence among slaves. With PGS’s help, the Kol formed microcredit unions and won leases to quarries so that they could keep the proceeds of their labor. Some bought property, a cow or a goat, for the first time in their lives, and their incomes, which had been nil, multiplied quickly. PGS set up primary schools and dug wells. Villages that for generations had known nothing but slavery began to become free.

A moving story. A great example that micro-credit can go a long way in changing the fortunes of thousands of people.

The Economist article on profiting from the poor

The Economist has an article talking about Mexico's CompartamosBanco. This Microfinance Bank charges high interest rate (annualised 75%+) and has listed its shares with a market capitalisation of over USD one billion.

Compartamos apparently ran a not-for-profit like operation and grew very little. Then it rediscovered itself as a for-profit aggressive company, raised money and is growing fast now. Several Microfinance industry veterans including Mohammad Yunus are of the opinion that Microfinance must be a social business with no-profit, no-dividend, reinvestment model. Compartamos is of the opinion that generating profits out of this sector will bring in more investment and thereby more individuals can benefit from this process.

The Economist approves this viewpoint. It is also praising Compartamos for its financial literacy course that has benefited around 60,000 people.

Microcredit for slum dwellers in Delhi

A Government of India Press Release says, a bunch of Government owned banks have come together "to provide loans at reasonable rates of interest to the slum dwellers of Ekta Vihar in Delhi".

The banks involved in the lending are "Andhra Bank, Bank of India, Canara Bank, Indian Overseas Bank, Punjab National Bank, State Bank of India, Syndicate Bank, UCO Bank and Vijaya Bank."

The self help group involved in managing the lending is "ASHA Community Health and Development Society, an NGO working in health and development of slum areas."

The press release also says that the borrowers are eligible for life insurance cover from LIC.

Kiva vs Microplace

I was thinking of writing about this for quite a while. There are two nice write-ups which I will point to. One at NextBillion.net: Kiva vs. MicroPlace - What's the Difference? and the other at Microfinance Gateway: The buzz about online microlending. At the nextbillion.net, an Indian commenter Subhodip Dutta had written:

I am looking forward to launching an Indian specific P2P lending site which would be a mixture of all three sites prosper,kiva & microplace.Already in the process of coding and designing would really appreciate if any one guide or throw some more light on the regulatory licensing aspects of the business and other country specific government permissions. Suggestions from mentors are welcome.

In India, both Kiva and Microplace will run into rough weather with the authorities, in my opinion. Or alternately, the RBI and the Government may not mind Kiva model but may get antsy with the Microplace model. It may be possible to simply register a non-for-profit charity and set up a web site to run a Kiva type operation.

However, Microplace model seems to be interesting. It is a bit too early to say which will succeed. India is a large enough microfinance market where one can tap enough lenders and enough MFIs and enough borrowers, to sustain several Kiva and Microplace like operations simultaneously.

Micro-investment: Fabindia

Business Standard has a story on Fab India, owned by William Bissell, working with weavers to put together joint ventures.

The concept, now a Harvard Business School case study, is simple. A fully-owned subsidiary of FabIndia, Artisans Micro Finance, a venture fund, facilitates the setting up of these companies, which are owned 49 per cent by the fund, 26 per cent by the artisans, 15 per cent by private investors and 10 per cent by the employees of the community-owned company.

The investment by these four categories of investors provides the paid-up capital. The company promotes the sales of its artisan community to FabIndia, which is the principal buyer. Eventually the companies will sell to other buyers, too. Haryana and Faridabad have already started independent sales.

The results seem impressive too.

Although the villagers see it as a gamble, there is already evidence that it works. A community-owned company promoted a year ago in Jodhpur with a paid-up capital of Rs 34 lakh is valued at Rs 1.10 crore. The company, which totted up sales of Rs 5.7 crore and a profit after tax of Rs 22 lakh in its first year, has 2,300 artisan shareholders.

Each of their Rs 100 shares is worth about Rs 300. As many of them hold 10 shares each, their investment of Rs 1,000 has tripled to Rs 3,000, an escalation they couldn't have dreamed of. Through a complicated internal trading system, an artisan can — if he wishes — recover his investment.

Microcredit in Meghalaya

Microcredit institutions has spread in the Indian state of Meghalaya. The Economic Times reports:

"At present, there are more than 1100 SHGs, formed under twenty-five federations comprising ten community and rural development blocks spread across the West, South and East Garo Hills. The groups are required to form federations before registering under the banner of BILCHAM," said Daniel Ingty, a rural development officer associated with the bank.

Here, BILCHAM is Banking Institution and Learning Centre of Excellence for Holistic Aspiration of Mothers, an apex self help group federation in Meghalaya.