Aparently the Micro Finance Companies introduce themselves that they are the real helping hands to the poor. Because, banks do not give any kind of business loan to the poor who cannot show any income proof or business entity.
That point that huge space was vacant and a section of non banking finance company started targeting on that untamed abundant market to explore their business.
Their business model is to formation of small group area wise and give loan to the group’s individual member. The ticket size of initial loan is minimum 5,000 rupees and in some cases up to 50,000 rupees subject to discretion of Micro Finance company.
Normally the loan tenure is minimum 1 year and minimum rate of interest is 26% either flat or on reducing balance.
The condition of formation of the group is basically named as Self Help Group. It means in straight way that if any member of the group cannot repay then the responsibility of repayment of that member will come automatically to the rest of the members of the group equally.
I have seen that when a loan was disbursed to a group among 4 or 5 or 10 members, the Prime time was good but after one or two month the real pain starts. Because financial position is same to the members of the group, and when a group member cannot arrange money to repay, the other members cannot make support to that member, repayment on behalf of that member.
The business model is totally unscientific because if the loan amount is marginal and tenure is short, almost similar to Pay Day Loan, then in every month 10-12% erosion from capital will occur, but there will be no alternative to recover the capital, profit is so far story.
In India private financer give loan @4%-10% per month to the borrower who would have urgent need of cash and in that case the private lender will ask any collateral security either gold ornament or land deed. Their market size is limited. But when the same lender is forming a registered company and getting registration number from Reserve Bank Of India (RBI), a broad avenue is opening to play in broad base market, the market of uneducated, poor, weaker section of the society.
If you ever visit any Micro Finance company’s website you will find some stereo type content is there and max to max 3-5 photos consisting of usual story of success, you will never find the success rate of all groups and uplifment of their economic condition and assets building. They will say that they have disbursed loan to 12 or 20 million people. So automatically question will come in mind that if 12 or 20 million multiply by 4 equal to 48 million or 80 million peoples’ economic uplifment have happened then India’s GDP should reach at 12 to 15%. But in real sense it does not happen whether the growth of Micro finance is 80% in a year.
Does it not exploitation?