There was a time when lending of money to the poor was not considered profitable. The poor would have to suffer the wrath of many money lenders who would charge them unscrupulous interest rates. However, all of this is about to change in the future. Many banks in India are seriously entering the Micro-finance business. Following the lead of MFIs (micro finance institutions) and other NBFCs, the banks have realized the importance of the micro finance industry.

Parimala of Saligramam is part of a SHG (self-help group) that engages in glass and emboss painting. Her SHG named Lucky was recently given a second loan of Rs 3 lakh after the group successfully repaid its first Rs 1 lakh loan it had taken from the bank in EMIs of Rs 10,600 spread over 10 months. Nevertheless, Parimala is upset because while the group had asked for a loan of Rs 5 lakh, the bank lent her only Rs 3 lakh.

Of late, banks have discovered that lending to the poor is indeed profitable. Banks either team up with MFIs and other NGOs who help in identifying and grouping the members into various SHGs who are then given finance or they directly lend to the borrowers through their micro finance branches. Interest charged on such loans is usually at sub prime lending rates. In the first phase, the average loan size is usually below Rs 10,000. Also, banks normally encourage SHGs to first open a savings bank account before giving credit.

"We initially observe the saving patterns of the group, how they save, lend and distribute money amongst themselves before giving them credit,” says Manohara Raj, senior vice-president, HDFC Bank

There are many banks now which have exclusive branches that deal only in micro finance. Indian Bank has added 11 more micro finance branches to its network in India, in addition to its Chetpet branch in Chennai where it started its microfinance initiatives from in 2005.

This year, the bank plans to open 13 micro finance branches. "It's an established fact that by being part of self help group, women are able to carry out economic activity more effectively. Also, they need not borrow money at usurious rates of interest from money lender any longer,” says MS Sundara Rajan, CMD, Indian Bank.

Also entering the micro finance business very strongly is HDFC Bank. It has four micro finance branches located in interiors of Tamil Nadu. Nearly 15% of bank's micro finance businesses are generated from four branches. It is also looking at opening a few more micro finance branches this year.