India: MFIs – A mixed experience

By Seema Sahai: The Hindu Business Line

Micro-finance has been recognised as an instrument for attaining poverty alleviation goals. The Twelfth Plan specifically mentions that micro-finance will help generate employment by providing affordable financial products for fixed capital formation in the household sector.

Although micro-finance includes financial services such as thrift, insurance, credit and remittance, credit remains the most emphasised service by clients and regulators alike.

India has two channels of micro finance — Self Help Group- Bank Linkage Programme (SBLP), and Micro Finance Institutions (MFI)-led microfinance. MFIs have surpassed Regional Rural Banks (RRB) and commercial banks in terms of number of small loan accounts. Even after the crisis which started in 2010 MFIs have outpaced SBLP in annual growth in terms of number of accounts.

With MFIs growing at 68 per cent per annum in terms of unique client base in 2005-10, there can be no doubt that MFIs have played a crucial role in bringing about financial inclusion.
BOTTOM OF THE PYRAMID

But this is the success story of MFIs and not that of the borrowers. Growth of MFI and growth of borrowers do not necessarily go together. The general operational practices of major ‘for profit’ MFIs in India are not in congruence with the stated goal of pulling people out of poverty by providing them productive assets. To begin with, MFIs provide credit to only those units which are already in business for more than a year or two. So the very idea of providing credit to the poor is defeated.

The credit is used by clients to realise working capital requirements such as procuring raw material (in case of manufacturing) replenishing stock (in trading), upgrading shops (in service industry), or fulfilling some personal needs. So, one should already be doing well to get a loan to better oneself.

Additionally, the basic criterion for selection of borrowers in all major MFIs mandates that the borrower must be a permanent resident of the place and should own a house. This categorically leaves out the very poor.
ONE SIZE FITS ALL

Also, MFIs offer a fixed credit amount and fixed tenure to all types of enterprises. So, whether one is a tailor or welder, vegetable vendor, carpenter or in the photocopier business, one gets a fixed amount of credit repayable for a fixed time period. There is no assessment of business needs of different types of activities. A photocopying machine, for example, may cost around Rs 1 lakh and a sewing machine may cost just 5,000. The level of enterprise potential is not taken into account. A small amount of Rs 10,000-20,000 is not sufficient for starting most business activities. Even an average quality buffalo costs Rs 30,000-40,000. Incidentally, this amount is not even sufficient to cater to a running and growing enterprise, where entrepreneurs have to depend on private sources for peak season work.

Training and business advisory services are mostly supply-driven without taking into account the needs of the enterprise. Even government institutions for capacity building and providing market linkages are absent on the ground. Further, the sector is dominated by ‘for profit’ MFIs or NBFC MFIs. It is not their business to develop clients into entrepreneurs. The disconnect between MFIs and clients has been recognised as an important reason for the micro finance crisis that erupted in India in 2010.

All this does not negate the positive role played by MFIs. Their functioning has definitely resulted in consumption smoothening.

Also, small loans are welcome, because in a state of resource crunch this credit helps in sailing through many problems. Loans should be given for consumption purposes (presently they are given for productive purposes only). Right now, clients have to depend upon private sources of credit, such as relatives and money lenders for consumption loans that are very costly.

Employment generation through MFI has to focus on financial inclusion for those beyond the eligibility criteria of MFIs, and also on creating an enabling environment for borrowers, such as capacity building and market linkages for clients.

India: NABARD to partner with Rural Development Ministry in expanding the Self Help Group movement

From Press Information Bureau, Government of India

The Union Minister for Rural Development, Mr. Jairam Ramesh has stressed the need for expanding the women’s Self-Help Group movement, as a tool of empowerment and promoting economic well being. Interacting informally with media after a crucial meeting with NABARD officials in Mumbai today, the Minister said “the National Rural Livelihood Mission would connect at least one woman from every poor household across the country with self-help groups in five years. Presently we have 3 crore women who are members of SHGs and we have to raise it to 7 crore in five years”.

