These are mostly invited opinions for various publications including the Economic Times, Business Line, Entrepreneur Magazine and someothers. Most are focused on Financial Inclusion & Microfinance and other issues surrounding India’s informal economy.
Microfinance is about small loans to those with low income in the informal economy. These three factors pose three unique challenges. The small loan size means a different kind of economics and business model from mainstream banking with distinct processes and cost-efficiencies, since the income per loan is particularly low. That the borrowers have low income means the risks are large; small shocks in the family or larger system can have devastating impact on a borrower’s means to repay. And finally, lending to the informal economy presents a different set of challenges in that there is no documentation to verify assets, occupation, income or anything about the person.
The microfinance industry is still grappling with these challenges, learning many of the lessons the hard way. With lending rates now limited to 26 percent under the new regulation, gone are the days … Read More »
In a country like India, where over half the population scratches out a living in a manner that could be called ‘self-employed’, access to loans was going to be the magic bullet that was going to catapult them to greater economic gain. Microfinance for microentrepreneurs. Never mind that in the end most who borrowed never spent the money on a real business. What about those who did?
In any other realm of entrepreneurship, investors and lenders do extensive due diligence on past financial records and make laboured assessments of business plans and management teams. In the case of the microentrepreneur, every transaction is in cash, accounts are rarely recorded and there is hardly any reliable evidence available of their past success or data with which to assess their future potential. Furthermore, most ‘microenterprises’ are not profitable when you factor in … Read More »
Between 2005 and 2010 the microfinance industry saw a spectacular growth trajectory of almost 80 per cent a year, taking it to almost Rs. 25,000 Crore and making it one of the fastest growing industries in India. In October 200, a crisis led by an ordinance in Andhra Pradesh, where much of the lending was concentrated, limited collection methods and resulted in a dramatic drop in repayments. Now, one year later, media reports indicate that the industry has shrunk by 40 per cent. Microfinance is now in dire need of reinvention to emerge as a stable and responsible industry with a strong value proposition for the financial inclusion agenda.
Read the full article in The Hindu Survey of Indian Industry 2012
The numbers that describe India’s economy are mindboggling. Just one-tenth of the population participates in the formal economy. Of these, only about 35 million pay taxes. That’s less than 3%.
No wonder then that our economy produced a GDP of only $1.42 trillion at last count, about the same as that of the city of Tokyo which has a population of 35 million. There are simply too few producing value and wealth in India and so there is not enough to go around.
The financial inclusion agenda so far has been largely focused on redistribution of wealth while what is required is inclusion in the creation of wealth. Financial inclusion so far has meant debt distribution and nofrills bank accounts.
Microfinance has been one major channel of debt distribution to the poor. While the original assumption was that these loans were for investment … Read More »
In the 1980s and early 90s lending to the poor was considered a losing proposition in the banking sector. In the mid 1990s, the problem that microfinanciers stepped in to solve, was to find a way to make credit available to the poor on large scale in a viable way. This meant finding effective ways of delivering credit to people with no collateral to offer and mechanisms to ensure repayment. On these counts the industry has had some fair success and some failures.
Read the complete article in the Indian Management Journal
We talk constantly of poverty in India as if it is our real problem. But I don’t think it is. It is a consequence of deeper underlying issues.
Global inequity among human beings has been framed and constructed in the context of money — the want of money and, therefore, the ability to acquire. The focus on poverty as the problem forces us to formulate solutions that involve redistribution of money, to give people the ability to acquire. But what were the original drivers of progress and wealth creation?
The potential of money comes from the interaction with the mind. Wealth is created from human ingenuity. Consider that we are a country where only approximately 10 per cent participate in the formal economy, and only approximately 4 per cent of our citizens meet the Rs 1.6 lakh income criteria to pay taxes. … Read More »
What is poverty? Having less money, living on less than Rs.90 a day or not being able to afford basic human needs?. Look at it this way and money is the problem. Solution: financial inclusion, microfinance, guaranteed employment schemes. But is it? Really?
In India, distribution of income differs from the popular imagery of a pyramid. With only 4% citizens paying taxes and only 10% employed by the formal economy, the prospects of solving this problem through simple redistribution schemes are abysmal. But perhaps it is not about money at all!
The more I encounter poverty, the more I realize that it is actually about the lack of power to change one’s circumstance. If tomorrow I lose all material wealth, no one will call me poor because I am empowered to do something about it.
Generally, you draw your power from the knowledge … Read More »
MFIs can operate as subsidiaries of banks, using a bank’s access to low-cost funds to lend cheap to the poor.
In 1995, Bank of Madura had 95 rural branches that were generally unprofitable. Deposits in these branches were too low and defaults on loans too high to justify the cost of servicing these communities. Besides, the bank’s staff disliked rural postings and it was difficult to attract talent into these areas.
The then Chairman & CEO, Dr K. M. Thiagarajan, in his bid to develop a profitable model of rural lending, pioneered the model of Self Help Group (SHG) lending, that was a hybrid between the Grameen Joint Liability model and mainstream banking.
Lending was done to a group of 15-20 women, who were co-guarantors for one another. They would meet locally to pool their dues once a month, and two of the … Read More »
Cataclysmic events are no strange beast to the banking business. As for microfinance, the sector will survive even as some players drop out.
Sure, I say. I’m taking a contrarian position in the industry and here’s why. Let’s look at why people have loved the microfinance industry, at least in the past.
First, there was enough propaganda that it was alleviating poverty to make you feel good about association. And proponents will still argue that if some of the struggling MFIs are allowed to fail, it will crush the dreams of financial inclusion and, thereby, a chance to ‘better the lot of the poorer sections of society’.
This simply does not hold. Six years into this, it is starkly apparent to me that financial inclusion in the form of high interest loans does not better the lot of anyone very much. There is … Read More »