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When The Poor Became Profitable SHRIYA MOHAN traces the Indian microfinance story and what stops it from making a dent in poverty WHEN MUHAMMAD Yunus, winner of the Nobel Peace Prize in 2006, showed the world what a small loan could do to a group of poor villagers in Bangladesh, people wondered why such a simple idea had never been thought of before. According to N Srinivasan's State of the Sector Report on Microfinance, published by Sage, over 800 microfinance institutions (MFIs) now operate in India, reaching out to over 140 lakh clients, with an outstanding cumulative loan of Rs 5,900 crores in small loans. Over 54 million clients from the Self Help Group (SHG) — Bank linkage programme and MFIs, today access microfinance services. The Indian microfinance sector has seen phenomenal growth in the last few years. In 2007-08 alone, MFIs have had a growth rate of 40 percent. The SHG bank linkage and the MFI are the two mainstream models operational in India. The formal financial institutions in India, led by NABARD, adopt the SHG model which forms small lending groups who use savings, credit and social involvement as instruments of empowerment. The MFI model in India has been purely credit oriented due to regulatory restrictions on intake of member savings. Although microfinance is often blamed for exorbitant rates of interest, presently 24 percent per annum, its defense has always been the high transaction cost it incurs to setup shop. In comparison, SHG bank linkage program lends at 11 percent because it functions in areas where financial infrastructure is in place. Today, 450 lakh clients access SHGs as compared to 140 lakh from MFIs. The Microfinance India summit organised from 11 to 13 November 2008 by Access Development Services, had an Asia Investor Fair to cater to the growing base of international private equity investors eyeing the Indian Microfinance sector to park their funds. Vishwanath Prasad, founder of the $20 million Bell Wether fund, which has invested for Europeans and Americans in 15 Indian MFIs, says, "Investors these days want investments that not only give them returns, but are also being put to use by catering to a social cause." Vijay Mahajan, founder of Basix, one of the leading MFIs in India, disagrees with the pure credit approach of Microfinance. He explains, "Suppose I give a woman a loan to buy a buffalo, she doesn't have access to graze land, veterinary services and milk marketing linkages. That loan is a burden. They are not going to overcome poverty with that sort of assistance. But if you help them with business advice, market linkages and technology and then give them the loan, they can then overcome poverty." But Prasad and many others believe that microfinance cannot be used to alleviate poverty. He stresses, "MFIs exist because the mainstream banking sector has failed in its responsibility to provide equitable access to financial services. It is unfair to expect MFIs to eradicate poverty." __._,_.___
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