Giving credit to the poorest among the poor is a great thing. Normally, main stream banks and financial institutions are not interested to give loan to the poor people because they feel that it is not profitable. So, poor people living in the rural areas often have to borrow money from money lenders at a very high interest. Sometimes, some borrowers commit suicide after the interest mounts beyond their capacity.
So, some microfinance organizations have come into existence in India and they give loan to the poor people. What they do is to first get a loan from a traditional bank and then give loan to the poor people with a higher interest rate. Poor people come to them for loan because the interest rate is much lower than the money lenders. Thus, microfinance is a good blessing for many people. There is no doubt that many families have been benefited immensely. You can read an excellent article in New York Times titled 'Microloans May Work, but There Is Dispute in India Over Who Will Make Them'.
There is another side of the story too. There have been numerous allegations against microfinance organizations in India. I am quoting from a report of Business Week:
For one thing, there have been allegations that some microlenders structure complicated loans with hidden costs to exploit borrowers. The well-publicized suicides of about a dozen women caught in a debt trap in Andhra Pradesh over the last year cast industry practices in an unflattering light. Government inspectors accused four microlenders—Spandana, Asmita, Umdama Pottu Pedatha, and Share Microfin—of charging interest rates as high as 40% to 50% and harassing borrowers for repayment. The microfinance lenders have since been lending at interest rates of around 24%."
Finally, I feel that microfinance has to be promoted and expanded more in India. However, there must be a regulatory body to look after the whole system.
What is your idea?
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