MICROCAPITAL STORY: Microfinance Institutions SKS, Ujjivan and Bandhan Report Growth as Indian Inflation Rises to All Time Highs

As first reported in an Economic Times article on inflation and microfinance in India, a number of Indian microfinance institutions appear on track to experience growth of over 100% in 2008, even as the rest of the Indian economy suffers from rising inflation. Analysts predict that Indian inflation will remain in the double-digits until at least December and current rates are at a 13-year high. India’s current inflation (11.05% as of June 2008) has been caused mainly by the continued rise in oil prices coupled with the weakening rupee. Cost of imports has become more expensive and the government is expected to continue to raise fuel prices.

The Indian central Bank, Reserve Bank of India (RBI), has raised its repo rate (the interest rate at which banks can borrow rupees from the RBI) to 8.50%, the highest it has been since March of 2002. While major Indian banks have begun to raise lending rates in response to this increase, most of India’s larger microfinance institutions are not reporting plans to increase their rates.

The rise in prices is having its effect on borrowers, even at the micro-credit level and this is why India’s microfinance institutions are experiencing such growth. Participants in the credit programs are facing higher costs of input and thus require greater amounts of capital to run their businesses. Economists note that inflation can have different impacts on residents of urban and rural areas, with urban areas more dependent on the market for increasingly expensive essentials while rural areas are more self-sustainable. In any case, though inflation will be cutting into the bottom-line for everyone in India, Ujjivan’s Samit Ghosh reports that default rates among micro-credit borrowers have not yet risen.

Additional Resources:

Economic Times

http://economictimes.indiatimes.com/News/Economy/Indicators/Micro-credit_booms_as_poor_look_to_combat_inflation/articleshow/3238766.cms

Forbes

http://www.forbes.com/2008/06/20/inflation-india-fuel-markets-equity-cx_vr_0620markets07.html

Reuters

http://in.reuters.com/article/economicNews/idINIndia-34476120080711

http://www.reuters.com/article/rbssConsumerFinancialServices/idUSBOM31974320080630

Investopedia.com

http://www.investopedia.com/terms/r/repurchaseagreement.asp