With Grameen Bank's founder, Muhammad Yunus, getting his Nobel Peace Prize a few days ago for his pioneering role in spreading micro-credit in Bangladesh, the entire movement has just got another push. At a time when banks, such as in India, are unable to push credit to distant villages and are yet to come up with a viable model to lend to the poor and disadvantaged, Mr Yunus' Grameen Bank has shown how this is possible, and that too with recovery rates as high as 98.85 per cent. In India, Nabard figures show, the number of Self-Help Groups (who take micro-credit) has increased around 10-fold in the last 5 years, and the 2.2 million such groups today cover around 31 million households through women's membership. Indeed, such is the potential that India's leading and most dynamic private bank, ICICI Bank, has an active division working on ways in which to tap this market--this involves lending to NGOs familiar with an area and using their expertise to lend to the right sort of families/structures. But while there can be little doubt about the need for such financing, particularly when, as in India, very large parts of the population remain untouched by the formal banking network, it is important not to get carried away by the heartwarming stories of those used to paying 150 per cent interest rates now getting it at 18 per cent, and so on. Microfinance is very important, but is it, as is being increasingly thought, a substitute for good old job creation through the setting up of industrial units? The two, actually, are unrelated, and are best seen that way. | |
| In India, a recent study shows, the average size of loans for first-time group members is Rs 2,684 and Rs 4,497 for repeat loans. This is probably enough just to buy a sewing machine or some such rudimentary piece of equipment, if you assume that the money is being taken only for business purposes and not for consumption. In other words, such units are family-run and probably suffer from the attendant problems of low productivity and low skills associated with poor scale. It is unclear how such units can possibly compete with output from modern industrial units and, now, very low-cost Chinese imports. While the model may work for small services, a barber shop or a small provisions store in the village/town, its competitiveness in other areas is not immediately obvious. Indeed, it is precisely this lack of competitiveness vis-à-vis the larger industrial sector and imports that ensured the demise of the SSI sector. |
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| While it is important that enough studies be done to examine the longevity of units financed by micro-credit and the amounts of income they help generate for members, it does seem intuitively obvious that micro-credit cannot be a substitute for employment creation, whether in the services sector or the industrial one. The other issue to bear in mind is the cost of such money. It is intuitively obvious that if banks consider micro-loans more risky, the only way they will do such lending is if the returns are made higher. A 20-24 per cent lending rate would ordinarily be considered high, if not usurious, but when it is usually for short-term trade credit to someone who would ordinarily pay much more in the informal financial market, it works well. However, it is as well to recognise the limited framework in which such micro-credit works. |
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