Sunday, November 27, 2011

Negative interest rate for microloans

This announcement by the Andhra Pradesh state government is certain to be another defining moment in the history of competitive populism in India, one that is certain to be emulated by atleast a few other states.

"The members of Self Help Groups in the Andhra Pradesh will get interest-free loans up to Rs 5 lakh from January 1... However, women would be eligible for interest waiver only if they ensure prompt repayment. As banks were now charging 14 per cent interest on loans to self help groups, the interest-free loans would cause a financial burden of Rs 1,400 crore on the State Government... To cater to the micro credit requirement, the government has set up a cooperative credit society under the name 'Stree Nidhi' with an initial corpus of Rs 1,054 crore."

Andhra Pradesh has an SHG bank linkage lending target of Rs 10000 Cr this year, nearly half the national target of Rs 22000 Cr. Of this Rs 10000 Cr, Rs 9000 Cr is in rural areas while the rest is for SHGs in urban areas. The state has 1.11 Cr women in SHGs.

Given the nearly 10% rate of inflation, the state government would actually be lending at minus 10% to these SHGs. It would form the most generous bank-lending program in scale anywhere (possibly anytime) in the world.

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