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Microcredit gives credit where there may be none

ERSHAD KHANDKER
THE hungry destitute and landless village family is a normal thing in the villages of third world Bangladesh. All they need is some money for a fresh start. Credit worthiness of the poor villager has been a problem for centuries. Many have succumbed at the hand of the greedy moneylender. The moneylender would offer money at short term and high interest rate and disappear only to come back to collect. The poor villager, unable to meet the interest payment would only see his debt increase. The money lender would seize the mortgaged land holding while the villager would loose all and become a destitute.
The need for money or credit was urgent. Institutional lenders like commercial banks could not lend to a poor man because the cost was more than the return. But apparently you could give money to the poor woman! Grameen Bank started its unique scheme to offer small loans to the woman of the family. The concept of microcredit emerged as a very strong answer to the need for credit at the village level. We now have non-government institutions (NGO), government banks and many commercial banks practicing microcredit as a means to reaching to the poor. The pros and cons of the system, its efficacy are a matter of debate. However, credit was unavailable before the concept of microcredit was popularised by Grameen Bank.
Now it is available.
There is a very large group of people and across nationalities, who think that micro-credit has serious procedural problems and do more harm than good. Firstly, NGO micro credit provider charges 15 per cent flat rate interest. But with re-payment being weekly, effective interest rate comes to about 24 per cent. This weekly recovery system is said to put back breaking pressure on the borrower. Secondly, NGO's deduct 10 per cent savings from the borrower right at the time of disbursement. Many look at this system as one more example of the high cost of NGO micro credit. Researchers should be trying to seek ways to cut the interest rate. But in the meantime, we can realise that the urgency of the need of the borrower and the actual availability of the money may seem to be a blessing to the actual borrower. And the 10 per cent savings deducted is refundable, and may be useful to the borrower since this is forced saving and the money is available for later use. The borrower may take this forced saving to increase his capital and expand his business.
Micro credit should not be viewed with a cut and dry approach. Not many know the facts that are found at the ground level. For example, the cost of getting money from the commercial banks can be larger than obtaining a loan from the NGO. The different procedures and paperwork, the wait that may be upto 10 days as
the bank checks different security issues, may cost the applicant a lot of money. There may be psychological disturbance. NGO credit is given with minimum paperwork. NGO workers have to make regular visits to the borrower's premises to offer hands on supervision and advice. While the commercial bank would lend the money with lack of concern for the actual project for which the loan was given. This is understandable because with the small amount of money involved, it is not cost effective for the bank to have the corporate officer spending time on the small borrowers. Research has shown that the weekly recovery approach, while stringent, makes the serious borrower diversify and get more family members involved in business. More workdays are put-in and more members of the family get to know the value of hard work. A strong work ethic is undeniably a good lifeenhancinglesson tolearn.
Microcredit is there when the alternative is the village moneylender with his 100 per cent interest rate and the evil design to capture the mortgaged item. Commercial bank branches are far and wide. In the meantime, the microcredit provider is there to visit the borrower weekly and offer counsel and advice not only on business matters but on community development issues also. The truly ambitious and hardworking need just one chance. Microcredit may very well be the very last resort for that ambitious and hardworking family.
Ershad Khandker is a senior journalist