Nothing deters the women who form a snaking queue in front of the partly constructed building that is the office of Bandhan, a micro-finance institution. Not the stifling heat of the summer afternoon, not the poor infrastructure, not even a nationalised bank’s branch that sits just a few yards away, wallowing in its loneliness.
Most of the women in the queue make a living by embroidery and most of them have an account with this bank. Yet, they have approached Bandhan for working capital.
Until about two months earlier, these women from Babnan village, 40 km from Kolkata, almost always struggled to raise enough money to buy thread and cloth. Their requirement was small, about Rs 3,000, but banks refused to give loans.
“All of us have accounts with them, but being women, we are not given loans by banks. The banks only give loans above Rs 1 lakh. They also ask for thousands of certificates, which we do not have, as they don't want to lend,” said Celina Begum, an embroidery worker. It’s then that a micro-finance institution (MFI) came to her rescue.
MFIs raise money from people like Celina Begum, small loan seekers who have the intention to pay back. They create a pool of funds and then use it to extend small loans to these very people.
Take the example of Bandhan. Every day between 10 am and noon, four of its credit officers, all locals, move across the village collecting cash from small groups of women.The collected money is taken to the office. By 3 pm, it’s disbursal time.
The MFI maintains a passbook and a register, which records the interest rate, the principal, weekly payment and the outstanding amount after 45 weeks. For example, a woman taking a Rs 10,000 loan has to pay Rs 250 every week to the MFI. This goes on until she has returned Rs 11,250. So, the MFI earns Rs 1,250. It takes out Rs 100 of this sum to pay the insurance premium and puts the rest in the kitty. Every borrower is insured and in case of her death, her family has to pay nothing to the MFI. The insurance company covers up the loss for the MFI.
Bandhan charges a flat 12.5 per cent rate interest from the villagers, which means this interest is not calculated on reducing balance. Thus, effectively, the MFI charges 20 per cent to 24 per cent interest, and its margin could be as high as 12 per cent, without taking into account operating cost, which MFIs claim varies between 6 per cent to 9 per cent. For agriculture loans also, the MFIs charges the same interest rate. The interest rate of the main MFIs, such as SKS Microfinance, Spandana and Share, varies between 24 per cent to 30 per cent, and their operating model is the same.
If one borrows Rs 10,000 from a public sector bank, the weekly equated monthly installment (EMI) would come to be Rs 73 to 75, calculated at 4 per cent interest rate for three years. Even for a 45-week repayment tenure, the EMI would not be more than Rs 231, which would reduce every month.
But, it isn't just Chandanpur that is ignoring the lower loan rates offered by banks. Small borrowers across the country are increasingly doing the same, as the red-tape is much less in MFIs.
On their part, MFIs defend their high interest rates.
“If anybody is criticising the model in which MFIs work, then an alternative model should first be devised. For weekly collections, the cost of operations is very high, and 24 per cent is the minimum an MFI can charge. The operating cost of MFIs varies between 6 and 9 per cent,” said M Udaia Kumar, managing director, Share.
Vikram Akula, founder and chairperson of SKS Microfinance did not comment on the subject as the company is waiting to launch its IPO shortly.
Weekly repayment is a challenge for MFIs and shifting to a monthly EMI is risky as most borrowers of MFIs depend on daily cash flows, said Y V Shiv Narain, vice president, Finance, Spandana.
However, Nabard, accredited with matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas of India, differs with the MFIs.
The government has introduced several schemes for giving credit to the low-income group people, with interest rates varying between 4 per cent to 7 per cent.
“The interest rate charged by MFIs is too oppressive and exploitative. There are schemes under which the poor people can get loans at as low as 4 per cent interest rates. It is due to the lack education that the poor women are exploited,” said P Mohanaiah, Chief General Manager, Nabard.
Under the differential rate of interest scheme of the government, the self-help groups can avail loans at effectively 4 per cent (The West Bengal Swanirbhar Sahayak Prakalpa scheme). Under the Kisan Credit Card loan scheme also, farmers can avail loan effectively at 5 per cent.
But villagers at Babnan say an MFI is a lifeline for their small-time trade. So much is the dependence that they often double up as informers to the “credit officers,” to the MFIs, when it comes to assessing the credit worthiness of prospective borrowers.
“We inform them before hand about the possible defaulters. If we do not do that, it will create a wrong example and they might just stop giving us money at all,” said Shamsunesha Begum, another embroidery worker.