Global credit crisis hurts tiny loans in South Asia
By Rina Chandran
Reuters

MUMBAI, Nov 17 (Reuters) - A global credit crisis that has felled large investment banks and prompted multi-billion dollar bailout packages is also hurting unlikely victims half a world away: small south Asian businesses dependent on microfinance.

Microfinance has helped poor women and farmers in Bangladesh and India set up businesses and grow crops since the 1970s.

But as credit tightens and largesse from corporations and socially-minded investors dries up, microfinance will be hit, impacting poor people who have no other access to finance.

"A liquidity crisis is the very worst-case scenario for microfinance institutions," said Roy Jacobowitz, managing director of development and communications at ACCION International in Boston, which backs microfinance institutions.

"The demise of microfinance will be devastating. It will leave people that depend on it in a very, very bad situation: they could go from a level of success back to poverty."

South Asia accounts for the most microfinance borrowers, making up more than half of global demand, according to Sa-Dhan, an association of community development finance institutions.

While ACCION hasn't seen a "catastrophic impact" on MFIs there yet, Kashf Foundation, an MFI in Pakistan, whose economy is tanking, is now seeking international lines of credit, he said.

In India and Bangladesh, microfinance has given hope to hundreds of thousands, especially women, who have built successful businesses that have changed their lives.

But these may now be under threat because of tighter credit.

"There's less money out there, so there's less money for MFIs," said Siddhartha Chowdri, a manager for ACCION in India.

"For MFIs, the cost of their funds has gone up, and at the same time, they're under pressure not to raise lending rates to their borrowers. At some point that becomes unsustainable."

REGULAR INCOME

Microfinance shot into the spotlight in 2006 when the Nobel Peace Prize went to Bangladesh's Muhammad Yunus and his Grameen Bank that pioneered giving small loans without collateral.

But today in Bangladesh, one of the poorest nations in the world, microfinance borrowers and workers are a worried lot.

Kulsum Bibi, a 45-year-old mother of three, set up a nursery with a loan of 3,000 taka ($44) from Bangladesh Rural Advancement Committee (BRAC), after her husband left her and their children.

"I felt as if I was sinking in a deep sea," said Kulsum, who also enrolled in a BRAC school for adults, and can now read and write and maintain the accounts of her small but profitable business selling plants and saplings that employs 10 people.

BRAC is one of the largest providers of financial services to the poor in Bangladesh, having disbursed more than $5 billion to nearly 7 million people since 1972, mostly women like Kulsum.

It is institutions like BRAC that are helping develop impoverished regions in Bangladesh and India, but their efforts may be hamstrung by the tighter credit conditions.

"If commercial banks are affected, then the expansion of the microfinance programme will be affected," said Mahabub Hossain, an executive director at BRAC, adding that its donor-dependent efforts in education, healthcare and family planning are at risk.

"I am deeply worried," said village health worker Hosne Ara, who works on programmes for tuberculosis and family planning.

"I have been working on this programme for many years now, and if it stops my family will be deprived of a regular income."

FACING THE HEAT

In neighbouring India, MFIs had served 10.5 million clients at end-2007, according to Sa-Dhan. The market is forecast to expand to 50 million clients by 2012, with the outstanding loan portfolio rising to $6 billion from about $769 million now.

Indian banks have focused on MFIs as part of the government's "priority lending" requirement of 40 percent of all lending to ensure smaller businesses and entrepreneurs can access funds.

About 500 commercial, regional and cooperative banks are indirectly involved in microfinance, including State Bank of India (SBI.BO: Quote, Profile, Research, Stock Buzz), ICICI Bank (ICBK.BO: Quote, Profile, Research, Stock Buzz) and Yes Bank (YESB.BO: Quote, Profile, Research, Stock Buzz).

Global heavyweights including Standard Chartered Bank (STAN.L: Quote, Profile, Research, Stock Buzz) and HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) are also eyeing the space.

But with banks turning cautious, MFIs may suffer, particularly smaller outfits that cannot afford higher interest rates or have access to private equity or venture capital.

"Now that banks themselves are facing the heat, they might either resist lending to MFIs or increase interest rates on loans further," said Prathima Rajan, analyst at research firm Celent.

"On the flip side, MFIs might resist borrowing," she said, thereby hurting their chances for growth and success.

When they see MFIs cutting back, borrowers may also be unwilling to repay loans, which is critical to maintaining liquidity and giving fresh loans, Jacobowitz said.

"That will lead to belt-tightening, and for poor people it means tightening a belt that is already tight," he said.

However, if banks could overcome the jitters, then the case for lending to MFIs for small, high-margin loans with low defaults is stronger than ever, said Somak Ghosh, group president of corporate finance and development banking at Yes Bank.

"This is actually a good time for banks to raise lending to MFIs, as their business model is a lower risk than large loans for a few big corporates, which are anyway seeing a slowdown."

SKS Microfinance, India's largest MFI, recently raised about $75 million by way of private equity and said it aimed to more than double its client base to 8 million over the next two years.

This is evidence that a well-managed MFI with a strong portfolio of borrowers can grow stronger in a crisis, ACCION's Jacobowitz said, because it is financing needs that are "so fundamental and so basic" that demand for them is unaffected.

"It's about lending for the small neighbourhood store in an area where there are no big stores," he said.

"These people have little discretionary income for some of the other products and services that take a hit during a crisis." ($1=68.50 taka) (Additional reporting by Serajul Islam Quadir in DHAKA; Editing by Bill Tarrant)