Generally people have the following needs.
Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood, old age.
Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death.
Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of dwellings.
Investment Opportunities: expanding a business, buying land or equipment, improving housing, securing a job (which often requires paying a large bribe), etc.
Poor people find creative and often collaborative ways to meet these needs, primarily through creating and exchanging different forms of non-cash value. Common substitutes for cash vary from country to country but typically include livestock, grains, jewelry, precious metals and in some extreme cases wives.
Banks both public and private have failed to deliver credit to poor people because of lack of collateral, high operation cost and fear of high delinquency. Hence, microcredit evolved.
Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services.
More broadly, it is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers."
The founders of the microcredit movement in the 1970s (such as Muhammad Yunus) have tested practices and built institutions designed to bring the kinds of opportunities and risk-management tools that financial services can provide to the doorsteps of poor people. While the success of the Grameen Bank has inspired the world, it has proved difficult to replicate this success.
Let us know Grameen better to understand their model whose success is getting increasingly difficult to replicate.
Grameen Bank was the first major microfinance organization and community development bank started during 70’s in Bangladesh that makes small loans known as microcredit to the impoverished without requiring collateral.
Grameen believes that charity is not an answer to poverty. It only helps poverty to continue as it creates dependency and takes away individual's initiative to break through the cycle of poverty, whereas loans offer people the opportunity to take initiatives in business or agriculture, providing earnings and enabling them to pay off the debt.
Grameen regards all human beings, including the poorest, as endowed with endless potential, and that unleashing the creativity in each individual should be the answer to poverty. Grameen has offered credit to many poor, women, illiterate and unemployed people. It created access to credit on reasonable terms such as the group lending system and weekly-installment payment with reasonably long term of loans, enabling the poor to build on their existing skill to earn a better income in each cycle of loans.
Grameen’s objective has been to promote financial independence among the poor. Yunus encourages all borrowers to eventually become savers so that their local capital can be converted into new loans. Since 1995, Grameen has funded 90 percent of its loans with interest income and deposits collected, hence aligning the interests of its new borrowers and depositor-shareholders. Hence, Grameen distinguishes itself from such institutions by converting deposits made in villages into loans for the more needy in the villages.
It targets the poorest of the poor, with a particular emphasis on women, who receives 95 percent of the bank’s loans. Women represent a suitable clientele because, given that they have less access to alternatives, such as traditional credit lines and incomes, they are more likely to be credit constrained and they have an inequitable share of power in household decision making. Lending to women also generates considerable secondary effects, including empowerment of a marginalized segment of society.
The interest rates charged by microfinance institutes including Grameen Bank are high compared to that of traditional banks; Grameen's interest (reducing balance basis) on its main credit product is about 20%.
Solidarity lending is a cornerstone of microcredit. Although each borrower must belong to a five-member group, the group is not required to give any guarantee for a loan to its member. Repayment responsibility solely rests on the individual borrower, while the group and the centre oversee that everyone behaves in a responsible way and none gets into a repayment problem. There is no form of joint liability, i.e. group members are not obliged to pay on behalf of a defaulting member. However, in practice the group members often contribute the defaulted amount with an intention of collecting the money from the defaulted member at a later time. Such behavior is facilitated by Grameen's policy of not extending any further credit to a group in which a member defaults
A group-based credit approach is applied which utilizes the peer-pressure within the group to ensure the borrowers follow through and use caution in conducting their financial affairs with strict discipline, ensuring repayment eventually and allowing the borrowers to develop good credit standing.
Another distinctive feature of the bank's credit program is that the overwhelming majority (98%) of its borrowers are women.
Success eludes
Aggressive lending by microcredit companies in Andra Pradesh is said to have resulted in over 80 deaths in 2010.
Microcredit has been blamed for many suicides in India
1. MFIs have deviated from success model perfected by Grameen.
2. Too many institutions cater to poor in the same geographical area; more than one will make a crowd here. Discipline is cornerstone for the success of MFIs , especially the Harvard educated/ trained mangers of MFIs do not understand their customers unlike the local moneylenders who know each other well and live in the same community; they understand each other’s financial circumstances and can offer very flexible, convenient and fast services
3. MFIs require social commitment to improve standards of their poor customers. MFIs who have accepted capital from private equity funds put themselves in difficulties to toe their schedule and line.
4. MFIs have become greedy and wanted a growth which is untenable with a view to cater to requirements of equity analysts to help sell their IPOs at unrealistic prices, thus cheating investing public.
5. Customer accounts have become inaccurate with management of some MFIs depositing cash on behalf of customers to keep the rating of their securitized papers high to raise money in cycles to fuel unmanageable growth, without any consolidation.
Briefly, MFIs intentions on websites read too well but in realty they are nothing but third grade finance companies and worse than the local moneylenders.
http://www.rbi.org.in/scripts/BS_NBFCNotificationView.aspx?Id=6857
