17 November, 2009
Shark Repellent
New rules may encourage banks to get into microfinance to help keep the poor out of the clutches of loan sharks.
Nov 16, 2009
Those little pieces of paper pasted on power poles around the city mean nothing to most people who have bank accounts and can get credit. But for many others who have no regular income and collateral and are desperate for a financial lifeline, the notes can connect them to underground lenders that are their beacons of hope.
We believe there are business models that can allow banks to charge high interest rates and manage risks - DR BANDID NIJATHAWORN Deputy governor, Bank of Thailand
Loan sharks are easy to fund but hard to repay. Interest may end up being two or three times the principal, not counting stiff penalties for missed payments. But as banks overlook them, the poor have no other choices.
It is estimated that around 7 million people are shut out from both banks and existing microcredit institutions, despite government attempts to improve grassroots finance. The village fund programme introduced eight years ago offered one million baht apiece to nearly 8,000 communities. But each programme accepted just 50 borrowers of up to 20,000 baht each.
"Once the money was allocated, the fund closed to new members, despite the fact that some villages contained 2,000 to 3,000 people. The funds later sought to merge with village savings entities to embrace new members," said Natee Klipthong, secretary-general of the National Village Fund. He said the total credit pool of the funds now stood at 130 billion baht.
The Government Savings Bank also lends to small entrepreneurs such as vendors or motorcycle taxi drivers. But it assesses their cash flow strictly so not many people qualify.
Many villages have set up thrift funds that pool savings for members to borrow. Members then allocate part of the return as a dividend and welfare fund for the community. But such co-operation cannot be found everywhere.
With the lack of legal and efficient institutions to lend to the poor, such as Grameen Bank in Bangladesh, underground lending continues to flourish.
The Bank of Thailand, under its new financial development framework, will push commercial banks to offer microfinance for the poor, said Bandid Nijathaworn, a deputy governor. It will ease rules to cut operating costs of microfinance operations.
The central bank requires banks to separate microfinance from other operations. It will allow them to lend to a poor individual on a joint guarantee - Grameen Bank uses this method - to compensate for lack of collateral.
Banks could hire local people to act as agents to collect data on borrowers and offer loans via grocery stores or service stations instead of opening branches. Banks will be free to set interest rates they think are appropriate.
The key problem for the poor is lack of access to credit, rather than ability to repay. Still, banks have overlooked the potential, Dr Bandid said.
"We believe there are business models that can allow banks to charge high interest rates and manage risks. In the past, people were forced to loan sharks that charged painfully high interest rates. We want to give opportunity to people to borrow and repay."
The central bank also plans to give licences to overseas banks that have microfinance expertise in the next three years, he said.
Bank executives agree an opportunity exists to reach out to the poor, even if it's not a profit-oriented business.
"We can do this as a kind of social contribution but this doesn't mean we will get nothing in return. We might get relatively lower interest rates, but the risks are minimal," said Nophadon Ruengchinda, executive vice-president of Thanachart Bank. "The borrowers may join hands to ensure that their loans won't turn sour."
Mongkol Leelatum, CEO of Thai Credit Retail Bank, says microfinance has a mass market but it calls for a different business model in which banks must be in closer touch with communities to see who has potential, and also to help them train for occupations.
"Currently, no commercial banks are ready to do it. If we really are to do it, we can," he said
Source: Bangkok Post
Nov 16, 2009
Those little pieces of paper pasted on power poles around the city mean nothing to most people who have bank accounts and can get credit. But for many others who have no regular income and collateral and are desperate for a financial lifeline, the notes can connect them to underground lenders that are their beacons of hope.
We believe there are business models that can allow banks to charge high interest rates and manage risks - DR BANDID NIJATHAWORN Deputy governor, Bank of Thailand
Loan sharks are easy to fund but hard to repay. Interest may end up being two or three times the principal, not counting stiff penalties for missed payments. But as banks overlook them, the poor have no other choices.
It is estimated that around 7 million people are shut out from both banks and existing microcredit institutions, despite government attempts to improve grassroots finance. The village fund programme introduced eight years ago offered one million baht apiece to nearly 8,000 communities. But each programme accepted just 50 borrowers of up to 20,000 baht each.
"Once the money was allocated, the fund closed to new members, despite the fact that some villages contained 2,000 to 3,000 people. The funds later sought to merge with village savings entities to embrace new members," said Natee Klipthong, secretary-general of the National Village Fund. He said the total credit pool of the funds now stood at 130 billion baht.
The Government Savings Bank also lends to small entrepreneurs such as vendors or motorcycle taxi drivers. But it assesses their cash flow strictly so not many people qualify.
Many villages have set up thrift funds that pool savings for members to borrow. Members then allocate part of the return as a dividend and welfare fund for the community. But such co-operation cannot be found everywhere.
With the lack of legal and efficient institutions to lend to the poor, such as Grameen Bank in Bangladesh, underground lending continues to flourish.
The Bank of Thailand, under its new financial development framework, will push commercial banks to offer microfinance for the poor, said Bandid Nijathaworn, a deputy governor. It will ease rules to cut operating costs of microfinance operations.
The central bank requires banks to separate microfinance from other operations. It will allow them to lend to a poor individual on a joint guarantee - Grameen Bank uses this method - to compensate for lack of collateral.
Banks could hire local people to act as agents to collect data on borrowers and offer loans via grocery stores or service stations instead of opening branches. Banks will be free to set interest rates they think are appropriate.
The key problem for the poor is lack of access to credit, rather than ability to repay. Still, banks have overlooked the potential, Dr Bandid said.
"We believe there are business models that can allow banks to charge high interest rates and manage risks. In the past, people were forced to loan sharks that charged painfully high interest rates. We want to give opportunity to people to borrow and repay."
The central bank also plans to give licences to overseas banks that have microfinance expertise in the next three years, he said.
Bank executives agree an opportunity exists to reach out to the poor, even if it's not a profit-oriented business.
"We can do this as a kind of social contribution but this doesn't mean we will get nothing in return. We might get relatively lower interest rates, but the risks are minimal," said Nophadon Ruengchinda, executive vice-president of Thanachart Bank. "The borrowers may join hands to ensure that their loans won't turn sour."
Mongkol Leelatum, CEO of Thai Credit Retail Bank, says microfinance has a mass market but it calls for a different business model in which banks must be in closer touch with communities to see who has potential, and also to help them train for occupations.
"Currently, no commercial banks are ready to do it. If we really are to do it, we can," he said
Source: Bangkok Post
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