Global credit crisis hurts tiny loans in India, Bangladesh

Global credit crisis hurts tiny loans in India, Bangladesh

Mumbai: A global credit crisis that has felled large investment banks and prompted multi-billion-dollar bailout packages is also hurting unlikely victims half a world away: small South Asian businesses dependent on microfinance.

Microfinance has helped poor women and farmers in Bangladesh and India set up businesses and grow crops since the 1970s.

But as credit tightens and largesse from corporations and socially minded investors dries up, microfinance will be hit, impacting poor people who have no other access to finance.

“A liquidity crisis is the very worst-case scenario for microfinance institutions," said Roy Jacobowitz, managing director of development and communications at ACCION International in Boston, which backs microfinance institutions, or MFIs.

“The demise of microfinance will be devastating. It will leave people that depend on it in a very, very bad situation: They could go from a level of success back to poverty."

South Asia accounts for the most microfinance borrowers, making up more than half of global demand, according to Sa-Dhan, an association of community development finance institutions in India.

In India and Bangladesh, microfinance has given hope to hundreds of thousands, especially women, who have built successful businesses that have changed their lives.

But these may now be under threat because of tighter credit.

“There’s less money out there, so there’s less money for MFIs," said Siddhartha Chowdri, a manager for ACCION in India. “For MFIs, the cost of their funds has gone up, and at the same time, they’re under pressure not to raise lending rates to their borrowers. At some point that becomes unsustainable."

Microfinance shot into the spotlight in 2006 when the Nobel Peace Prize went to Bangladesh’s Muhammad Yunus and his Grameen Bank that pioneered giving small loans without collateral.

In India, MFIs had served 10.5 million clients at end-2007, according to Sa-Dhan.

The market is forecast to expand to 50 million clients by 2012, with the outstanding loan portfolio rising to $6 billion (about Rs29,400 crore) from about $769 million now.

Indian banks have focused on MFIs as part of the government’s “priority lending" requirement of 40% of all lending to ensure smaller businesses and entrepreneurs can access funds.

About 500 commercial, regional and cooperative banks are indirectly involved in microfinance, including State Bank of India, ICICI Bank Ltd and Yes Bank Ltd.

But with banks turning cautious, MFIs may suffer, particularly smaller organizations that cannot afford higher interest rates or have access to private equity or venture capital.

“Now that banks themselves are facing the heat, they might either resist lending to MFIs or increase interest rates on loans further," said Prathima Rajan, analyst at international research firm Celent. “On the flip side, MFIs might resist borrowing," she said, thereby hurting their chances for growth and success.