India’s Banks Are Big on Microfinance

Thursday, August 24, 2006

Lending money to the poor has largely been the province of small operators, but major financial institutions are now starting to focus on it in a serious way. ICICI Bank (IDN) is a big money-center lender that deals with sizable companies in Bombay, Bangalore, and New Delhi. It is also one of India’s biggest consumer lenders. So why does Nachiket Mor spend a lot of tie in India’s economically depressed rural hinterland looking for prospective borrowers? He recently visited a family of five living in a soot-covered hut, getting by at barely subsistence levels in the North Indian state of Uttar Pradesh.

Mor signed off on a one-year, $130 loan that will allow the family to buy a buffalo and sell its milk. And written into this loan contract is a most unusual clause. If the animal isn’t milking, the family gets a moratorium on its monthly loan repayment. “The client would need to find other money to service the loan or even sell the buffalo to pay us, which would be counterproductive for both of us,” explains Mor, deputy managing director at ICICI.

These kind of small IOUs are showing up more and more on the loan books of major Indian banks.

The microfinance movement?lending as much as a few hundred dollars to poor entrepreneurs to set up businesses such as a small grocery store, family farm, or tailoring shop?has been around for decades. Back in the late 1970s, microfinance specialist Grameen Bank in Bangladesh pioneered the idea that the impoverished have skills that are underutilized, are surprisingly low credit risks, and should be given a chance.

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Source: Business Week (link opens in a new window)