Microfin In Macro Mess?

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Corporate entry threatens the very idea on which microfinance institutions were set up. How will the dispossessed be affected, asks Manav Chopra

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Women are microfinance firms’ favourite customers

WHAT began as a service aimed at empowering marginalised people like Kamlesh from East Delhi is being increasingly eyed by the corporates. If this happens, the entire microfinance (MF) concept could be turned on its head.

Just three years back, this middleaged housewife and mother of three was struggling to get by selling garlands at the traffic crossing — until a microfinance institution (MFI) came to her rescue.

Kamlesh was contacted by Basics, a Hyderabad-based organisation that has a branch in East Delhi. It had loaned her Rs 10,000 to rent a shop. Today she earns Rs 5,000 a month — nine times more than what she earned before she got that loan from Basics.

But the microfinance romance could soon start fading away unless the regulator, the Reserve Bank of India (RBI), redirects the MFs’ waning focus towards its central mission to serve the poor. They also need to provide their mostly illiterate and less aware clientele with healthcare and insurance services. Till these institutions are reminded of their original mission, success stories like Kamlesh’s could in time become things of the past.

Sadly, though, very few companies have bothered to keep their social mission alive. Corporate entry is slowly invading this last bastion of the poor as well. For though it is true that the MFIs are not charities, they ought not to be allowed to push their private agendas at the behest of capital hungry businesses that are driven by capital sources. And this is just what is happening.

What’s triggering this debate? SKS Microfinace Ltd — a major player with investors like private equity firm Sequoia Capital — plans an IPO this year. Although the world has already witnessed the controversial Compartamos IPO in Mexico that reaped huge profits for its investors, this is the first IPO of a socially motivated institution in India, and, similarly, not many in the sector are happy about the move, arguing SKS is trying to overreach. SKS officials refuse to comment on what they call baseless fears. But critics still feel the move could cause problems, ostensibly because the sector is still young and SKS Microfinance’s investors enriching themselves will send the wrong signals to the RBI and the political class, for whom the vote counts as much as these poor people need the money.

Essentially, what most plagues the industry is the serious shortage of ‘social’ capital — meaning capital from socially motivated, patient, investors who put the microfinance mission above lucre. Is this possible?

What’s needed therefore is some sort of balance that will ensure that their central mission isn’t overtaken by the profit motive. It is because this has not happened so far that Kamlesh’s three children eat so well today and go to good schools.

To date, 23 million impoverished households have benefited from microfinance services, a concept that really kick-started in 2004 with total disbursements of $80 million. By last year’s end, MFIs had loaned a massive $2.5 billion.

MFIs are very different from regional banks and self-help groups (SHGs). What the latter failed to achieve in several decades, MFIs have managed in the space of just six years. They have done what no bank has so far succeeded in doing —making the rural poor bankable.

Microfinance is the brainchild of Muhammad Yunus who found that very small loans could make a disproportionate difference in the lives of the poorest of the poor. In 1983, he founded the Grameen Bank. By July 2007 it had issued $6.38 billion to 7.4 million borrowers.

It’s not, of course, as though we never had rural banking till Yunus launched the concept. In India there is a bank within every five kilometres of 99 percent of the population. But until the MFIs arrived, 135 million rural households were still unbanked and moneylender credit stood at around 40 percent.

Issues like high delivery costs, lack of collateral, and the failure to raise awareness among the dispossessed has arguably been the biggest challenge that microfinance has faced thus far.

MFI loans average Rs 10,000 — too small for commercial banks to service this fringe sector. And although SHGs have indeed made a difference, their growth has been too tardy.

SKS Microfinance plans an IPO this year. But critics say the move goes against the concept of small lending

THE REAL beauty of microfinance in a country like India is that the client is saved of most of the constraints faced by regional banks and SHGs. The MFIs are inexpensive to run, do not require collateral from the borrowers, and there is a system here that makes sure that the loans are repaid. The microfinance system boasts of 99 percent repayment rates — far higher than conventional bank repayment rates. The microfinanciers painstakingly screen their clients, picking only those who are already running small businesses. They also take care to educate clients about their financial products and planning, and have regular meetings and repayment schedules. Interestingly, financiers prefer women above men, apparently because they are so much more prudent in making investments. And as there are so few conventional banks and SHGs in these destitute regions the MFIs have had a large impact.

The RBI says some microfinance institutions are not too different from greedy moneylenders

Microfinance does have its critics, of course — many of whom find the 25 percent interest the microfinanciers charge unacceptable. But a closer look will tell you that the costs incurred fully justify the rates. They borrow from banks at an average rate of 12 percent. The 13 percent difference, the operational expense — real estate, manpower, delivery costs — are all squeezed in so they stay viable. Explains Kartik Desai, Vice-President of Lok Capital: “So this is the key to understanding why banks so miserably fail in servicing the poorer sections. Were the banks to enter this segment, they would charge interest of up to 50 percent, about the same that moneylenders charge.” Moneylenders charge ridiculous rates — in many cases 100 percent interest — and, besides, use coercive methods.

The product is also criticised for the multiple lending that many of them engage in where their presence is concentrated — states like Karnataka, Andhra Pradesh, Tamil Nadu and Orissa where the terrain is flat and have high population density. This makes it easier for the MFIs to identify cohesive groups, have regular weekly meetings and keep delivery costs low. Equally important, the relatively lower crime rates in these regions allow loan officers to move around without risk of theft or battery. Female literacy and fewer gender inequalities make it easier for women to get loans. MFIs in crowded areas often tend to encroach into the others’ territories because in these the people are already familiarised with the service. Accordingly, many of them end up taking several loans from different MFIs and eventually fail to repay.

The MFIs have seen phenomenal growth — nearly 80 percent in the last six years. But the pragmatists see no more reason to rejoice and believe that this growth in the last five years is unsustainable in the long haul. To continue growing, they say, the MFIs will, among other things, need to diversify their product, create healthy infrastructure and identify virgin areas.

The government and RBI are increasingly concerned about the direction many segments of the industry are slowly taking. “The most serious criticism comes from the RBI, which recently found that the MFIs — though great to start with — were currently not doing much better than oppressive moneylenders. The RBI is most unhappy with the focus of microfinance companies on growth and sees no great difference between MFI and DSA (direct sales agent) loans. The apex bank would be happy if the interest rates were lower and the service quality and transparency higher. There is, moreover, very little by way of creating awareness” says Vishal Mehta, co-founder of Lok Capital

No wonder different MFIs are now moving in different directions. Some are addressing the RBI’s concerns and restoring their focus on customer problems. Basics has already moved from providing microloans to more nuanced products for the poor, like business consultancy and micro-insurance. And Spandana, another MFI, has just begun providing maternity care and is looking to innovate further.

As long as the checks and balances are in place, the market will remain hassle- free, especially for those which it is actually meant.

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