T N Ninan: Prize money

Weekend Ruminations

The Nobel Peace Prize does not usually go to a businessman, but Mohammed Yunus is a money-lender with a difference, and so is his Grameen Bank in Bangladesh. The idea that Yunus pioneered three decades ago""that the poor are creditworthy even though they have no collateral to offer, that they will repay loans especially if backed by group guarantee, and that innovative banking solutions will meet a dire financing need at the bottom of the pyramid""is now well on its way to becoming mainstream. As anyone following Keya Sarkar's monthly column on this page will know, India too has been caught up in the micro-finance wave for the last few years.

We now have dozens of companies that have been set up to undertake micro-finance activities. Venture capitalists have moved in to fund them, and non-governmental organisations (NGOs) have flourished in the field as the mainline organisers. The big Indian and even foreign banks have sensed an opportunity, and early movers like ICICI Bank, HDFC Bank, ABN-Amro and others have worked out a way of profiting from this new movement; direct lending involves unsustainable costs, so they are busy re-financing those who lend micro-credit. The interest rates are attractive for the lenders""24 per cent a year is normal""but no one is complaining because that is cheap for the poor (think of it as 1 per cent a fortnight and see if a moneylender will compete at that rate).

The eco-system that supports this idea is now being built. The Indian Institute of Management at Bangalore has introduced a course on micro-finance. The government has set up a high-level committee (chaired by former RBI governor C Rangarajan) to advise on policy, and conferences on the subject are being held all the time. Why, micro-finance has also had its first whiff of controversy and a run-in with government authorities, with a collector of Krishna district in Andhra Pradesh banning some micro-finance activities/organisations. The manner in which that issue was sorted out also demonstrated that micro-finance activists can now reach the highest political levels, and are not without political clout. It is possible that some of the turmoil is because cheap micro-credit eats into the business of money-lenders and those who organise chit funds""which means that micro-finance is making a difference.

The story goes beyond India, of course. The UN has declared this as the year of micro-finance. The G-8 has issued a statement in support, and the IMF and World Bank are talking of 'financial inclusion'. Citibank has instituted an award for micro-entrepreneurs""and it is not the only one. European royalty now shows interest in the subject, and the Bill and Melinda Gates Foundation has decided to get into the field, as have some other big charity bodies overseas.

When the great and rich and mighty are all jumping onto the same bandwagon, and the Nobel committee has blessed the creator of the concept, it is important to recall how the idea started. A professor of economics who saw poor people in his university's neighbourhood needing credit and not getting it, tried to get the local commercial banks to lend to them. He got the predictable answer, so he took out the money himself and lent to people who were poor, usually illiterate and mostly women, ignoring dire warnings that that would be the last he saw of the money. The experiment worked. Learning from this and encouraged by the early success, the professor then set up the Grameeen Bank a quarter century ago; this extended from one centre to the whole district and then the whole country""and now has agencies and support groups around the world. The Grameen Bank now has over a thousand branches and 2 million borrowers for money that comes with a 20 per cent interest rate, a short repayment period (this is usually trade credit, after all), and has a loan recovery rate of 97 per cent. Borrowers have to mandatorily save some money, and perhaps as a result of this half of those who have borrowed from the bank for a decade have crossed the poverty line.