It’s actually a boon to moneylenders . For two decades, microfinance institutions (MFIs) have spread fast in Andhra Pradesh, reaching millions of poor women and filling the space once dominated by moneylenders. But last week, the state government issued an ordinance that temporarily shuts down and permanently maims MFIs in the state. This also threatens to maim MFIs across India, since equity investors and bankers will be reluctant to finance a sector with such political risks.
The AP government says it is protecting borrowers from coercive loan recovery by MFIs that reportedly has caused 30 suicides. Its not-so-hidden agenda is to give the government’s own microfinance scheme — through self help groups (SHGs) — a lending monopoly , eliminating MFI rivals. The preamble of the ordinance clearly says that MFIs are a threat to SHGs and must be quashed.
The government is supposed to be a referee. But in AP, the referee is also a big player and it wins by disqualifying rivals. The state alone cannot provide enough inclusive finance, so villagers will be driven back to moneylenders. Money lending thugs posing as MFIs have apparently caused some suicides.
We need a regulatory regime that checks malpractices while encouraging the positive aspects of microfinance. But local politicians don’t want to empower people through independent access to finance: they prefer patronage networks that can be used as vote banks. Government-driven SHGs can serve that purpose, but not MFIs.
Of the 30 reported suicides, 17 were borrowers from SKS, the biggest MFI. SKS says that none of the 17 was a defaulter or in arrears, so their deaths could not be due to microfinance. The authorities should look at all possible causes. Right now, MFIs have been branded as killers without conclusive evidence.
Many MFI agents have been arrested. Arrests were feared of the most distinguished MFI stalwarts like Vikram Akula of SKS and Vijay Mahajan of Basix, who have for years won national and international awards for their pioneering social work. The high court has fortunately stopped this.
Among millions of borrowers, there will always be some looking for any excuse to default. The ordinance provides them a readymade route. Even complaints of having been insulted or annoyed are, under the ordinance, enough to put MFI officials in jail.
The ordinance halts all MFI operations until they register with district authorities, which MFIs fear will take weeks. The ordinance also forbids any MFI to lend to a member of an SHG without first getting a no-objection certificate.
The MFI model depends critically on the discipline of weekly meetings with borrowers, for loan disbursements and repayments. The ordinance stops all weekly meetings till the rural administration gears itself to register all MFIs, and a delay of weeks can destroy the entire loan discipline. Some politicians will be happy to encourage default (as in loan melas) and kill MFIs.
But that will be an appalling loss for India. A globally acclaimed industry that employs thousands and benefits millions is at risk. New Delhi should intervene to amend the most noxious clauses of the AP ordinance.
Most MFIs started as NGOs, as did Nobel Prize winner Mohammed Yunus. But NGOs had limited reach, being dependent on donor finance. So, many switched to a forprofit model, which enabled them to raise money for expansion from equity investors and banks. Such MFIs expanded hugely, reaching not just thousands but millions.
But success bred problems. Some MFIs expanded at over 100% per year, affecting quality. In some areas, multiple MFIs gave multiple loans to the same women’s groups, leading to excessive and unviable debts. Some field agents reportedly used force to recover loans, although managements prohibited this. In some areas, moneylenders posed as MFIs, and used muscle for loan recovery.
Award-winning heads of MFIs are outraged at being treated like criminals and want to sue for defamation. But the political threat can only be met with people power. MFIs should organize thousands of women borrowers to demonstrate in their favour. This will convince the public that MFIs are benefactors, not exploiters. Once politicians and bureaucrats are surrounded by thousands of women demonstrators, their hostility to MFIs will ebb or evaporate.
Organizing women for this will take effort, time, and a radically new training manual. The first step might be to mobilize borrowers for annual awards — for the best borrowing group, most successful entrepreneur — and demonstrating in support. Later, the same organizational skills can be used to demonstrate against political attacks on MFIs. So, apart from canvassing support from New Delhi and the RBI, MFIs must immediately start harnessing woman power. The question remains whether they will survive long enough to achieve this.
(Disclosure: The author has invested in three MFIs)