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The general purpose of small lending in developing countries is to provide the poor with financial services and capital in the hopes that they can break the cycle of poverty through business development. Microcredit to the disadvantaged is a cost effective weapon to fight poverty and it serves as a catalyst in the overall development of socio-economic.

Small loans help poor families start or expand income-generating businesses. But majority of poor people in rural areas around the world lack access to this kind of micro-credit. In India alone, over 200 million people (36% of the rural population) do not have access to a bank. Although India has more microfinance organizations than any other, these programs only reach a small percentage of needy households. The rest have no alternative to the local moneylenders whose exorbitant interest rates reinforce the indebtedness that contributes to a lifetime of poverty.

The lack of access to credit for the poor, particularly in rural areas, is attributable to practical difficulties arising from the discrepancy between the mode of operation followed by financial institutions and the economic characteristics and financing needs of low-income households. Moreover, the poor individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the minimum qualifications to gain access to traditional credit.

Today, Microfinance Institutions (MFIs) play an important role in the economic development of poor communities. MFIs include non-governmental organizations (NGOs), credit unions, non-bank financial intermediaries, and even a few commercial banks. The World Bank estimates that there are now more than 7,000 microfinance institutions, serving some 16 million poor people in developing countries. To the extent that these MFIs become financially viable, self-sustaining, and integral to the communities in which they operate, they have the potential to attract more resources and expand services to clients. The majority of these microfinance organizations are donor funded, which is an obstacle to their scalability and sustainability. Of the more than 7,000 MFIs worldwide, less than 100 can claim financial self-sufficiency.

Micro Finance as a concept is still new in India but has caught the attention of every rural stakeholder. With roughly about 5 % of population being impacted through Micro credit, there is still a long way to go. But the beginning is definitely promising. The initial success of micro lending has thrown open many possibilities for the future replication. At the present rate of growth of Micro credit, within the next 10 years, we can expect a 3 fold increase in impact. Add a portion of thrust from the regulatory authorities, and you can expect a five time increase in the impact. With the growth in population and the fact that providing credit is just a stepping stone for increasing the rural GDP, even the best case scenario is not good enough for a massive social impact.

Quiver's objective is to build a sustainable credit model for Rural Finance. Rural people in India, especially the poor farmers, have little access to finances/loans from formal sources (like banks) mainly due to time taking and lengthy/complicated procedures. In order to understand the current status on Micro-Finance and Loans in the village as-well-as to assess the potentiality of this market in the village, responses were collected from households on Micro-Finance and Loans, during Panchayat Adhayan in Saurath.

Study revealed that rural households avail loan mainly from sources like Banks, Money lenders, Friends/Relatives and Financial Institutions. Approximately 69% households have taken loan in the past from the different sources for business or medical or urgent personal needs, of which majority of the households preferred to avail loan from Friends and relative or Pvt. Financial institutions though the interest rate charged is high (5 times more than the bank); the reason being easy to access and no mortgage required. Banks have been preferred by less than 10% of low income group households (MHI less than 2000) in Saurath. Apart from the reasons mentioned above, the other major reasons of low accessibility to Banks for loans by lower income group could be:

  • Rural banks do not provide flexible products and services to meet the income and expenditure patterns of small rural borrowers. As noted, small rural borrowers have irregular/volatile income streams and expenditure needs, and therefore, prefer to borrow frequently, or repay in small instalments, but most banks do not offer such products.
  • The transaction costs of dealing with formal banks are high. Also the distance of the nearest bank also affects the accessibility of the poor.

Bank loans were availed by households mostly for business or agriculture purposes (as agri-loan). Repayment performance details revealed that most of the households (approx. 75%) who have availed loan did not repay their loans regularly. The irregularity in the repayment of the loans is responsible for the 41% of households still reeling under loans.

As a result of the study it was found that more than 50% of the villagers took loan for one or many reasons out of whom majority are very poor. What develops a need for bank loans and small and micro financing companies in these villages is that people take loans from merchants and relatives at a very high interest rate, whereas, these banks and companies will provide them with the loan at a very low rate.

Quiver is working towards building a sustainable credit base for Rural Finance. The purpose of conducting this pilot study in a small village was to enlist the factors which would have to be taken into consideration while building such a sustainable model and understand the current status on loan requirement in the village as-well-as to assess the potentiality of this market in the village. Apart from understanding the current financial liabilities of the households in terms of loan availed, the study also tried to identify the possible customers of future who would like to avail loan (from any source). Small rural clients prefer to borrow frequently, and repay in small instalments; one could usefully explore the possibility of offering new and more flexible loan products, like those offered by microfinance, to villagers.

Analyzing the need of low interest bank loans and micro-finance at the rural level Quiver decided to come up with a solution. With a tie-up with its service partner ICICI bank, it will be soon offering people small loans from these banks at a lower interest rate, which will help the villagers to safeguard themselves from getting exploited by the local merchants and relatives, who charge interest rates as high as 30%. Quiver along with ICICI will offer custom designed micro loans to the rural people, which will help them to improve their economic activities to a great extent.

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