There is a touch of irony in India’s growth story. Jobs in the government, private and public sector are limited and restricted to the educated. At the same time, the informal economy in India is growing at a fast rate, employing 93 per cent of the labour force in the country. But informal economy workers, who contribute 63 per cent of the gdp, still cannot benefit from the additional wealth they have contributed to generate.
Why? That’s because they do not have access to credit to take advantage of economic opportunities.
The problem, however, is more complex when viewed through the demographic and poverty trends in the country.
Consider this: one-third of the world’s poor live in India; the youth (15-34 years) constitute over a third of India’s total population; and the proportion of unemployment among the youth is the highest in the country, especially among urban men. Doesn’t this combination of poverty, youth and unemployment sound like a recipe for socio-economic crisis?
Now add to this the fact that India is getting urbanised at a faster rate than the rest of the world and around 60 per cent of the urban youth were jobless in 2004. To address this issue, policy-makers need to think of alternative sources of employment for those left out of the ambit of the formal economy. It is here that microfinance plays a pivotal role in providing sustainable livelihoods by stimulating small businesses.
How microfinance helps
According to the Consultative Group to Assist the Poor, an international consortium of development agencies, people with access to savings, credit, insurance and other financial services are more resilient and better able to cope with everyday crisis. However, only 0.01 per cent of the urban poor have banking relationships. While rural areas account for 95 per cent of microfinance outreach in India, the cities are un-served. In urban areas, lack of access to trading space for vendors and livelihood training further push the poor into poverty.
According to the Economic Census 1998, banks and financial institutions directly financed 2.8 per cent of enterprises, while 1.9 per cent received finance linked to poverty-alleviation schemes. Thus, a total of only 4.7 per cent of enterprises, rural and urban, received formal finance. Informal credit—from moneylenders, pawnbrokers and relatives—helps the poor to manage cash flow but often traps them in a longer debt period. Therefore, providing urban microfinancial services can be a big opportunity, given the gravity of the situation, demand and expanding market. However, the dynamics and challenges in the urban environment vis-à-vis microfinance are different from those in rural areas.
Delhi, a special case
Research done by the ngo We the People shows that very few microfinance institutions are working in Delhi slums and resettlement colonies despite an enormous demand for microfinance. One such institution Satin, working in the capital, estimated the number of people living on a daily earning of up to us $2 in Delhi and the National Capital Region at about two million.
In the light of the above facts, We the People decided to initiate a pilot project for its microfinance operation in Delhi. After doing research in a few slums and resettlement colonies on profiles of customers, needs and sources of financing, it evolved a microfinance model specifically for urban areas: the People Group Model. This model works on the principle of “group guarantee”. All the members of the group provide mutual guarantee for each other and are jointly liable to repay the loan amount in case one or more members of the group fail to do so.
This enables customers to build financial, physical and social capital in terms of group cohesiveness, extending support to each other and developing business networking, in turn creating a social network in the local community.
Under this scheme, poor, young people availed of credit up to Rs 10,000 and received training in acquiring business-oriented skills and insurance for life. Over 100 borrowers in east Delhi got a combined loan of about Rs 1 million. Today they are vegetable traders, readymade garment shopkeepers, small transporters, owners of repair shops, Internet parlours, grocery shops, etc. Customers have overwhelmingly proved that reliable sources of credit provide a fundamental basis for planning and expanding business activities.
Ajaya Mohapatra is CEO of the Delhi-based NGO We the People, which promotes micro-entrepreneurship among the underprivileged.