Credit will cut rural poverty in India

Thursday, November 9, 2006

Microfinance in India, -currently focused on small loans for the rural poor, is growing fast enough to make an impact over the next -decade, according to a new report.

However, the sector must focus on transparency and governance, training local partners, and developing a more diverse menu of services, says the report, released yesterday at a microfinance conference in New Delhi.

Microfinance serves about one fifth of poor households in India and has helped to widen the reach of financial services to the population of 1.1bn, 80 per cent of whom have no access to banks, says the 2006 report on Microfinance in India, a joint initiative of the Swiss development agency, the Ford Foundation and Care, the humanitarian organisation.

Nearly 70 per cent of India’s population is in rural areas where money lenders who charge exorbitant interest rates are usually the only source of loans.

Private and multinational banks and a handful of venture capital firms have stepped up investments in Indian microfinance in the past three years, adding to increased financing from India’s government and agriculture-oriented banks.

“The sector can be reasonably confident that it will make a dent on financial inclusion in the next 10 years,” said Prabhu Ghate, author of the report. Banks are participating in microfinance because “they regard it as good business” and are “undertaking it less and less because of moral [reasons]”.

But as the industry grows, it must establish better systems for consumer protection; evolve services such as savings, insurance and remittances; look to serving the swelling numbers of urban poor; and consider how to regulate itself.

Although there is no agency that regulates the sector, repayment rates are remarkably high at above 90 per cent. The average loan size is Rs4,000 ($90). India’s government has indicated that it will introduce microfinance legislation in its next parliamentary session.

“The government of India has to play a role in regulation,” said Adrian Marti, deputy country director of the Swiss Agency for Development and Co-operation, at yesterday’s microfinance conference. “They must make it clearer for investors – only those very interested stay on board because it’s quite complex.”

Continue reading “Credit will cut rural poverty in India

Source: Financial Times (link opens in a new window)