Mr.Ramesh noted that at present the southern states of Tamilnadu, Kerala, AP and Karnataka account of 70% of women Self-Help Groups and 80% of credit flow. “This is a highly geographically distorted scenario, we need to spread the Self-Help Group movement across the country” he remarked. The focus of the new initiative will be on Madhya Pradesh, Chhattisgarh, Jharkhand, Bihar, Uttar Pradesh, Rajasthan and even Gujarat and Maharashtra. The Minister informed that the NABARD is creating a Rs 1500 crore fund to cater to the Self Help Groups in weaker districts. NABARD participates in the process by way of refinancing banks who lend to women Self-Help Groups.

Needed, flexibility in rural lending

Mr. Ramesh said there is an urgent need to bring in flexibility in lending norms of organized banks to Self Help Groups. “The SHGs require variety of kinds of loans, which the Public Sector banks are not being able to cater to. As a result the poor are driven to micro-finance institutions, who offer credit on flexible terms, but charge an exorbitant rate of interest.”

The Minister stressed the need for developing an organized and well regulated micro-finance institutions network but felt that the Microfinance Bill, in its present form has too many loopholes. “In its bid to protect the micro-finance institutions, it will kill the SHG movement” he said. The Minister re-emphasized that micro-finance institutions are not the instruments of alleviating poverty, “Micro-finance cannot provide a definite answer to the challenges of poverty alleviation, but it can lead to financial inclusion by providing credit to the customer as per his/ her own needs,” he said.

Aajeevika Cell set up in NABARD

Mr Jairam Ramesh also inaugurated that ‘Aajeevika Cell’ in NABARD which will work in close coordination with the Ministry of Rural Development in achieving the goals of the National Rural Livelihood Mission. The NABARD CMD Mr. Prakash Bakshi said the Aajeevika Cell will facilitate convergence of wide variety of approaches and best practices to mobilize poor households into Self-Help Groups.

India: MFIs not going to solve poverty problems: Jairam Ramesh

From The Hindu Business Line

Micro-finance institutions (MFIs) are not going to solve India’s poverty problems, but they could be an instrument in bringing people to the web of financial services, the Union Minister for Rural Development, Mr Jairam Ramesh, has said.

“They (MFIs) are not answers to poverty alleviation and certainly not the panacea they like to see themselves as,” Mr Ramesh said after releasing a NCAER-CMCR study on “Assessing the Effectiveness of Small Borrowing in India” here on Monday.

He highlighted that the findings of the study does not provide a robust enough defence of MFIs vis-a-vis the self help groups (SHGs).

The real comparison of MFIs should be with money lenders (informal sector) and not SHGs, he noted.

Mr Ramesh expressed confidence that the country would, in the coming months, have a good regulatory system governing MFIs — a system that appreciates the role of such institutions.

“There was hype governing some of MFIs. They set out to claim that they are solving India’s poverty problems. If they were modest in their ambitions, the vehemence with which their critics struck back would have been even much lesser… vehemence of backlash was directly proportional to the exaggerated nature of the claims of many of these institutions,” he said while referring to the recent fracas in the functioning of MFIs in Andhra Pradesh.

Bangladesh: Women Raise Own Funds for Microfinance

By Naimul Haq, Inter Press Service

Amidst despair and poverty, women in some remote villages of Bangladesh are raising money and lending it to each other through a unique microfinance programme launched by a local non-government organisation.

Unlike the traditional microfinance arrangements where credit comes from external sources or development partners, the local NGO Pally Bikash Kendra (PBK) has taken a different approach where beneficiaries themselves generate and save money to help small businesses survive.

Called “Self-Help”, the programme was launched four-and-a-half years ago in the wetlands of Mithamoin in Kishoreganj district in central Bangladesh, less than 150 kms from the capital Dhaka. Today, the 317 women’s groups operating in the area have a combined fund of roughly 15 million taka or over 200,000 dollars.

Twenty-eight-year-old Bishan Chkraborti is one of hundreds of beneficiaries who virtually had nothing at the beginning but, after joining the “samity” or group, now runs her own business raising cygnets and selling adult swans at a local market.

Four years ago, her eight-year-old son had to drop out of school, since she could not afford the boat fare to take him to the only primary school in the 200-hectare swampland. “I had no income as my disabled husband could not work. We lived in a tiny one-room bamboo-shed home,” said Chkraborti, who comes from Puran Borgadia village.

