One crore micro-capitalists May 20, 2007

Chinamma was born a Devadasi but she refused to become a prostitute. She would collect neem seeds in the forests of Raichur district in Karnataka and earn Rs 12 a day. Her life changed completely when she joined a self-help group which helped her with a loan. She makes fertilizer today from the same seeds and employs 10 women. Her sales are Rs 250,000 and profits Rs 50,000. Rising demand from businesses like hers have lifted wages three times for the 12,000 women who collect neem seeds.

There are 1.2 crore poor women like Chinamma across India who take small loans to start businesses from microfinance institutions, banks and NGOs. They buy a cow and sell milk or invest in a sewing machine and stitch clothes. They may open a vegetable shop or begin hundreds of other businesses. Many of these micro-capitalists are the landless poor. What started as NGO charity work has now become a self-sustaining business with the entry of banks and microfinance companies, who find the women have an excellent record of loan repayment. Inspired by Bangladesh, this idea first caught on in Andhra, and is spreading across India, gradually replacing the village moneylender.

Chinamma’s story teaches us two ways of conquering poverty. In the first, government gives money to the poor--free electricity, subsidised food through the PDS and rural employment guarantee schemes. In the second way, the state creates conditions for people to help themselves. It builds roads and connects people to markets; makes it easy for the poor to get titles to their land and take credit against them. It provides vocational training so they can get a job; it ensures reliable power so that factories can run; and it reduces licenses and permits so that people can easily start businesses. The first way gives people fish; the second way teaches them to fish.

Chinnama’s sensible way, however, is under attack. The Andhra government closed 50 branches of two microfinance institutions (MFIs) last year for charging high interest rates. MFIs argue that it is expensive to provide weekly service to the poor in the rural areas. Their women customers prefer MFI loans rather than cheaper, subsidized loans from the government’s MFI for which “you must either have contacts or pay a bribe and then wait 6-9 month for the loan”. In contrast a young, dynamic MFI like SKS Microfinance delivers transparent loans at their doorstep in 7 days.

The Reserve Bank agreed with the MFIs. It argued that competition was growing among micro-lenders and interest rates had begun to fall. It also observed that countries that had tried to control loan rates had killed their microfinance business. For this reason the micro-loan business is four times bigger in Morocco and Bolivia where interest rates are ot controlled versus Tunisia and Columbia where they are controlled. Chinamma’s way will always be threatened in a populist democracy like India. Micro-lenders will have to fight the political power of money lenders, survive the envy of bureaucrats who run government financial institutions, and battle unscrupulous politicians who will find votes in capping interest rates on micro-loans.

Chinamma thinks it criminal that chief minister Karunanidhi gets away by waiving loans worth Rs 7000 crores while she pays interest on her loans diligently. She wonders when voters will realize that there is more dignity in her way of life because it doesn’t depend on the false promises of politicians or the charity of NGOs. Perhaps it will happen, she muses, when the middle class begins to vote and takes a more active role in politics.