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borrowing, credit, government schemes, india, insurance, interest rates, investment, lending, loan trap, loans, MFI, MFIs, microcredit, Microfinance, Microfinance institutions, moneylender, opportunity, poor, poor people, poors, post office schemes, poverty, saving, savings, schemes, servicing poor, social welfare, welfare
Microfinance institutions are supposed to be doing social welfare by providing microcredit to poor people. But the striking feature of the working of these MFIs is that the model they are following for the so called welfare of the poor will hurt more than providing any benefit.
One of the consumption habit among the poor class is that they first they had consumption financed by the way of borrowing from moneylenders or by any other institutions and after that they repay by daily savings. In between the transaction the moneylender or the MFIs made huge amount of money by charging very high (sometimes impractical, as high as 50-60%(not less than 20%) which makes whole thing unviable for the borrower) interest rates on the name of low credit of these borrowers. This kind of system is only beneficial for lenders.
What seems to be the problem is that poor don’t save much, whenever they face with the situation where they need money they borrow from moneylenders, even if some of their big expenditures are predictable such as marriage, celebrations, festivals they simply don’t save even for these events. So, then they get trapped into the vicious cycle of borrowing and then paying, high rate of interest of these lenders ensure it. What they lost in this the cost they are paying as interest and income they and forgoing on savings, a double blow.
What actually happening in the whole scenario is that these MFIs are only promoting consumption among the targeted social class. This will only exaggerate the problem. It is all about generating cash flow to support 2 meals of the day for a family. And if he is not able to do that what’s the point in providing a consumption loan (even if he need it badly) just to reduce his family to 1 meal a day.
Among the poor there is a very low tendency to save, although govt has started various programs to promote savings among these poor classes, such as post office saving scheme where one can deposit a fixed sum on recurring basis weekly or monthly. These kinds of schemes are aimed at developing saving habit among poors. But these schemes got only limited success, because of agency problem.
There are some allegations made by these MFIs on the government institutions regarding credits given to poor. One of them is that these institutions try to control the use of credit given by them. These are true but look at what’s the motive behind that. Government wants to ensure that the credit taken by the person must be put for desired use; otherwise if that credit is used for the some other purpose which will not yield any income that person will face difficulty in repayment of loan or may default.
The other allegation MFIs made is about the speed of loan disbursement and the purpose of loan. So, MFIs are absolutely true about these facts but at the same time there is a question about what they actually doing. It’s right that they are giving loans to poor on short notice for health shock or when the person in dire need. But look at the kind of interest rates they are charging (at least 20% that’s the good case but they charge up to 50%). Doesn’t it look like an opportunist behavior when someone is in dire need of quick credit they make it an business opportunity. So, I am asking a simple question here what the good they are doing.
So, what I think is that instead of providing microcredit to poor, if these MFIs work towards developing saving habit and financial planning(even by way of Insurance as deposit mobilization is not allowed to them) among poor so that they can do away with these credit cycles which always come to hunt them. More so with the kind of reach they have, they can put that reach into channelizing the funds into productive avenues by providing consultation as well as opportunity to create a business to disadvantaged people. Otherwise they are doing just a disservice to poor and looks to be simply opportunists, who are taking a benefit of under-developed financial system of the country and dire need of poor.
–Amit Kumar