In the backdrop of heavyweight multinational banks going bust, success of micro credit institutions sounds interesting. Such is the gaining popularity of micro finance industry that many commercial and multinational banks are increasingly starting their operations in this sector. ABN AMRO, Standard Chartered Bank, HSBC, ICICI, HDFC, UTI etc., have also developed their own strategies and models for lending in this sector. Because of isolation of rural India from global financial meltdown, microfinance is considered to be recession proof and in fact is booming like never before in these turbulent times.
Before moving ahead let us gain some insight on micro financing. The concept of micro credit was visioned by the now Noble laureate, Dr. Mohammad Yunus of Bangladesh. He established “Gramin Bank” in 1976. Gramin Bank concentrated on disbursing loans to poor and needy people from rural areas. Its lending system was peculiar but effective. To obtain loans, potential borrowers had to form a group of five. Many groups in a village were federated in a centre. Bank gave credit to centre, which in turn forwarded it to one or two members of each group. This loan was given to members without any collateral security. In spite of any collateral security, the loan recovery rate was as high as 98%. This was because of one of the most pioneering principle of the system – mutual accountability. Failure of repayment on part any borrower may lead to ineligibility to receive any further credit to the whole group. Hence the borrower is kept under constant pressure from his group members to repay the loan. This led to timely repayment of the loans. This system has worked wonders and Gramin bank has now over 1000 branches in every province of Bangladesh, borrowing groups in 28000 villages, 12 lakh borrowers with over 90% being women.
In India, the micro credit is characterized by self help groups (SHG) and NGOs. SHG is an association of individuals, generally poor women forming a group. These groups are promoted by NGOs who act as ‘centers’ as in the case of Gramin Bank. NABARD is the biggest institution in India which advances grants and loans to these SHGs.. ICICI bank through its ‘partnership model’ has already achieved an outstanding of Rs. 720 cr. Other private sector banks like HDFC (175 cr), UTI (100 cr) etc., are also looking at microfinance as a serious business opportunity. Among the multinational banks, ABN AMRO Bank, (85 cr), Standard Chartered Bank (15 cr), and HSBC bank (12 cr) have also developed their own strategies and models for lending to the sector. (Please note: these figures are as of 2005). The government has also announced opening up of the external commercial borrowing (ECB) route for the micro finance institutions to allow cheaper foreign funds for the sector.
Microfinance still reaches only about 10 to 12 % of the poor in the country. Sixty-seven percent of the population in the country has no bank accounts and 80% have never taken a loan from a formal source. This provides an immense potential to micro financing industry in India. Its importance has increased in the present scenario of economic downturn. More and more entrepreneurs are starting their own venture in the field of micro credit. In the words of Dr. Mohammad Yunus “it’s (micro edit) an important tool to create self employment. It bears more significance in terms of recession, as it shows laid off employees a way to stand up again on their own”.
Starting a micro finance institution (MFI) has become easier with the government’s backing to the sector. This has led to many fresh graduates, laid off employees and social activists starting their own venture.
This recession has provided us an opportunity to overlook some of the glamorous jobs and ventures to contemplate about micro credit which in no way is as glamorous, but certainly has immense potential and as some consider it is ‘the next big thing’.