Microfinance Grows In India’s Poor, Rural Regions: The Case of Troubled Bihar

Microfinance, the offering of small loans to poor clients who have no access to conventional lenders, has helped lift tens of millions of people in India out of poverty.

Microfinance Institutions Network, an association representing the microfinance sector in India., better known as MFIN, said it saw a 47.9% growth in its gross microloan portfolio in the second quarter ended September to 2.02 trillion rupees ($28.4 billion) over the prior year. Banks held the largest chunk of that amount, with about a 40% share, followed by nonbanking financial company-micro finance institutions with 31% of the total loan portfolio. Small finance banks accounted for 17%, in third place.

Over that period, the total number of microfinance loan accounts climbed to 97.9 million from 74.3 million. A great portion of these accounts are held by poor rural women, most of whom use the funds to start small-scale entrepreneurial businesses.

The average microloan last summer was 33,511 rupees ($472).

“It is heartening that in the last 30 months, an additional 18.3 million women have taken microfinance loans,” said Harsh Shrivastava, CEO of MFIN. “This growth in unique borrowers is an endorsement of the unstinted trust that small borrowers have reposed in all [central bank]-regulated microfinance institutions. This is also seen in the strong track record of repayment that microfinance continues to demonstrate.”

Indeed, evidence suggests small borrowers across India are paying back their loans on time.

Northeast India -- primarily the huge states of West Bengal, Bihar, Orissa and Assam -- accounts for some 40% of all microloans outstanding in the country. These provinces all feature large, swaths of rural poor who have no access to traditional banking.

In the populous state of Bihar, 99% of loans made by local microfinance institutions have been paid back on time, Sushil Kumar Modi, Bihar’s deputy chief minister and finance minister said last month.

As such, Modi (no relation to Prime Minister Narendra Modi) noted microfinance institutions could help drive out moneylenders charging usurious interest rates from the Bihar lending market.

Bihar is an especially attractive target market for the microfinance sector, given the state has a large poor population without access to conventional loans.

Saija Finance Private Ltd., a microfinance firm in Bihar, noted while microfinance has made great strides in the state in recent years, market penetration remains quite low due to Bihar’s huge population -- 104 million, of which 46.5% live below the poverty line.

Saija estimated that some 70% of Bihar’s population could potentially become microfinance clients.

Saija focuses its microfinance operations in the poorest parts of India, both rural and urban, which are underserved by financial institutions. Its principal business model focuses upon providing loans to “self-employed men and women to support their business enterprises.”

Loans offered by Saija range in size from 5,000 rupees ($70) to 100,000 rupees ($1409) and carry an annual interest rate of 24.3691% on a diminishing basis – under this system, the repayment is regularly deducted from the loan and the interest is charged only on the principal balance.

For example, in Bihar, one of Saija’s clients is a woman named Sadhna Sinha who took out a loan to buy her own sewing machine and started a tailoring business. She took out a second loan, due to increased demand, bought another machine and was able to employ two workers.

“Now, I am able to take orders and meet demands from four shops and earn good profits,” she said.

Zamruddin Alam took out a loan of 25,000 rupees (now $352) in 2010 to expand his mobile phone sale and repair service.

“I have a staff to look after the business when I am required to move from place to place for repairing mobiles at other centers as well,” he said.

Of course, Bihar’s poverty – which creates the need and market for microfinance – also poses many risks for lenders, microfinance or otherwise. A report from the Small Industries Development Bank of India cited, among other factors, that Bihar suffers from poor infrastructure, lack of technology-based resources, low rates of literacy and gender empowerment.

Bihar also endures the phenomenon of “red corridors” which refers to disruptive activities and an ongoing insurgency by Naxalites (Maoists). Small Industries Development Bank of India noted this has “proved to be highly detrimental for the overall socioeconomic development” and makes Bihar a “highly volatile” place to carry out microfinance activities.