| Q1. |
How does microfinance help the poor? |
| A1. |
Microfinance plays an important role in fighting poverty. Microfinance increases household income, which leads to ancillary benefits: increased food security, the building of assets, and an increased likelihood of educating one's children.
Microfinance is also a means for self-empowerment. It enables the poor, especially women, to become economic agents of change - they increase income, become business-owners and reduce their vulnerability to external shocks (illness, weather, etc)
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| Q2. |
What is microfinance? |
| A2. |
Microfinance is as a financial system conceived to provide poor families with very small loans (microcredit) to help members begin or sustain income-generating activities. It refers to a sustainable lending model that targets the poor. Microcredit gained prominence in the 1970s, through the efforts of Mohammad Yunus, a microfinance pioneer and founder of the Grameen Bank of Bangladesh . In 2006, Prof. Yunus and Grameen Bank were awarded a Nobel Peace prize for their efforts to create economic and social development from below. The definition of microfinance has broadened, and includes savings, insurance, and money transfer vehicles. Microcredit has largely been directed by the non-profit sector, but there are a growing number of for-profit MFIs like VFSPL in India . For profit microfinance institutions are referred to as Non-Banking Financial Companies and are regulated by the RBI. |
| Q3. |
What is the basis for the interest rate charged by MFIs? |
| A3. |
Providing financial services to poor people is expensive. This cost is one of the most important reasons why banks don't make small loans. The cost of servicing a Rs. 6000 loan is the same as servicing a Rs. 1,00,000 loan.
Microfinance is a business that works on the principle of high customer contact. The process of setting up operations to provide access to credit in an area is an intense process. First VFSPL CRS must perform area surveys to assess the viability of an area, this is followed by projection meetings to evaluate potential interest. The projection meetings are followed by training of members on credit discipline, group formation. After centers are set up, the CRS has to travel on a weekly basis from center to center to collect repayment and disburse loans. The CRS also meet with customers on non-repayment or disbursement weeks to keep the group in contact and to maintain the cohesiveness which is vital to the group guarantee principle. All this leads to high personnel and administration costs.
In addition, we must borrow from commercial sources to lend to our members. This cost of lending is anywhere from 10-12%. Added to this cost are the high personnel/administration costs, loss of repayment percentage and a sustainable profitability margin. However, it is the lowest possible interest we can charge to cover our costs.
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| Q4. |
How do you know microfinance is making an impact? |
| A4. |
Microfinance has gained popularity in recent years for multiple reasons. Firstly it is a much better alternative than the informal financial sector (mainly moneylenders or pawn brokers). In India , moneylenders charge rates of 36-120% annually. MFIs are a source of constant cheap credit for the poor and customers realize this. Secondly, MFIs like VFSPL provide microfinance plus services like insurance, health camps which address vital needs of customers and helps increase their productivity.
Also, as MFIs mainly focus on women, this helps empower them. This access to finance allows women to increase income, which benefits the entire household.
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| Q5. |
Does microfinance work for all the poor? |
| A5. |
Microcredit is best-suited to those with entrepreneurial capability and opportunity. This translates to economically active poor who can undertake activities that generate stable incomes.
However, the poorest are unable to qualify for microcredit under the current structure. The main reason is that extremely poor people (destitute and homeless) lack a stable income. Without a stable income, it is difficult to make the weekly/monthly repayments that microcredit requires.
Programs have been developed to address the needs of the poorest of the poor. At VFSPL , we are developing an Urban Poorest program that is a grant based program for the poorest. The program aims to help its members develop a steady source of income and break the cycle of extreme poverty.
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| Q6. |
What is a Microfinance Institution (MFI)? |
| A6. |
A microfinance institution is an organization that offers financial services to low income populations. The primary activity of most MFI's is micro-credit, however many also offer other services like insurance, deposit, etc. Various types of institutions offer microfinance: NBFCs, NGOs, SHGs, cooperatives, private commercial banks and sectors of government banks.
Some NGOs offer microcredit as one slice amongst a host of non-financial development activities. VFSPL mainly focuses on loan disbursement but also provides microfinance plus services like healthcare through its partner Parinaam Foundation.
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| Q7. |
How can I get involved? |
| A7. |
Microfinance is a growing field as economies become more complex and wealth disparities become more acute. Depending on your interest and availability you can participate in this growing industry as a worker or as a donor. For more information see our Get Involved section.
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| Q8. |
Why do you only lend to women? |
| A8. |
Social development studies have demonstrated that women are better borrowers in terms of repayment and utilization. They are much more likely to reinvest income into the household, for the benefit of the entire family.
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| Q9. |
Why doesn't VFSPL allow members to save? |
| A9. |
VFSPL is a Non-Banking Financial Company (NBFC), and is therefore regulated by the Reserve Bank of India (RBI). RBI regulations do not allow NBFCs to hold savings deposits.
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| Q10. |
Where else can I find information about Microfinance? |
| A10. |
- Microfinance Gateway www.microfinancegateway.com
- Consultative Group to Assist the Poor (CGAP) www.cgap.org
- Unitus http://www.unitus.com/
- Grameen Bank http://www.grameen.org
- National Bank for Agriculture and Rural Development (NABARD) http://www.nabard.org
- Sa Dhan: Association of Community Development Finance Institutions http://www.sa-dhan.org
- South Asian Microfinance Portal http://www.microfinancesouthasia.net
- Microfinance Information eXchange (MIX) http://www.themix.org
- World Bank http://www.worldbank.org
- Microfinance.com http://www.microfinance.com
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