“IT IS the big moment. Couldn't be bigger,” says Matthew Titus, of Sa-Dhan, an association of Indian microcredit lenders, of the outlook for his members. He is not alone in seeing microcredit—the lending of tiny amounts of money to people with even tinier assets—as at the point of take-off in his country. A new report from the central bank, the Reserve Bank, tackles some of the regulatory issues involved in expanding credit “at the bottom of the pyramid.” It argues not just that microcredit helps the poor, but that it allows banks to “increase their business, enhance their profit and spread the risk.”
A billion-rupee boost
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In his budget speech in February, the finance minister, Palaniappan Chidambaram, promised to promote microfinance institutions ( MFI s)—mostly charities—“in a big way”, and to help them to act as intermediaries between banks and borrowers. He doubled, to 2 billion rupees ($46m), a fund devoted to providing the MFI s with capital—to help, for example, organise SHG s. He promised new legislation that would give them an official status and a clear regulatory framework. He also allowed them for the first time to borrow money from abroad.
Despite its recent growth, however, microcredit is far less widespread in India than in neighbouring Bangladesh. A World Bank report published last December reckoned that it amounted to no more than “a drop in the ocean”, touching fewer than 5% of India's poor. In Bangladesh, by contrast, it is estimated to reach some two-thirds of potential borrowers.
One reason India has lagged, oddly, is the determination of its post-independence rulers to free poor farmers from the clutches of local moneylenders. The upshot is, in Mr Titus's envious words, “a
banking infrastructure to die for”—66,500 branches (mostly of public-sector banks), 98,000 agricultural credit co-operatives and a post office with 154,000 outlets. Yet most of India's rural poor still do not have access to formal finance, the World Bank study found. Moneylenders are no longer as dominant as they were, but they still play an important role, especially among the very poor. When poor people do manage to borrow from banks, they often have to pay bribes that make the total cost of finance no less usurious.
So there is a huge gap. But expanding to fill it is expensive. Microcredit is a time-consuming business, where it is hard to achieve a big increase in market size without a commensurate increase in costs. Some see the solution in technology. Vishnu Dusad, boss of Nucleus Software, one of India's leading suppliers of retail-banking systems, says he hopes to bring down the cost of lending so that loans of 100 rupees will be feasible.
Nucleus is working with an MFI start-up, Ujjivan, whose initial intended market will be the poor of Bangalore, India's information-technology hub. Ujjivan's Samit Ghosh aims to cut operating costs from the MFI s' typical 95% of income to 70% or less.
Many agree that adapting commercial-banking systems to MFI s might allow them to cater for more customers, raise efficiency and cut back-office costs. But the real challenges are at the front end, in the villages themselves. Ajay Tankha, a Delhi-based microfinance consultant, says that there is already evidence that some SHG s are overstretched. Microcredit, he says, can ruin as well as rescue the poor, if not enough is done to help and advise the borrower. And in that area, computer programmes remain a poor second-best.
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