A young man standing jauntily near a cart wheel – a familiar symbol of rural India and its poverty – is how I remember Vikram Akula when I first saw his photograph in the Economic Times. Having been very much impressed earlier by Prof. Dr. Muhammad Yunus’ successful experiment with his path-breaking Grameen Bank in Bangladesh, I had been trying hard to get some NGOs interested in starting one in India as well. After all Yunus had been successful in alleviating the poverty of 30 lakh families in the 30 years that he had been operating his bank and this was 10 years ago. Today in 2010, that figure could be 4 million!
I did face an ideological problem though. Dr. Yunus’ Bank charged an interest of 24 % from the borrower groups. I would prefer that there was no interest at all unless, in the eyes of the jurists, the poverty of the borrowers somehow justified the taking of interest from them!
In the article accompanying his picture, Vikram Akula was described as someone who had made good in the USA and could have continued to do so but had decided to return to India to ‘rid it of its poverty’. From that day on, I made sure that I referred to him whenever I spoke or wrote about microfinance. Soon we began reading of the success of his operations till he launched his ‘for profit’ arm by the name of SKS. And the rest is recent history which is still unfolding.
Today, both V Akula and his microfinance operations are having to defend themselves against the charge of levying high and opaque interest rates from borrowers, employment of goons to recover from defaulters and finally of being responsible at least for some of the errant, humiliated borrowers’ suicides . It appears that their latest strategy is to ask just to be allowed to coexist along with the Self Help Groups (SHG) and even the Moneylenders.
But this is not the only option: Microfinance needs to revive itself if only to return the twinkle in the eyes of the poor of India.
BANKS MUST REDUCE THEIR RATES
Banks lend to MFIs at around 12% while the MFIs lend to the borrowers at around 30% before the Andhra Pradesh Ordinance and at about 24% after it.
As far as the administrative costs are concerned, these are much lower for the banks and much higher for the MFIs. For example, a bank may lend Rs. 100 crore to an MFI while the MFI will lend an average of Rs. 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 with 20,000 members again; when compared to the one contract with the MFI that the bank has to administer.
Now, the MFI used to manage itself before the AP ordinance by charging a total of 30% from the borrowers. I suggest that the banks consider lending to the MFIs at a rate which reflects their actual costs and to charge no interest at all. This practice is followed by The Kuwait Fund for Arab Economic Development which lends, contrary to what its name suggests, to all third world countries approaching it for development loans. Doubtless there are other institutions in the Arab and the wider world which follow this practice.
The banks can make up their loss 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 LOANS
The banks must simultaneously bar the MFIs from lending to those borrowers who come to them for consumer goods loans. It might be best to give loans only for small businesses in a cooperative matrix as Grameen Bank does. Loans could be given to individual borrowers for education and illness as well. It may be tempting to include loans for marriage in the list of ‘constructive’ purposes: it may be better, however, to give such loans to group marriages which have an inbuilt economy of scale.
A CONDUIT FOR PHILANTHROPISTS
The MFIs can investigate if they can convince the very large number of philanthropist individuals and institutions in the country to give them a part of their charity to be used by them for a fixed period and to be returned thereafter. As poor a group as the Indian Muslim Community (IMC) gives away a minimum of Rs. 10,500 crore in obligatory charity every year, mostly during the month of Ramadhan. This month (corresponding to early August, 2011) will be a good time to begin this effort. An equal amount is spent by Muslim Charitable Trusts all over the country.
A word of caution in this regard: 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 since one of the eight heads of expenditure specified in the Qur’ān is ‘for changing the hearts’. So the MFIs will have to 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.
A BOLD STEP IN ZERO INTEREST MICROFINANCE
The Jamaat-e-Islami Hind (JIH ) has recently decided to open at least 500 Zero-interest Cooperative Credit Societies throughout the country by 2016 under its flagship social service vehicle called, ‘Vision 2016’. This effort will have as its pilot Al-Khair Cooperative Credit Society, Patna, which has been in existence since the last one decade or so and managed to disburse Rs. 4 crore last year to the poor of the city and its suburbs. Should the plan succeed, they would be lending about Rs. 2,000 crore by 2016 throughout the country on a zero interest basis. Also, there is every reason to believe that the whole operation will be run on secular, and not communal, lines.
INVITE GRAMEEN BANK TO OPEN HERE
The Government of India (GOI) can consider inviting the Grameen Bank of Bangladesh (GBB) to begin operating here as well. Here are the salient features of their format and framework:
1. GBB lends only to women and then only to a ‘group’ of 8-10 women.
2. It asks them to submit the details and the feasibility of their project for which they have come together to seek a loan.
3. If GBB approves of their project after its own study, it grants them a loan of no more than Taka 8-10,000 per member and thus, no more than Taka 64,000-100,000 per group. It charges an interest rate of 24 %.
4. It does not ask for any mortgage. Instead it binds each woman to a code of ‘responsible and ethical’ living such as keeping her house and her children clean, sending the children regularly to school, no bad habits particularly drinking, leading a balanced and frugal life, etc.
5. A default by a member automatically bars the whole group from getting another loan.
6. The rate of return of loans at the GBB is a very healthy 98 %.
The Indian MFIs can enter into a competition with the GBB in ‘doing good by the poor’ instead of justifying what they had been doing till recently.