It has been said of him that the reason why microfinance is not successful anywhere else in the world is that there is no Muhammad Yunus outside Bangladesh.
What makes him unique is his answer to a question governments have been trying to resolve for long: how to lend money to the poor and get them to return it, too. About 97% of Grameen Bank’s seven million borrowers are extremely poor women, yet the repayment ratio is 99%.
In Delhi on a visit after he was awarded the Nobel Prize, Yunus told Paromita Shastri of Mint that cheap loans would never work—you have to meet the cost of funds and then some. Excerpts:
Microfinance originated in India but hasn’t caught up here the way it has in Bangladesh. Why?
It’s not going as fast as it should. Where we have reached 115 million people in 30 years, you should have reached 160 million by now. But you have about 34 million. Officials tell me that is very good but I feel this is just a drop. Even if the base is good, you have to move on quickly and scale up by about 80%.
Is scaling up a problem?
Not at all. It is so much more fun in India. Lots of innovative experiments are possible. In Bangladesh, when we were expanding, everybody said we’d collapse. But if we did (collapse), we didn’t hear the noise! By 1995, we were already big. We now have 2,300 branches in Bangladesh; we’re exhaustive.
So how do you suggest we go about it? Even big banks are moving into microcredit
Big banks are welcome as they don’t see it as a money-making venture. Existing commercial bank branches have limited capacity. Unless you have dedicated branches or different channels in the branch, you can’t achieve the numbers. Each branch should cater to about 5,000-20,000 borrowers. But one commercial bank branch can cater to a maximum of 100 poor people. Also, commercial banks take resources from poor villages and transfer to well-off urban areas or big projects. Why can’t you set up a Grameen Bank like ours by law?
Have you seen the draft law for the Indian microfinance sector?
Yes. The most important thing I feel is the intention—is it aimed at promoting the sector? At this initial stage, I’d like to see an enabling law, not a restrictive law. Also, you have to allow the microfinance companies to take deposits. At present, you restrict it to NGOs, which are not a legal entity.
Everybody wants cheap loans…
Cheap loans are no solution. Reducing interest rates means limiting the capacity for the entity to expand. Also, budget money must be brought in. The more you can make it business-like, go into a cost recovery mode, the more you can go in for expansion. But if you keep it in subsidy mode, you can’t do it. There are two ways to do microcredit. One is as a social business, to help people. The other is a profit- maximizing mode, but then what is the difference between a moneylender and a micro-lender? I’m not on the side of profit-maximizing microfinance, or of subsidising. Only social business.
How are profit-making and profit- maximising different?
Once people start making profit, they want more of it. You have to be clear about your aim. For emergencies, you need to build a reserve—your profits can flow into it. Or you can make your borrowers owners of the company, so they can earn dividend. Grameen Bank is owned by its borrowers. My idea is to use microfinance as a bridge to help people realize their potential.
What do you lend at?
Commercial interest rates in Bangladesh are 15-16%. Our highest rate is 20%. For housing loans, it’s 8%; for student loans, it’s 8.5%; and for beggars, it is 0%. We pay 8.5% to 12% for deposits.
For an ideal rate, we have a formula: cost of funds plus 10-15%. For reasonable profits, look at the margin between the cost of funds and the interest rate charged. Cost of funds plus 10% is the best possible rate, or the green area. Cost of funds plus 10-15% is okay too, to include the cost of inefficiency or training or outreach. We call it the yellow area. But cost of funds plus over 15% is the danger zone, moving into money-lender territory. So if your cost of funds is 10%, then 25% is a good start. But in India, if the cost of funds is over 16%, rates will have to be around 25-30%.
You must be aware of farmers’ suicides in India.
I have heard, but I don’t understand why it is happening and why it can’t be stopped. One of the suggestions is to lend at 6%…
But 6% means banks, or whoever, give it from their own pocket. The rates must be attractive for both. But if, as you say, even well-to-do farmers who can get sizeable bank loans are committing suicide, microcredit can’t help. To solve a unique problem, banks must be innovative. Say, give loans without taking land as collateral. Or give a credit line and don’t question the purpose. Tell them ‘we don’t need to know... spend it on anything, seeds, fertilizer, land whatever. Just inform us if you change your mind.’
You can also do it through insurance. You have to see how far you can go without collateral.
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