MICROCAPITAL BRIEF: Traditional Moneylenders Gain as Microfinance Industry Grows in India

Since its founding in the 1990s by non profit organizations, the Indian microfinance industry has nearly doubled in value by delivering USD 2.5 billion in loans through early 2009. In connection to this rapid growth, government reports have shown an increased market share of traditional moneylenders, which include pawn brokers, gold merchants and other private moneylenders.  The traditional Indian moneylending industry charges annual interest rates as high as 120 percent, according to CGAP (Consultative Group to Assist the Poor). A Reserve Bank of India (RBI) survey indicated that in recent years, “traditional moneylenders’ share of total rural Indian household debt grew to 29.6% from 17.5%.”  Some academic researchers believe that moneylenders are keeping afloat many microfinance borrowers by acting as stopgaps so that micofinance borrowers can repay prior microloans. The concern is that these borrowers are just digging themselves deeper into debt. However, Padmaja Reddy, managing director of Spandana Foundation, a microlender in India, states that the boom in traditional moneylending represents an increase in “overall demand for credit” and an indication of the untapped market demand for microfinance.

About Reserve Bank of India (RBI):

Established in 1935, Reserve Bank of India is the nation’s central bank and undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies. The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in banking fraud, assess the divergence non-performing assets and supervise the rating model for banking sector. RBI consists of twenty-two regional offices. RBI website: http://www.rbi.org.in/scripts/AboutusDisplay.aspx#MF

About Spandana Foundation:

Founded in 2005, Spandana Foundation is a non profit organization that provides microloans in India. Spandana’s microfinance projects are initiated by members who live and work in communities that are served.

Spandana website: http://www.spandana.org/

Bibliography:
RBI: http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29

CGAP: http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=CGAP+%28Consultative+Group+to+Assist+the+Poor%29

Spandana: http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Spandana+Foundation

Additional Resources:
[1] Original article: http://online.wsj.com/article/SB126055117322287513.html?mod=WSJ_hpp_LEFTTopStories

Housed at the World Bank Group, CGAP is an independent policy and research center dedicated to providing financial access for the world’s poor. CGAP is supported by over thirty development agencies and private foundations.  Its mission is to provide market intelligence, to promote standards and to offer advisory services to governments, microfinance providers, donors, and investors. CGAP website: http://www.cgap.org/p/site/c/aboutus/

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