Subir Roy: Learning from Grameen Bank

VALUE FOR MONEY

After the celebration in this part of the world over Muhammad Yunus and the Grameen Bank of Bangladesh being awarded the Nobel pace prize dies down, focus should shift to how best this global recognition can be leveraged. To what extent can and should the Grameen model be emulated in this part of the world to fight poverty and the social distress associated with traditional usurious money lending?

A few researchers have earlier claimed that both the bank and its global champions have become victims of myths about the bank. It is not an agent of social change and its attempt to address donor concerns like correcting gender bias makes it rely on women borrowers (97 per cent of all borrowers) in a counter-productive way. Women's disadvantaged social role is strengthened, not alleviated, as they can be cajoled more easily than men to repay loans and their menfolk use them to borrow indirectly. As it gets big the bank resembles the moneylender that it is supposed to replace.

To answer in part the question""are women borrowing from the bank better off or worse off""one can highlight the "telephone ladies". There are nearly 300,000 of them funded to buy mobile phones, which they deploy as pay phones. Thereby they are able to offer phone services to nearly half of Bangladesh villages where earlier no service existed. Grameen Phone, one of the firms the bank has floated, is the largest such service provider in the country and 16 per cent of its revenue comes from the telephone ladies. It is difficult to believe these women are fronting for their men, who take away their earnings.

The obligation to pander to overseas donor sensitivities is one argument which has died a natural death over time. In 1995 the bank decided to stop taking donor funds and the last bits in the pipeline ended in 1998. Today, the bank is financially self-sufficient and runs on the resources of its members (borrowers), depositors and its own funds. All loans taken by its 6.6 million borrowers come from deposits and these plus the bank's own funds account for 142 per cent of loans disbursed. Members of the bank own 94 per cent of its equity. Since it was incorporated as a bank in 1983, it has made profits in all but three years. Loan recoveries stand at nearly 99 per cent and there is a carefully worked-out procedure of asset classification to mark out non-performing loans and provide for them.

The bank is so self-reliant because it has a burgeoning deposit base. It pays more to depositors than the competition and would find it difficult to pay less as a good number of depositors' representatives are on its board. Its lending rate of 20 per cent for its standard income-generating product is neither very high nor pegged artificially low. Most loans get repaid because they are used for the purpose for which they are disbursed. It counsels borrowers while regularly supervising loans use, thus preventing misuse. Most importantly, the grassroots links (it is present in 71,000 villages) of the bank enable it to follow a flexible recovery policy, which takes into account both natural calamities and personal setbacks.

Most poor countries (India is one of them) would give an arm and a leg to call such an institution their own and the key issue really is, how can such institutions be replicated? First is the tremendous leg-up that the Bangladesh government gave to the organisation by making it a bank through law. Under this dispensation it was exempted from paying income tax and in return profits are not distributed but transferred to a rehabilitation fund.

Muhammad Yunus outlines the dilemma faced by micro-credit organisations thus: It is NGOs that mostly lend to the very poor but the most critical problem they face is "finding money to lend out to the poor" (EPW, 4 September 2004). There is need for national wholesale funds, which not only provide resources but play an important role in promoting standardisation and best practices. They are a pivotal link between informal micro credit programmes and the mainstream financial system through intermediation. The key role of a wholesale fund is to "persuade" the central bank to allow partner organistions to take deposits against its guarantee. Plus a system of deposit insurance can be initiated for deposits taken by micro-credit organisations.

The overarching need is to provide a legal framework which enables successful micro-credit organisations to convert themselves into financial institutions. The special law which allowed the organisation to become a bank should be "generalised" to allow NGOs in general to create formal banks. Such micro-finance banks "can strengthen the financial system of a third world country by filling in the vacuum left by conventional banks, and giving a boost to the emergence of a local level grassroots economy." He is also for a regulatory agency to oversee the micro finance banks and facilitate their activities.

India has been a late adopter of the micro-finance model and while this is growing very rapidly, aberrations have already crept in. Interlopers have got in, claiming that their near usurious rates are par for the course and government-backed micro lending sometimes takes place at absurdly low rates, which pay no heed to costs and spread a wrong impression about what is sustainable. Only grassroots organisations can successfully lend at the grassroots and such operations can be self-sustaining provided there is a carefully regulated process under which successful organistions can accept deposits and slowly grow into such a marvel as the Grameen Bank. Yunus's ideas should be carefully studied by the Indian government as it prepares legislation to regulate micro finance.

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