Now she has a bigger house with a tin roof, mud floor and bamboo fence. She also grows vegetables and sells them to locals with a slight profit margin. Her son is also back in school.

The Self-Help programme, designed for very poor women, is a simple system based on the discipline of raising and saving money, creating small funds to be loaned out to beneficiaries at negligible interest rates.

Every samity is made up of about 15 women – mostly the landless, widows, beggars and divorced – who deposit 10 taka (13 cents) every month when they meet for discussions to approve fresh loan applications. In those meetings, they also discuss what to do with the loan money, how to use it efficiently, and other social issues that affect women like education and health.

“We don’t have any defaulters,” said a proud and confident Padabi Rani Das. “If a member fails, we all fail. We don’t let anyone fail as we have a system of helping members overcome their difficulties.”

Community organisers like Foyzur Rahman of PBK guide the members on maintaining accounts and depositing money in the local bank, and dispense advice on new business prospects and similar issues.

“We acted as a catalyst promoting their interest to form the samity for their benefit. Of course, initially they did not readily accept our proposals, believing we were another of those money grabbers,” said PBK programme manager Fahmida Jigor Jahan.

“When the women realised that they were getting benefits and saw that gradually poverty was disappearing, they wanted us to find them bigger amounts of loans,” Jahan explained. It was a challenge in the beginning, she said, since the women had never handled big amounts, and figures like 4,000 taka (53 dollars) were already huge to them.

Any member could apply for a beginner’s loan, known as “input support,” amounting to 1,000 taka (13 dollars) for small businesses such as stitching clothes, growing vegetables, selling dry fish, raising livestock and starting grocery shops.

Once the applicant is able to pay back the loan, she qualifies for a repeat, and at a certain stage can take out bigger loans ranging from 4,000 to 10,000 taka (52 to 133 dollars).

Such loans usually go towards expanding grocery shops, vegetable farming and agricultural businesses like cereal farming. After they pay back their loans, the borrowers become eligible to apply for bigger amounts. This takes them to the next stage of borrowings known as LIFT, which stands for Learning and Innovation Fund to Test new ideas.

Jugomaya Rani Das in Sarkerhati village is one of many who prospered from taking loans from LIFT. She used the loans for vegetable farming and to support her husband’s fishing business.

A mother of two sons, Jugomaya is the leader of a samity who learned how to make money after many years in extreme poverty.

“Life without earning was miserable,” Jugomaya said of her life before joining the group. “We were burdened with borrowing but had no way of repaying the loans. At one stage I thought I would give up family life and turn to begging elsewhere.”

After four years in the samity, Jugomaya now runs a relatively stable business catching fish every other day and selling them in the floating wholesale market, which fetches her family about 480 taka (just over six dollars) every day.

On top of this, she also leases land to plant rice every dry season. Rice farming earns Jugomaya some 35,000 taka (460 dollars) every four months, after meeting all expenses.

About 50 such Self-Help groups who form community-based organisations qualify for bigger amounts of loan money from external sources like the Palli Karma Shahayak Foundation (PKSF) to continue wider microcredit programmes.

Money for LIFT comes from PKSF, a federation of 257 partner organisations offering various sizes of loans to NGO borrowers at nominal interest rates.

Since its inception 20 years ago, PKSF has disbursed over 450 billion taka or over six billion dollars to about 8.6 million borrowers through NGOs like PBK.

PBK has helped nearly 38,000 borrowers – 98 percent of them poor women – since it started working in three districts, disbursing a total of 27 million taka or 3.5 million dollars.

“There was a time when women did not have a voice as they never participated in income generating activities. Today they are empowered and can decide how to develop their own communities,” said PBK executive director Mohammad Hasan Ali.

Since PBK started its microcredit intervention in Mithamoin five years ago, almost all of the 58,000 women have gotten involved in direct or indirect income generating activities.

India: AP plans NBFC to lend at subsidised rates to SHGs

From The Economic Times

HYDERABAD: Andhra Pradesh, once the home to micro finance companies, plans to set up a non-banking finance company (NBFC) to lend at subsidised rates to self-help groups (SHGs) with funds from the central government that will end hopes of revival of profit-seeking micro lenders in the state.

