The Effect of Microfinance on India - Essay Example

The effect of microfinance on India, Hyderabad Introduction Poverty is a controversial issue. There is much debatearound it as the reasons of poverty can be very different. The reasons can have different origin: they can spring from personal characteristics, inequality or government’s actions. As there are many causes of the given problem, there are also many solutions offered to it. Microfinance is one of them. Its effectiveness is very doubtful thus needs special investigations held in order to determine if it really helps decrease the level of poverty in our society (Branch & Klaehn, 2002). Certainly, like any other intervention, microfinance may have different effects in different areas depending on the standard of living in this or that country. Thus, it is essential to consider every region separately in order to come to the right conclusion. In the given paper we will analyze the effect of microfinance in India, Hyderabad. Microfinance in Hyderabad Microfinance is widely used in India and even had some positive results at the very beginning: “India’s microfinance sector was once touted as a saviour of the poor and a good bet for investors. The high point for the industry came when SKS—then India’s biggest microfinance company with a $1.2 billion loan book, a third of it in the southern state of Andhra Pradesh—went public in July 2010. The $350m offering was more than 13 times oversubscribed.” (“Road to redemption”) However, according to the same source, the situation started worsening at once. It is essential to analyze the reasons of worsening and make recommendations. Credit use According to the available statistics, the credit offered by Spandana and other Microfinance institutions working in the region of Hyderabad, was used by 37% of households. The percent is not very high if to take into account the purposes of taking loan (Chowdhury, 2007). Institutions do not state that credits were taken for business starting purposes. However, 30% of people who took loans said that they used this money mainly for this purpose, while 22% used these funds to buy facilities for the business they already have; 30% of borrowers spent loan to buy new facilities for their households (Greater Hyderabad Municipal Corporation). New business activity and existing business situation Here we can see some positive dynamics. The availability of Microfinance institutions loans changed annual percent of newly created businesses from 5.3 to 7. Competition did not bring any difficulties to the existing businesses (Greater Hyderabad Municipal Corporation) Expenses and pay back availability The expenses are different and depend on the purpose of credit. Data shows that those who took a credit with the purpose of starting a new business, spent money more reasonably. That means that these borrowers made investments, which would bring a profit, and bought durable goods (Floro & Pan). Thus, they will be able to pay the credit back easily. Moreover, it is also known that these people cut their expenses on food and cigarettes in order to make ends meet and to be able to pay off the credit. Those borrowers who were not going to start a new business spent money more irrationally that calls into question their ability to pay the credit off. They paid much attention to temptation goods instead of making long-term investments. This also testifies that households have more financial abilities but still such expenses can make them fall into debts, which they will not be able to pay as microfinance is a short-term loan and should be paid fast. Some recent results show that the methods the institutions use to take their money back made some people commit suicide. “Many in the industry admit that runaway growth spurred reckless lending to poor Indians. Just months after the SKS listing, Andhra Pradesh’s state government accused the industry of strong-arm collection tactics that drove some farmers to suicide. It issued suffocating rules; almost all loans in the state were written off; business ground to a halt” (“Road to redemption”). Changes on the area of healthcare, education and female position improvement Unfortunately, the availability of loans provided by microfinance institutions did not change the situation in the field of healthcare and education. The number of children admitted to schools did not increase at the same time as the number of applications to hospitals did not decrease. People still can’t spend more on sanitation and medicine. The position of women did not also change; they still can’t make important decisions in their families and receive good education. Thus, people’s ways of life was not considerably improved. “While strong claims are made for the ability of microfinance to reduce poverty, only a handful of studies use sizable samples and appropriate treatment/control frameworks to answer the question” (Morduch p.1cited in Westover, 2008). Conclusion and Recommendations Having analyzed the information above, it is possible to make a conclusion that microfinance can have positive results and be very helpful for successful businesses and prospective business ideas. Certainly, it is not possible to know if the business idea you took the short-term loan for is prospective. Thus, the existing businesses can benefit from microfinance most of all as they have relatively strong positions (Dowla, Asif & Dipal, 2006). However, the main task given to microfinance upon making it available was to decrease the level of poverty (Rutherford, 2000). Its connections with poverty rates change is not proved, thus it can’t be called effective. Notwithstanding that microfinance is very popular in the mass media and it has some positive results, there are many publications that disprove its usefulness and positive impact. According to Jon Westover, “there are numerous studies that demonstrate the tremendous successes of such programs throughout much of the underdeveloped world. However, despite the increase in the popularity of microfinance programs and the vast amount of research conducted to date, there are two key areas for future research into the effectiveness of microfinance programs” (Westover 6). The connection between poverty reduction and the availability of microfinance is doubtful and not proved. Therefore, the microfinance programs should be provided with caution. Further research is needed to evaluate the effectiveness of such short-terms loans. Works Cited 1. Branch, Brian & Klaehn, Janette. Striking the Balance in Microfinance: A Practical Guide to Mobilizing Savings. PACT Publications, Washington, 2002. 2. Chowdhury, Anis, How Effective is Microfinance as a poverty Reduction Tool, 2007available at http://www.bloomsburyacademic.com/view/Poor-Poverty/chapter-ba-9781849664530-chapter-008.xml 3. Dowla, Asif & Dipal Barua. The Poor Always Pay Back: The Grameen II Story. Kumarian Press Inc., Bloomfield, Connecticut, 2006. 4. Floro, Sagrario & Pan A. Yotopoulos, Informal Credit Markets and the New Institutional Economics, Westview Press, Boulder Col., 1991. 5. Greater Hyderabad Municipal Corporation, “Chapter V: Basic Services to the Urban Poor,” Hyderabad - City Development Plan, available at http://www.ghmc.gov.in/cdp/chapter%205.pdf. 6. “Road to redemption”, January 12 2013.available at http://www.economist.com/news/finance-and-economics/21569447-industry-starting-revive-road-redemption 7. Rutherford, Stuart. The Poor and Their Money. Oxford University Press, Delhi, 2000. 8. Westover, Jon. “The Record of Microfinance: The Effectiveness/Ineffectiveness of Microfinance Programs as a Means of Alleviating Poverty”, 2008, Available at http://www.sociology.org/content/2008/_westover_finance.pdf Read More