This is an article from the economist back in January discussing the problems with microfinance in India. Indian micro-lending banks were effective until they started making reckless loans and using "strong arm-collection tactics" which ruined the lives of many of the Indian poor. These tactics and loans are against Grameen principles where micro-lenders would often discuss the business plans with the poor as to avoid making bad loans. Also, they should not force loan collection as the purpose of microfinance apart from monetary profits are also social profits. Other successful microfinance banks have extend the repayment period or extended new loans in order for the poor to get back on their feet should they be unable to pay the old loan.
The Micro-lending in India has new national guidelines to draw a line between profit and profiteering such as creating a cap on interest rates and barring micro-lenders to lend to customers with more than one loan, which will hopefully improve microfinance in India.
Source: http://www.economist.com/news/finance-and-economics/21569447-industry-starting-revive-road-redemption
8 comments:
It is good to hear that there are stricter guidelines for micro-loans in India. These types of loans can really help push the economy in India forward and should be available for those who need them. Although I feel that there should be some type of screening to see if the individuals receiving these loans have the types of entrepreneurial skills in order to make good use of their loans.
I remember an OWU grad coming to speak to my economics class about micro-finance. His data showed that it is the most effective means of lifting individuals out of poverty. Clearly it is a great technique to help the rural poor. However, there are stories of banks sending individuals to beat up or forcefully take back borrowed money. It is good to hear there are going to be tighter restrictions on such predatory practices in India.
In my opinion, the benefits of micro-finance are quite over-rated. The initial success of these small loans was due to the fact that this type of financing was aimed mostly at poor, rural dwelling women only. The women were more careful than men with money. However, the moment they started expanding this movement to other people, more and more cases of default arose. The individuals to whom the money is being lent to are unskilled people with almost no entrepreneurial acumen. All I'm saying is that unless these loans are supplemented by trade schools or technical institutes,which promote entrepreneurial spirit and help small start-ups, the loans are not going to uplift anyone out of poverty.
While I am glad to see that more restrictions are being put on micro finance loans in India in an attempt to have more safe and fair practices, I also agree with Karn. The people who want to receive these loans should either have to go over their business plan with someone and prove their drive to make things work, or should have some kind of training before being expected to create a business on their own. This training may be considered a part of the loan itself or a different type of loan. This way, they would have a chance at a higher success rate and a lower default rate on the loans.
There seems to be a lot of controversy surrounding the topic of micro finance loans. I believe that the original idea of the loans is a good one, but the expansion of the practice has led to a decrease in effectiveness. Originally, loans were closely supervised and the lenders worked with the debtors in making the most of their business pursuits; also, people who had gained from micro loans would eventually become lenders as they got more and more profits. Now, it's easy to see how loans can be given out too easily to people in high-risk situations and who, honestly, have a much lower chance of success than wealthy companies.
It seems like microfinancers in India are shifting to mortgage loans. However, many Indians lack the education they need to start a successful small business. The property right system and governmental corruption could also be a challenge. Without the change in the mindset of the people as a whole and the reform in the government, such efforts in injecting capital and helping enterprises thrive might be a difficult path.
With all respect to iceiceice, I want to mention that most Indians are actually very entrepreneurial in nature. Small start-ups are booming. The thing is that these individuals get their financing from regular banks.
MICRO-FINANCE, on the other hand, is used only in VERY FEW RURAL areas, for a few number of unemployed people. Most of the people in these rural areas are farmers and are already employed. Therefore, the number of people who need and secure micro-financing, compared to the overall population of entrepreneurs in India is very small.
The regular banking sector is quite well developed and only needs to be extended to more people. However, wide-spread reforms in the Government never hurt anyone and therefore, these reforms would be greeted with enthusiasm.
I agree that in order to issue loans, the business plans need to be discussed in order in ensure that the loans go towards income earning activities that will succeed. However, I don't think that technical schools or training programs are the way out. A wrong assumption economists have made about impoverished workers is that they are unskilled and required training. Echoing Karn's point, many people aside from Indians are also very entrepreneurial in nature, and that is one strong basis for micro-finance to work. The poor are often skilled enough to be able to make a living yet they do not because they lack the opportunities to do so. They may need money to start up, but once they do, they may start their businesses. Training on the other hand, may discourage or overwhelm the poor.
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