The state government, which crippled the micro finance industry with a law aimed at protecting borrowers, will access SHGs with funds to fill the void left by the near exit of micro finance companies. “We are planning to set up an NBFC that can offer credit to SHGs at a little over 3% interest rate. Already, state offers subsidised lending at 3% to SHGs through banking linkage under ‘pavala vaddi’ (affordable interest) scheme. Our effort is to strengthen this and we have asked the Union rural development ministry for equity participation,” said chief minister N Kiran Kumar Reddy, who has sought Rs 100-crore equity from the central government.

The Union government will offer credit to SHGs at 7% interest rate through public sector banks. This is expected to help Andhra Pradesh, which is planning to strengthen the SHGbank linkage to fill the credit gap arise out of the crisis in the microfinance sector. “The Centre has taken a decision to offer credit to SHGs at the same rate as that of crop loan to farmers, which is at 7%. This is part of the National Rural Livelihood Mission and the Centre would bear the subsidy burden,” said environment & forests minister Jairam Ramesh. This will help Andhra Pradesh, which houses 15% of SHGs in the country.

The state has about one million SHGs and 46% of the national bank credit to SHGs goes to Andhra Pradesh. Besides, the state has been facing a crisis in the microfinance sector resulting in a gap in demand and supply of credit in rural areas. The MFI segment has been reeling under pressure in the state since October last year after the Andhra Pradesh government decided to regulate its activities in the state. Andhra Pradesh’s tough stand hand hampered MFIs’ business in Andhra Pradesh, where the loan recovery rate has fallen to about 10% from over 95% in early 2010.

This led to banks denying fresh loans to MFIs. The Centre, as part of the Budget outlay, has proposed a separate financing window for SHGs with an initial corpus of Rs 500 crore. The state is looking at getting money from this. The state may also pool in Rs 50 -crore initial equity besides getting Rs 50 crore each from Nabard and SHG federations. According to Mr Reddy, the NBFC would serve the secondary credit needs of rural poor, who have already received a loan from SHGs.

The State of Microfinance in India: Emergence, Delivery Models and Issues

In the recent time microfinance has received increased attention among the researchers and financial service providers, as a good alternative in the rural credit market. Various studies revealed that microfinance is a powerful instrument for poverty alleviation, enabling the poor to accumulate the assets, boost their incomes, and reduce their economic vulnerability. There are various opinions about the micro credit demand in India. M-CRIL, a leading micro-credit rating agency provides a conservative estimate for the annual demand at Rs. 480 billion based on 60-70 million poor families with an average household credit demand of Rs. 8,000 (less than $160). In the growing market, to meet this huge demand we require the systems and approaches with comprehensive financial inclusiveness. Within this context, the Self-Help Groups (SHGs) movement in India and particularly the SGSY, SHG-Bank Linkage Programme (SBLP) of the National Bank of Rural and Agriculture Development (NABARD), various MFIs and community based organizations present the rich experience. The present paper explores the role of and performance of various delivery models of microfinance in India. Further the paper explores some issues like outreach, impact, efficiency, sustainability and financial inclusions.
Read Full Article: The State of Microfinance in India: Emergence, Delivery Models and Issues

India: Despite Fears of a Bubble, Microfinance Needed for Growth

By Manipadma Jena, Inter-Press Services

Sambari Naik never went to school and is determined to give her daughter Rebati an education. But 13-year-old Rebati seldom did well in her studies, often dozing over her books beside a flickering and smoky kerosene wick lamp in their house, which had no electricity.

Things changed, however, when 45-year-old Sambari brought home a solar lamp system on a 900- rupee (20-dollar) microfinance scheme from Bharat Integrated Social Welfare Agency (BISWA), a non- profit organisation working in 18 Indian states and headquartered in the eastern state of Orissa, which has some of India’s lowest socio-economic indicators.

Rebati is now doing well in school, while Sambari and her husband Khedu work at the brick kiln near their village of Ankhadihi in Orissa’s Sambalpur province. The couple earned 140 rupees (three dollars) laying up to 800 bricks a day. But most days now they earn more, putting in extra hours after sundown by the light of the solar lantern.

