Tuesday, May 09, 2006

Micro Finance Institutes: The lesser evil?

A recent probe into the functioning of MFI in Andhra as recommended that MFI's should fix the upper limit of interest chargeable at 12 percent and the repayment period should be at least monthly and not weekly as practiced by some. The probe has also highlighted the human rights violations by some MFIs in collecting payments, which should clearly be stopped.
While both of these steps are desirable, the basic premise of MFIs should be social impact but with a go to market model. Because, some of the borrowers are not able to repay the money i.e. the NPA are large the MFIs have to charge a higher rate of interest from the people they lend to. The model is to give out huge number of small loans (which involves costs) to people who are in need and sometimes giving loans without guarantee(which a person may not be able to provide even though he may have intentions to pay back the loan) .
Consider a firm like Citi Financial which operates in towns and cities and lends small personal loans at 18 to 30 percent pa. On the other hand the loans charged by local money lenders in small villages can even go up to 2000-3000 % PA. With high default rate it would be difficult for these MFIs to make a real impact as they would be forced to lend only to people with a credit history and or resources to offer as collateral. So while some might suffer under the high interest rates of these MFIs majority would benefit because they clearly are a lesser evil as compared to the local money lenders(Though not all are really as bad)
Mean while, at ISB the class economist contest has been unveiled. One of the groups has got Micro Finance as the discussion topic. Sadly our group did not get that. Anyways hope to apply some classroom learning to real life topics.

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