55 km away from Srinagar, Dilshada Bano, 45, runs a small tailoring institute for the girls of her neighbourhood in Baramulla. With the help of soft loans from relatives, she purchased 3 machines and signed up 6 girls as her first students. Over time, her class expanded to 30 girls and some girls became proficient enough to take up professional assignments. With the money earned from these assignments, some of them managed to buy their own machines and are now continuing the chain of self-reliance started by Dilshada Bano.
Meanwhile, the famous carpet-weaving industry has reached the opposite end of the self-reliance spectrum. It is said that a Kashmiri home is incomplete without a soul: a carpet which brings the entire household together. However all over Kashmir, the souls are slowly dying as the hands that wove them are shriveling up, exploited by middlemen and unable to raise the funds required to procure raw material. As such carpet-weaving can be expected to soon reach the “extinct” category.
The stark contrast between these cases does not highlight individual enterprise and passion: rather it brings to light the all-too-common challenge of access to funds. In the case of Dilshada Bano, access to funds helped her start a mini-revolution in her neighbourhood. But for the carpet-weavers the hold of middlemen is so strong that the community as such has become economically depressed. Banks and formal means of funding are way beyond their reach.
Are the poor worthy borrowers?
In cases like the ones cited above, the borrower is looking for very small amounts which commercial banks deny because their high processing and collection cost do not offset the interest earned. There is also a bias among formal lending organizations against borrowers of a certain economic status.
Consequently poor borrowers enter into a debt cycle with informal lenders, a cycle that often leads to bonded labour and other social ills. The point arises: are the poor unworthy borrowers?
This point has been successfully challenged by several self-help groups and microcredit organizations, the most famous of which is Grameen Bank. The case of the carpet-weavers is an ideal scenario for micro-lending. The cost of materials for a basic carpet can be as low as a few thousands but the returns are usually in lakhs, easily making a solid case for lending. In fact, the default rate for Grameen Bank is an astonishing 2% whereas that for commercial banks is 70% in Bangladesh.
Meeting the Microcredit Challenge
The key challenge in this regard is the lack of a bridging mechanism between borrowers and lenders. Increasingly, corporates are realizing microcredit is a sound business venture, not just one with a CSR element. In addition, with the increasing prosperity of the middle class, there is also a growing aspiration to help others. However people who are in a position to help often do not know how to do so. People in need of help usually do not know to whom to turn. A bridging mechanism can help connect these two groups of people.
The organizing principle of the platform can directly affect the individual’s ability and willingness to repay. In the case of groups like the Grameen Bank, the peer pressure and honour system can ensure timely payment. But in situations where the organizational principle is not an honour system, there can be issues in repayment. A 2006 study showed that only 1 in 5 borrowers in India used the funds for the actual purpose for which they took a loan. In many cases, a fresh loan was taken to repay the previous one. Clearly the governance structure has to support a healthy business relationship.
Micro Step to Poverty Alleviation
In situations where microcredit is meeting the business case, there is a strong contribution to the dignity of the individual and capacity building as opposed to charitable contributions. Being the recipient of a loan, no matter how low in interest, acts as a spur to personal responsibility toward success which is not an outcome of receiving a donation.
The key to success lies in creating a strong platform with the right organizational principles which will not only bring lenders and borrowers together but also a stronger economy.