Best of all, the Naiks save about 200 rupees (5 dollars) a month since they no longer have to buy the six to eight litres of kerosene they needed to light wood stoves and wick lamps. This amount now repays the monthly instalment for Sambari’s loan from BISWA.

“This new lantern lights up all corners of our one-room hut during storm and rain, and does not go off like the kerosene lamp. We go out into the dark to answer the call of nature without fear of snakes,” says Khedu Naik.

The Naiks belong to a Self-Help Group (SGH) in Sambalpur that has received assistance from BISWA, which partnered with the Delhi-based The Energy and Resources Institute (TERI) to provide renewable energy sources for the poor through microfinance. The partnership intends to cover more villages in the neighbouring underdeveloped states of Chhattisgarh and Jharkhand.

BISWA started out in 1994 as a non-profit extending microcredit to poor people, mostly women, to grow their income through small enterprises. But its subsequent strategy was to converge what it now terms social finance with social development initiatives.

The thousands like Sambari who are linked to women collectives affiliated with banks or SGHs have benefited from BISWA. Social finance now ensures their daughters’ higher education, and allows them to combat malaria through health loans and to access safe drinking water and sanitation facilities.

Orissa’s capital Bhubaneswar is one of the fastest-growing cities in eastern India. While converting its 2,000-year-old heritage zone into a global tourist destination, the local government sought to rid the city of the common practice of defecating in the open.

Among others, BISWA put its microcredit strategy to work. At the 87-household Gyana Nagar slum in the heart of Bhubaneswar’s heritage area, 24 women from four SHGs got loans ranging from 8,000 to 17,000 rupees (180 to 380 dollars) in 2008 to rebuild old or construct new toilets with baths.

“Though the loan is taken by the women, understanding its importance, the family pitches in to repay,” says borrower Mini Behera. Many women like Sambari Naik and Mini Behera say the benefits from these loans have brought them a stronger voice in family decisions.

BISWA’s financial services strengthen the ability of the poor to achieve the Millennium Development Goals – a series of anti-poverty and development targets adopted by the world’s governments in 2000, with a 2015 deadline – on their own terms in a sustainable way, says BISWA founder and chairman Khirod Chandra Malick.

The non-profit works with around a million rural women in India, and the number of those benefiting from its microfinance programme is growing.

“Microfinance is a critical anti-poverty tool. When the poorest (traditionally considered non-bankable), especially women, receive credit, they become economic actors and are empowered, to improve not only their own lives but also the lives of their families, their communities, and their nations. Microfinance can help make India’s economic growth more inclusive,” adds Malick.

BISWA works with various organisations, corporate entities and relevant government agencies, taking as much as six months to motivate and build capacities after which it lends amounts between 5,000 to 20,000 rupees (110 to 445 dollars) through bank-linked SHGs.

The repayment structure is on an easier monthly basis – not weekly as with many lenders – on diminishing balance with interest rates at 24 percent, up from 19 percent in March 2011.

“This model is key to BISWA’s microfinance sustainability,” says Jharana Mishra, BISWA’s chief manager for research and documentation. Microfinance incorporates an insurance component, unlike microcredit, that prevents borrowers from debt traps exacerbating their financial vulnerability.

Malick says integrating BISWA’s activities with microfinance brings many a challenge. “Structuring innovative yet feasible projects and motivating the poor to take ownership of these; maintaining the pace by striking a balance between expansion and sustainability of microfinance projects and mobilising funds for these are some of the major ones.”

India has roughly 400 microfinance lenders with a combined 207 billion rupees (4.6 billion dollars) in outstanding loans to 70 million poor people.

The glut of investments in the microfinance sector over the last several years and the scramble among the poor to take, in many cases, multiple loans at a quarter of the 100 percent annual interest rate that local Shylocks had been charging, has raised fears that the sector could be feeding a bubble.

Triggered by a spate of loanee suicides, more regulations coming from the Reserve Bank of India are expected to bring down interest rates and reduce aggressive lending and collection practices, potentially squeezing out smaller players. The industry is thus expected to become more transparent and accountable.

With a potential base of 120 million unbanked homes, the demand for microfinance in India is likely to rise. But the challenge is retaining the social focus, as BISWA is trying to do, and serving as the last-mile bridge to the low-income population excluded from the traditional financial services.

