Microcredit changes lives in India

Microcredit can open the door to poverty alleviation Keystone

A few hundred kilometres east of Hyderabad is a hub of micro-entrepreneurial activity, where poor people have taken small loans to set up their own businesses.

swissinfo’s Faryal Mirza went to the Indian state of Andhra Pradesh to meet families whose lives have been changed by Basix, a Swiss-backed organisation.

The drive along Highway 9 is smooth with tufted hills lining the view and terracotta boulders showing through the vegetation. As we drive to Nalgonda district, we see children dressed in white, brown and orange school uniforms walking to school, waiting for buses, hair neatly combed and clothes pressed.

Every so often, herds of goats stroll by. The goat is the livestock of choice here in this semi-arid area, which is blooming thanks to an exceptionally wet monsoon.

While this year’s heavy rains paralysed Mumbai, causing deaths and destroying homes, the monsoon was a source of jubilation here – an area which normally sees little during this period.

My guide is Mr Narsaiah – first names in this part of the world are rarely used – an area manager with Basix. This institution aims to promote sustainable livelihoods within the rural population and was set up with Swiss money in 1996.

Innovation

The Swiss Agency for Development and Cooperation gave it a start-up “grant” of $2.35 million, making it one of Basix’s largest donors.

For the SDC – which went on to guide the new foundation as a dialogue partner – this seemed to be an easy decision.

“Basix is an innovator in this field,” said SDC programme officer Aniket Alam, who is based in New Delhi.

Here was a microfinance institution trying to prove that lending to the poor could be profitable and conducted as a normal business.

And so, in its mission, Basix pledges to “strive to yield a competitive rate of return to its investors so as to be able to access mainstream capital and human resources on a continuous basis”.

The concept was to use donor funds to create a base and then to borrow commercially to build on its foundations. The key was and is to have a broad collection of donors and investors to ensure funding.

The SDC encouraged it successfully to build alliances with the mainstream financial sector, enabling it to attract loans and capitals from commercial sources.

The approach seems to have paid off. Nearly a decade after it was founded, Basix services more than 10,000 villages in 25 districts in six Indian states.

It has disbursed loans or microcredit totalling nearly four billion rupees ($89.4 million) and has just under a quarter of a million microfinance customers.

The typical interest rate is 24 per cent per annum. While not low by mainstream banking standards, the institution argues that this rate allows it to be sustainable.

Cycling to success

One customer is Lingaya, the owner of Mani Cycle Stores, whom we visit in his shop. Behind him are shelves filled to the ceiling with brightly coloured packages containing bicycle spare parts.

Thanks to a microcredit of 10,000 rupees from Basix, he was able to buy the lease on his shop and stock up on supplies.

In the cycling trade for 15 years, he tells me that the loan enabled him to build up his business to the extent that he could hire an employee. He recently took out a second loan for 19,000 rupees to buy more spare parts.

Demand for tubes and tyres are high in this shopping area and, on an average day, he can make up to 1,500 rupees.

He typically charges 100 rupees for spares with a 10-rupee fitting charge. Local competition is high with 10 similar shops nearby. But, luckily for him, his shop is in the heart of the district catering for 10-15 villages with a population of 75,000.

Lingaya’s edge over his competitors, he tells me, is his years of experience – which belie his youthful exterior – and his good contacts.

“I’m the only owner who can do repairs himself, and I’m from a local village,” Lingaya says.

His second loan is repayable in 14 instalments at 1,500 rupees a month.

There is an almost unrecognisable black and white photo of the 35-year-old in the loan repayment book he shows us.

Written in Telegu, it outlines the sum he has borrowed, the repayment rates and attached to it is a schedule, which is signed by the agent when he collects his dues.

Lingaya has not done badly so far, he tells us, managing to have married off his daughter, while putting one son through school and another through college.

Spinning tales

Narsaiah then takes us to a row of one-storey houses, whitewashed and delicately decorated in yellow and blue patterns.

The front room of the Narayana family home is dominated by a large handloom. Multicoloured yarn bundles hang from hooks in the walls.

This family is in the business of dyeing and weaving yarn. They took a loan of 15,000 rupees earlier this year to buy yarn and dyes.

They supply the dyed raw material to five other handloom workers, who they pay to weave. The man of the house then takes them to buyers in Vijayawada, a booming town at the crossroads of two key routes, one going to the Indian capital, Delhi, in the north, and the other towards the east to Calcutta.

Both husband and wife are happy with the business. It has helped them not only to buy their own one-storey home but also the house next door which they rent out.

Narsaiah explains to me that the Narayanas did not fall into this trade by accident – they belong to an occupational caste of Hindus.

I ask them whether they are hoping to pass on the business to their two children. Mrs Narayana, a young women in her mid-thirties, shakes her head vigorously.

“My children should get good office jobs when they are older, where they will earn enough so we the parents no longer have to work!” she said.

swissinfo, Faryal Mirza in Nalgonda, India

Key facts

Basix aims to promote sustainable livelihoods within the rural population and was set up with Swiss money in 1996.
The Swiss Agency for Development and Cooperation gave it a start-up “grant” of $2.35 million, making it one of Basix’s largest donors.
The SDC successfully encouraged Basix to build alliances with the mainstream financial sector, enabling it to attract loans and capitals from commercial sources.
Basix provides services in more than 10,000 villages in 25 districts in six Indian states.
It offers microcredit at an annual interest rate of 24 per cent.
The current rate of repayment stands at 97.9 per cent.

In brief

Microfinance refers to loans, savings, insurance, transfer services and other financial products for low-income clients.

Microcredit is a small amount of money loaned to a client by an institution often without collateral.

There are some 500 million borrowers worldwide.

Microenterprises make up 80% of all businesses in developing nations.