Banks find lending to poor profitable through micro - finance

In India banks are now thinking of micro-finance. With the introduction of micro-finance, MFIs (micro finance institutions) and other NBFCs began lending to the poor. Banks are finding lending to the poor profitable. Through their micro finance banks lend directly to the borrowers or they team up with MFIs and other NGOs who help them in recognizing and grouping the members into various SHGs who are then given finance. On these loans bank charge interest at sub prime lending rates.

For instance S Parimala of Saligramam can think her lucky. She is part of a SHG (self-help group) which is engaged in glass and emboss painting. Her SHG name Lucky was recently granted a second loan of Rs 3 lakh after the group successfully repaid its first Rs 1 lakh loan it had taken from the bank in EMIs of Rs 10,600 spread over 10 months.

But, Parimala is upset because while the group had asked for a loan of Rs 5 lakh, the bank lent her only Rs 3 lakh. For this reason when it comes to borrowing money, the poor, especially the rural folks, are at the mercy of money lenders.

In the beginning, the average loan given out is usually below Rs 10,000. Moreover banks normally persuade SHGs to first open a savings bank account before giving credit.

"We initially observe the saving patterns of the group, how they save, lend and distribute money amongst them before giving them credit,” says Manohara Raj, senior vice-president, HDFC Bank.

More and more banks are opting for micro finance, so much so that many banks are opening exclusive branches that deal only in micro finance. Indian Bank, in 2005 opened its first micro finance branch at Chetpet in Chennai, has added 11 more micro finance branches to its network in India.

The bank plans, this year, to open 13 more micro finance branches. "It's an established fact that by being part of self help group, women are able to carry out economic activity more effectively.

Also, they need not borrow money at usurious rates of interest from money lender any longer,” says MS Sundara Rajan, CMD, Indian Bank.

HDFC Bank a leading private sector bank is strengthening micro finance business. Currently it is having four micro finance branches located in interiors of Tamil Nadu. About 15% of bank's micro finance business is generated from four branches. It is also planning to open few more micro finance branches this year.