India: Gujarat steps in to back microfinance for SHGs

By Jyotsna Bhatnagar,The Financial Express

Ahmedabad: Even as the central bank attempts to streamline the operations of private micro financiers and states like Andhra Pradesh try to shield low-income clients from MFI exploitation, Gujarat is busy putting in place a Rs 1,500-crore network of microfinance linkages to empower over 2 lakh self help groups (SHGs) in the state. Once in place, this will be the country’s largest government-driven micro-finance linkage involving nationalised banks.

The project is one among the several conceived under chief minister Narendra Modi’s Rs 20,000-crore Mission Mangalam, which aims to provide a million livelihoods through self-employment by integrating self-help groups in the corporate value chain. Memoranda of understanding for the projects were signed at the Vibrant Gujarat Global Investment Summit in January. Government sources associated with the project revealed that the formal banking system is playing a pivotal role by providing micro finance linkages. While Rs 300 crore has already been linked, proposals received from large public sector banks for pumping in the remaining Rs 1,200 crore are awaiting clearance.

The project aims at linking the state’s 2 lakh SHGs with a minimum of Rs 50,000 cash-credit facility, protecting its estimated 25 lakh members from penury.

It would also shield those with seasonal incomes from liquidity crisis during lean months. The facility can also be used for swapping costlier loans from money lenders.

Said a government official: “The biggest advantage of this micro-finance facility would be that, being flexible credit, it can be used for any purpose including consumption, exigencies like marriage, education and health. More importantly, unlike conventional sources like money lenders who charge 7-10% interest per month, this credit would be available at an affordable 9-11% per annum. The credit would be dispensed as cash-credit and interest would be charged only on the quantum of money withdrawn and not on the entire amount.”

Most districts have seen hectic activity on the new initiative, holding meetings of government officials with senior bankers, district officials and representatives of SHGs. While 16 of the 25 districts have been covered, it is expected that all the linkages would be in place by mid-July.

SHGs are also being helped with capacity building to enable them to handle these funds. Over 2,000 workers has been recruited at the field level to hand-hold the SHGs to manage funds for sustainable livelihoods.

“The Gujarat government has proved that the formal banking system can be effectively milked to fulfill the micro-finance needs of the rural poor without any requirement of private MFIs and NGOs,” a government spokesperson claimed. “The biggest plus point is that this credit will not be in the form of term loans but rotational, which, over a period, would generate a much bigger corpus of over R5,000 crore which can be effectively used for empowering the poor,” he added.

Steps MFIs need to take for the poor in India

From Economic Times India

Fariduddin Chaudhari, Advisor to a Kuwait-based consultancy

Today, microfinance institutions (MFIs) finds itself on a sticky wicket when faced with the charge of levying high and opaque interest rates from borrowers, employment of goons to recover money from defaulters and of being responsible driving some borrowers to suicide. It appears that their latest strategy is to ask to just be allowed to coexist along with self-help groups (SHGs) and even moneylenders.

But this attitude misses the main point: that MFIs needs to reinvent itself to be able to stay as a hope for the poor. This article discusses a few important steps that need to be taken in this direction.

Banks must reduce their rates drastically: Banks lend to MFIs at around 12% while MFIs lent to borrowers at around 30% before the Andhra Pradesh ordinance and at about 24% after it.

As for administrative costs, these are much lower for banks and much higher for MFIs. For example, a bank may lend 100 crore to an MFI while the MFI will lend an average of 50,000 to no less than 20,000 borrowers; or 2,000 borrower groups if each group consists of 10 persons. It is, therefore, clear that the MFI has to work very hard to administer 20,000 or even 2,000 contracts.

The bank, on the other hand, has to maintain just one contract with the MFI. Before the AP ordinance, MFIs used to recoup a portion of their costs by charging 30% from borrowers. Why don’t banks consider lending to MFIs at a rate that reflects their actual costs and to charge no interest at all?

This practice is followed by the Kuwait Fund for Arab Economic Development that lends, contrary to what its name suggests, to all Third World countries. No doubt, there are many other institutions in the world that follow this practice.

Banks can make up their loss, if any, by charging their corporate and other borrowers fractionally higher interest rates, though it would be ideal to have an across-the-board zero interest framework for all borrowers.

