tag:blogger.com,1999:blog-5043138489010794057.post5724083229028858685..comments2024-03-27T15:57:09.192+05:30Comments on Urbanomics: MFIs and their higher interest ratesUrbanomicshttp://www.blogger.com/profile/16956198290294771298noreply@blogger.comBlogger7125tag:blogger.com,1999:blog-5043138489010794057.post-62616349836723188952010-09-07T19:51:38.071+05:302010-09-07T19:51:38.071+05:30Rajesh, my argument was that MFIs are inherently p...Rajesh, my argument was that MFIs are inherently prone to charging higher interest rates (or atleast the larger MFIs). <br /><br />in view of this, it may not be advisable to have a strategy that focuses on promoting MFIs while neglecting on the penetration of conventional banking. both are not substitutes. in fact, i will argue that the former would form the major share of the credit market, with MFIs servicing a smaller portion.Urbanomicshttps://www.blogger.com/profile/16956198290294771298noreply@blogger.comtag:blogger.com,1999:blog-5043138489010794057.post-70244815448326684222010-09-07T19:46:51.913+05:302010-09-07T19:46:51.913+05:30thanks Mr Gaddeswarup for your point. i fully agre...thanks Mr Gaddeswarup for your point. i fully agree with the decentralized (should we say franchise) model u suggest. in fact, by keeping the size and area of operation small, the administration costs can be brought down significantly, thereby enabling the MFIs to lend even smaller sums at lower rates. <br /><br />the model of small village-level franchises (adequately supervised) working under the broad umbrella of a central organization providing capacity building and re-financing support is excellent. but the critical thing here would be the transaction costs incurred in co-ordinating between these rural "franchises".Urbanomicshttps://www.blogger.com/profile/16956198290294771298noreply@blogger.comtag:blogger.com,1999:blog-5043138489010794057.post-88321539326285111332010-09-07T19:40:15.154+05:302010-09-07T19:40:15.154+05:30sir, administrative costs are surely one of the la...sir, administrative costs are surely one of the largest contributors to the high interest rates. i am inclined to think it is the largest contributor. in any case, the small size of micro loans means that interest rates will have an inherent upward bias.<br /><br />interest rates are a sum of the cost of capital, administration costs, risk premium, and a reasonable rate of return. in case of micro-loans, since the loan amounts are small, the per-capita administration costs are much higher than that for the regular borrowers. often, the reduced risk premiums (due to say, group collateral) are more than off-set by the higher per-capita admin costs. <br /><br />the nature of micro-loan borrowers means that a self-feeding loop of higher rates crowding-out better borrowers, thereby forcing rates up higher and also lowering loan sizes even more, gets generated. <br /><br />i completely agree with you that moneylenders are the most important source of credit for the poor, even in urban areas. therefore any attempts to throttle them, without having in place alternative sources of channeling credit, is likely to rebound badly and adversely affect the poor. and their dominant presence, as the hyderabad figures suggest, means that any attempt to drive them out is doomed to fail.Urbanomicshttps://www.blogger.com/profile/16956198290294771298noreply@blogger.comtag:blogger.com,1999:blog-5043138489010794057.post-11938520375118973092010-09-07T18:32:46.019+05:302010-09-07T18:32:46.019+05:30May be for the poor who is in need of immediate ca...May be for the poor who is in need of immediate cash,for example a health emergency, it does not matter as to what is the interest rate.... but what matters is the availability of cash for immediate use.<br /><br />Is it only the poor and slum dwellers who face high interest charges? I think every credit card user runs the risk of incurring a very high interest rate.... and yet everyone loves to hold one. It is for the simple reason that having a credit card gives a feel of security in case of emergency.<br />In the case of credit cards, there is not much administrative charges, it is just the high rate of default that ends up as high interest charges. In a nutshell, for someone's default or faulty identification of customers, every card holder is asked to pay a higher interest. <br />It is a fact that very few % of credit card users withdraw cash through credit cards as the interest rates are ex-orbitant for cash drawl.so, when it comes to credit card users not much hue and cry on high interest rate is there since by virtue of awareness in usage of credit cards that makes a bonafide user is more careful about when and for what to use a card and if we can bring that awareness among the poor and who access MFI's on when to fall back on MFI's then may be the default rate will come down and administrative costs might reduce.Rajeshhttps://www.blogger.com/profile/10029875438088623204noreply@blogger.comtag:blogger.com,1999:blog-5043138489010794057.post-10030877115874150962010-09-07T14:05:08.357+05:302010-09-07T14:05:08.357+05:30Perhaps one can try small organizations run by vol...Perhaps one can try small organizations run by volunteers working part time (either for free or for a small sums), in small areas they know. And a few such can come under the umbrella of a cenral office which confines itself giving training and supplying money. I have seen a small organization working in a village where only one person is paid for working part time. The total amount is small, about 3 lakhs and served 70-80 people so far, and it has been running for four years without any defaults and the interest rate is one percent a month calculated on the amount left after each month.gaddeswaruphttps://www.blogger.com/profile/16509075029154476375noreply@blogger.comtag:blogger.com,1999:blog-5043138489010794057.post-71905657216990167652010-09-07T09:23:58.680+05:302010-09-07T09:23:58.680+05:30I reproduce some more material from the same study...I reproduce some more material from the same study below.<br /><br />"but, in a survey of a 120 slums we conducted in Hyderabad, only 6 percent had a bank loan. On the other hand, 68 percent had loans (obtained from informal sources, such as moneylenders), and the average outstanding loan balance conditional on having a loan was over $1,000. The average interest rate they were paying on these loans was 3.85 percent per month or about 57 percent per year. "<br /><br />The numbers seem to suggest that the informal sector is still very dominant in meeting the credit needs of the poor. In light of this, attempts by governments of the day to throttle them, is likely to hit the poor more than the "usurious" lenders.sai prasadnoreply@blogger.comtag:blogger.com,1999:blog-5043138489010794057.post-80084734612073342852010-09-07T09:19:21.688+05:302010-09-07T09:19:21.688+05:30A question that arises is whether the authors '...A question that arises is whether the authors 'Abhijit V. Banerjee and Esther Duflo' seek to name rising administrative costs as the only, or even the most important reason for MFIs to lend at higher interest rates.<br />Traditional banking and lending wisom have always held that risk is directly related to interest rates and a riskier investment causes banks to charge a higher interest rate.<br />After reading the article i have not been able to understand the chain of reasoning that leads to the conclusion mentioned in my first para.Sai Prasadnoreply@blogger.com