NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Monday, June 13, 2005

There has recently been a flurry of articles in the business media about the success of the microfinance initiative in India. (That is pretty much why I’m writing this piece now.)

The collaboration of banks and financial institutions which provide the basic funds, the microfinance institutions (MFIs) that serve as intermediaries, and the self-help groups that collectively take these loans, seem to be making a substantial impact on rural incomes and poverty.

Equally importantly, this is throwing up new markets for banks that are not only “unpenetrated” but have remarkably low default rates. Industry estimates peg the default rate at less than 2 per cent of the loans disbursed. This makes it a viable and attractive business.

Friends at the Reserve Bank of India point out that despite the penetration of microfinance in some regions, lenders continue to face usurious borrowing rates. That is perhaps true to some extent. It is quite possible that the degree of success in microfinance is uneven across the country.

But at an aggregate level, the venture seems to be making a substantial dent in helping really poor households create assets and pull up their standard of living.

The microfinance paradigm interests me as an economist because it provides useful insights into the behaviour patterns of the rural households. I believe that these learnings can be used to structure other systems of service delivery.
Story found here.