Give only productive and constructive loans: Banks must simultaneously bar MFIs from lending consumer goods loans. It might be best to give loans only for small businesses in a cooperative matrix like the Grameen Bank of Bangladesh (GBB) does. Loans could be given to individual borrowers for education and medical treatment as well. It may be tempting to include loans for marriage in the list – it may be better, however, to give such loans to group marriages which have an in-built economy of scale.

Turn MFIs to become a conduit for philanthrophy: MFIs can contemplate if they can convince philanthropist individuals and institutions in the country to give them a part of their charity for a fixed period. As poor a group as the Muslim community in India gives away a minimum of 10,500 crore in obligatory charity every year, mostly during the month of Ramzan.

This year’s Ramzan, corresponding to early August 2011, will be a good time to start working on this effort. An equal amount is spent by Muslim charitable trusts all over the country.

Having said that, caveat is required here: most people think that this obligatory charity is meant only for poor Muslims but there are jurists who think that it can be given to non-Muslims as well as one of the eight heads of expenditure specified in the Qur’an is ‘for changing the hearts’.

So, it would be better if MFIs seek the support of such jurists when exploring the viability of this suggestion. A far bigger amount will be available from the rest of the middle class and rich Indians.

Make a bold step in zero interest microfinance: The Jamat-e-Islami Hind recently decided to open at least 500 zero-interest coop credit societies in India by 2016 under its social service vehicle called Vision 2016. This effort will have as its pilot the Al-Khair Cooperative Credit Society of Patna, which has managed to disburse 4 crore last year to the poor in the city and suburbs.

Should the plan succeed, they would be lending about 2,000 crore by 2016 throughout the country on a zero interest basis. There is every reason to believe that the whole operation will be run on secular, and not communal, lines.

Without new loans, SHGs owe MFIs Rs 7,000 cr

G. Naga Sridhar & K. Ram Kumar, Hindu Businessline

From a 98 per cent repayment rate barely six months ago to over six lakh Self Help Group (SHG) members defaulting on their loans, is the saga of microfinance in Andhra Pradesh. For Savithri, an SHG member from Bhongir in Nalgonda district of Andhra Pradesh, the reason for defaulting is simple: “I am unable to pay existing loans as I’ve not got any new loan in the last six months.”

This collective default adds up to a whopping Rs 7,000 crore.Savithri, who runs a grocery shop, has taken loans from two MFIs, and defaulted on both. However, her shop continues to run. She is just one among the over six lakh SHG members who have stopped repayment to MFIs since October 2010 after the enactment of the AP Microfinance Regulation Act.

“The absence of fresh loans is impacting our income generation activities and repaying capacity,” says Laxmamma from Tandur in Ranga Reddy district. The findings of the Reserve Bank of India’s Malegam Panel support these women’s claim. In its report, the panel observed that only 25.4 per cent of every new loan was spent on income generation, while 20.4 per cent was used for repaying old loans.

RESCHEDULING

Faced with huge outstanding loans, MFIs are now rescheduling loans to clients, following a recent meeting of the RBI with MFIs. The loans given to MFIs will be restructured by banks under the corporate debt restructuring (CDR), but only after MFIs restructure their loans to borrowers. The RBI has extended the earlier deadline of March 2011, to June 6, 2011, for restructuring of bank loans to MFIs under the CDR mechanism.

“In a way, the clients themselves have done the restructuring by not paying the instalments. However, we will be definitely restructuring on the books,” Ms Padmaja Reddy, Managing Director, Spandana Spoorthy, told Business Line. With norms for restructured loans being simpler and less harsh compared with NPAs, this should help both MFIs and their borrowers.

Spandana has Rs 1,500-crore outstanding loan portfolio in AP out of its total loans of Rs 3,700 crore in the country. SKS Microfinance has outstanding loans of Rs 1,250 crore from its borrowers in AP.

The country’s only listed MFI, SKS Microfinance, is willing to reschedule existing loans provided the “harsh provision against multiple loans” is removed. “We have also told the government that rescheduling of client loans can be done if we can extend fresh loans without hassles,” says Mr M R Rao, CEO, SKS Microfinance.

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