It was at 36 per cent rate of interest that SKS began lending, reminisces Vikram Akula in ‘A Fistful of Rice’ (Harvard). Conceding that it sounds incredibly high compared to Western loan rates of 10 to 12 per cent, he reasons that there was no other option, given the very different circumstances surrounding loans to the poor.
Foremost in the list of differences is the cost of servicing. “In the West, your banker doesn’t come to you each week to collect your loan payment face-to-face. But SKS loan officers travelled to every village, every week, to sit with the women and collect their payments.”
Second, at say 10 per cent interest, it would not be financially feasible to even cover the cost of fuel to get the loan officer to the villages, given the average size of the loans, adds Akula. To those who wonder if it was ever possible for a borrower to run a business despite paying 36 per cent interest, it can be enlightening to learn from him that the average profit margin of the micro-business borrowers was 50 per cent!
The alternative source of financing, viz. the moneylender, was at an exorbitant rate of 4 per cent a month, and at times as much as 10 per cent, working out to an annual percentage rate of 48 to 120 per cent, the author notes. “At such rates, anyone who fell behind on a payment could never expect to catch up – even just a couple of months in, your interest burden would already be so high that you’d simply enter an endless debt spiral.”