Sa-Dhan Newsletter Volume 4 Issue 2

Community Based Organisations

also cites an example in Vijaywada where private deposit

opment in business-like, professional and financially sustain-

takers charge slum dwellers for keeping deposits--deposi-

able manner. The study says urban poor, unlike the rural poor,

tors get a negative rate of interest on savings. The Bangalore-

are not found in homogeneous groups and, therefore, the

based Paradigm group estimates that 93.5 per cent of credit

strategy for urban poor should be different. It also suggests

needs for the urban poor is met from informal sector.

networking with large donor organisations or international

microcredit network.

The study admits that the rate of interest charged by NGOs

and MFIs are higher than the formal banking sector. It is

According to estimates of the Planning Commission, the total

primarily due to the transaction cost and lower volume of

number of urban poor in 1993-94 is 7.63 crore or 32 per

funds. But the study argues that the rate of interest being

cent of the total urban population. There are, however, varying

charged by the NGOs and MFIs is definitely much lower than

figures of urban populations living in slums. According to

those charged  by private moneylenders, pawnbrokers and

the National Buildings Organisation, 18.75 per cent of the

others.

urban population lived in slums in 1981. The 1983 report

of the Planning Commission's taskforce on housing and

In fact, Ms Supriti, former faculty member, National Law

urban development offered two estimates of slum population:

School Of India University and Mr Ramesh Ramanathan of

at 20 per cent and 26 per cent. The 2001 Census report

Ramanathan Foundation say "The RBI's regulation of interest

estimated total slum population at over 4.60 crore.

rates for loans below Rs 2,00,000 and for loans below Rs

25,000 extended by commercial banks should be removed.

In this context, the study conducted by the Ramanathan

These ceilings on interest rates on small loans discourage

Foundation says that all slum dwellers are not poor and cites

banks to lend to the urban informal sector. The differential

an example stating that some inhabitants of Dharavi in

rate of interest introduced in 1997 for urban poverty

Mumbai can be categorised as lower--and middle-income

alleviation scheme has served as a disincentive to commercial

families. The study regrets that there has been no realistic

banks to lend to urban informal sector and has affected the

estimate of urban poor in the country.

profitability of banks."

The study also suggests that credit needs are not for all urban

The Ramanathan Foundation study does not suggest any

poor. Credit should be extended to only those poor who have

remedy for making interest rates at par with those charged

the ability to utilise it and help themselves to come out of

by banks for purchase of car and consumer durables by the

poverty. There is a `culture of poverty' among some urban

middle and rich classes. Here the Union agriculture minister,

poor, the study notes and says that these people need enough

Ajit Singh, has a suggestion. Regarding rural finance by the

capacity building to make them fit for utilising credit. The

cooperative sector, he says: "Nabard should directly finance

study also suggests loans to small enterprises which can help

primary agriculture cooperatives (PACs) at grassroots level

opening up of few employment opportunities for the poor.

to lend to farmers, instead of routing finances through state

and district level cooperative banks which add up to the

Quoting the Economic Census 1998, it says that 80.4 per

transaction costs." Hopefully, on these lines the Ramanathan

cent of 3.40 enterprises in both rural and urban areas are

Foundation study should have suggested direct refinance to

self-financing. Banks and financial institutions directly fi-

the grassroot SHGs for reducing transaction costs!

nanced only 2.8 per cent of enterprises while 1.8 per cent

had received finance linked to poverty alleviation programmes.

The study quotes some estimates of credit needs for urban

Thus, only 4.7 per cent of all enterprises in both rural and

poor experts. According to McGuire, 2.5 crore poor house-

urban areas received any form of formal finance. The Nayak

holds in India require Rs 15,000 crore over nine years still

Committee had earlier estimated that the tiny sector (having

2005.

investments up to Rs 5 lakh) received only 2.7 per cent of

its working capital needs from formal banking sector.

According to Vijay Mahajan and G Nagasri, credit demand

Obviously, the proportion for the micro/informal sector would

for urban poor is Rs 9,000 per year per household. The

be even smaller.

Paradigm group estimates credit demand of Rs 10,071 per

household per year. These figures give a range of Rs 13,740

The study, in this context, points to other ways from which

crore to Rs 15,360 crore annual credit demand for the urban

the urban poor source credit like borrowing from friends and

poor, says the study.

relatives, rotation of savings and credit associations, saving

clubs, moneylenders, chit funds and pawnbrokers. It says that

There is, therefore, a strong case for an apex bank for urban

in this process, the average rate of interest on borrowings

development.

is as high as about 5 to 10 percent per month. The study

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