Banks see big future in small loans in India

Source: Reuters

12 March, 2007

MUMBAI: Microlenders have been helping farmers buy a buffalo and women set up weaving businesses for nearly three decades in India, most successfully in the wealthier southern states.

Now, rapid economic growth and the entry of more foreign banks and private equity firms, coupled with improving infrastructure and new technologies, is encouraging large Indian and international lenders to enter the space.

It is easy to see why: defaults are few and the potential to sell other financial services is large. Plus, growing competition is forcing banks to look at India's underserved 600,000 villages.

Even wealthy private investors are looking at microfinance, where in addition to the halo of a do-gooder, returns can be as much as 2 percentage points more than from conventional products.

"Time was when banks didn't take microfinance seriously, when they regarded it as corporate social responsibility rather than a serious commercial opportunity," said Siddhartha Chowdri of Accion Technical Advisors, a technical partner of Yes Bank India's for microfinance. "They realise now that the poor are good credit risks, and that they have a need for capital their whole lives."

India's microfinance market is estimated at 130 million homes, with moneylenders and other informal sources accounting for more than 80 per cent of borrowings.

Informal credit in rural India is estimated at US$5.4 billion (RM18.9 billion), according to the All India Debt and Investment Survey. More than 40,000 bank branches have lent nearly US$3 billion (RM10.5 billion) in the 10-year period to 2006, mostly to groups of poor women, it said.
State lenders including leader State Bank of India have a long record of lending to the poor to help meet a priority lending requirement, or 40 per cent of all lending.

Private lenders ICICI Bank, HDFC Bank, UTI Bank and Yes Bank have launched microfinance arms recently. Global heavyweights, including ABN Amro, Standard Chartered Bank, HSBC Holdings and Citigroup are also eyeing the space.

"We were the first organised lender here ... the moneylenders used to threaten my staff," said Anil Jadhav at Hindustan Cooperative Credit Society Ltd. in Kurla, a Mumbai suburb.

HCCS, which has lent sums as small as 1,000 to 2,500 rupees (RM80.5 to RM199.5), sends an officer to the borrower's home to assess need and ability to repay, and the risk of default. Jadhav estimates overdue loans are 0.9 percent of all loans disbursed.