However, in case of industrialists, delinquency could not be foreseen as they often did not pay up simply because they did not want to, and not only because they could not.   

The incredible success story of Professor Muhammad Yunus of Bangladesh’s Grameen Bank in the field of Microfinance, has inspired many others to try and replicate the same in their own geographies. 

Microfinance, in its initial ‘avtaar’ meant providing micro credit (tiny loans) to the poor and the needy who lacked access to the organized / formal financial institutions like banks. It provided people with micro loans that helped them engage in productive activities and grow their business initiatives.

However, the canvas has now widened and microfinance now also includes a range of services like providing insurance and savings credit.

The need for microfinance was felt because there was a clear lack of opportunity for people who are economically disadvantaged but had the capability to turn their fortunes around and live their lives in a meaningful way. However, due to lack of financial support on time, their life remained a struggle to achieve the basic needs of life.

While the concept is indeed commendable, one needs to be clear that the Microfinance Institutions (MFIs) are not in this business with altruistic motives. They are running a business and as a collateral benefit thereof, empowering lives.

The primary beneficiaries of Microfinace have been women. It has enabled many of them to earn a livelihood for their families and themselves. These loans provide support to the needy to start up their own small business.

Microfinance provided to women are deployed in productive income generating activities like grinding spices, buying buffaloes to sell milk, handicrafts, repairing shops for watches and bicycles,  buying an auto rickshaw, agricultural equipments, sewing, candle making and even ‘kirana’ stores.

Despite a high rate of interest, the MFIs have been successful in achieving a repayment rate of over 95 per cent as these women form groups to support their activities and generate revenues of which a small part is saved leading to the betterment of the households and the community at large.

It also has a multiplier effect to the extent that it helps to build confidence in other women on their path to a better life.

Institutions like Regional Rural Banks (RRBs), Self-Help Groups (SHGs), NGOs, Co-operative Credit Societies and Local Area Banks can broadly be classified as MFIs.

However, the new age MFIs are distinctive from say, a SHG to the extent that it is a separate legal organization providing financial services directly to borrowers. MFIs have their own employees who are trained to maintain accounts and records, help set up the business of the borrower and provide other support.

The working of an MFIs is normally democratic in nature where the group which is formed from each village is empowered to take a decision while approving members loans.

Clearly, Microfinance has evolved into a big business opportunity today.

In the week ahead, we shall take this discussion and focus on the evolution of the business model since Grameen Bank’s early days and why PE investors are now making a beeline towards such businesses.