Small loans to entrepreneurs result in business surge in India

With the arrival of small-scale lending businesses, or micro-credit initiatives, India has seen entrepreneurs surge into action. This new phenomenon has had a broad impact on Indian society, with poor people being the primary beneficiaries.

Micro-finance programmes are attractive because they help people start businesses and educate their children. The loans are usually disbursed to poor women whose total family assets are less than 20,000 rupees ($459) and whose monthly income is smaller than 250 rupees ($5.71). Yet micro-finance initiatives have a phenomenal repayment rate of 95 percent, better than the best commercial banks in the world.

In India, a single micro-credit initiative can serve about 300,000 needy families, with funds totalling $75 million.

The fledgling industry, blessed with sound profitability and strong social concerns, has benefited from the financial support from foreign venture capitalists.

Micro-credit initiatives have also had a large impact internationally, with an estimated 3,000 such programmes serving the worlds poor.

One example of newfound entrepreneurship in India involved a woman with a one time loan of 2,000 rupees she used to develop a successful business in hair exportation. Her company sent employees town to town to acquire handfuls of hair in exchange for small gifts that they brought. The hair is in turn sold to the United States and other Western countries for wigs and hairpieces.

It appears the free-market principles of Silicon Valley apply equally to rural India and other impoverished regions.

Source: Saritha Rai, Tiny Loans Have Big Impact on Poor, New York Times, April 12, 2004.

For NYT text (subscription required) http://www.nytimes.com/2004/04/12/technology/12venture.html

For more on International (Institutions and Growth) , http://www.ncpa.org/iss/int/

FMF Policy Bulletin\20 April 2004