Microfinance Gets Lending Boost with RBI Nod to Crowdsourcing

Tuesday, August 16, 2011

India’s microlending sector has got a significant nudge with the central bank giving its first nod to a crowdsourcing company to attract small loans from abroad for the country’s poor.

Following the Reserve Bank of India’s (RBI) approval, individuals or institutions from anywhere in the world can use Milaap’s online platform to identify whom they want to lend to, widely expanding the capital source for the company. They can extend as little as Rs.1,000 to fund someone’s education or solar stove business and Milaap will give the pooled money to the borrowers at interest rates of 8-15%.

India has only a handful of these so-called crowdsourcing, or peer-to-peer (P2P), businesses-smaller cousins of microfinance institutions, or MFIs, which extend small loans at interest rates of 18-24%.

The poor in India have to pay high interest when they borrow from MFIs as these, in turn, borrow from banks at commercial rates, said Milaap chief executive Sourabh Sharma. “This will open the doors to the entire world to be able to make loans to help India’s working poor. This exponentially increases the potential social capital which can be raised.”

The one-year-old start-up has worked with RBI on the approval almost since its beginning to facilitate low-cost, small-ticket loans for the poor from both global and domestic lenders, Sharma added.

We “expect 50% of the loans to come from international sources-both from individuals as well as international foundations and social funds looking to lend to the working poor. This should be close to $400,000 (Rs.1.8 crore)”.

India’s microlending sector dominated by MFIs has been in turmoil since October after a crackdown by the government of Andhra Pradesh, the country’s largest market for small loans, because of the high interest rates and coercive recovery of borrowings. This has restricted fresh lending to a large extent.

Crowd sourcing firms operate on a much smaller scale and account only for a fraction of India’s Rs.20,000-crore microlending sector. The regulatory nod to Milaap, if extended to other P2P firms, can open up an easier alternative for small loans.

Source: livemint.com (link opens in a new window)