Killing microfinance will help moneylenders

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)

7 thoughts on “Killing microfinance will help moneylenders”

  1. Sudhir Panwar,Kisan Jagriti Manch

    Rural poors are for exploitation,it is immaterial who is on the other side whether it is state private,private cum NGO or NGO.The Central Government wake up from slumber when the partners(Directors) from SKS cried foul against each other and declared for some regulatory legislation in the coming Lok Sabha session.But why it was running without proper framework of rules till now,one possible answer may be because the sufferer were from the disadvantaged section.I failed to understand the difference between different class of money lenders if interest rates and coercive methodds of recovery are similar.Thanks to A.P Government and High Court as they tried to discipline the financial activities of a group of persons whose sole aim was profit and more profit.I could not understand the reasons of sympathy of the person like SA Swaminathan for law breakers whether they are award winner or not.In recent past some cofusing definitions are added ,how a person who took small ammount of loan at 40% interest rate qualifies for the term ‘economic inclusion’ .The advice of swami to women may work but they are intelligent enough in the identification of issues for struggle.

  2. The governments actions are undeniably an effort to discredit private players in an effort to boost the SHG model in the state.

    What of for-profit MFIs? Somehow the garb of victimhood seems ill-fitting. If we are to take Akula’s statement at face value, then 17 of the 30 suicides were caused by factors other than micro-credit debt. What of the 13 others? Let’s lay this question aside for a moment and look at the way that the microfinance model works. The essense lies in the concept of group liability, the beauty and some might say deviousness of the scheme is breathtaking. With any credit scheme, the hardest part is screening and monitoring clients. When you lend to a group, the group is jointly liable, and thereby takes on the responsibility of monitoring the loans internally. This utilises the spy-on-your-neighbour brand of social capital. Highly effective, which explains the high rates of repayment despite the fact that close to 70%(estimated) of loans are used for consumption, or non-productive purposes. That then begs the question, what can the microfinance agent do to drive you to suicide that your friends and neighbours can’t or won’t do? Money-lenders have long been the boogie-man in the rural economy, but mass suicide has not been their forte, their means have been subtler. Interlinked markets and a position of authority have allowed them the ability to extract payment in kind. According to the data we collected in 6 villages across three districts in 2006, the average family had about 3 active loans at any given time, with 20% of the sample reporting upto 5. In 30% of these cases, the households did not believe they would ever be able to repay the entire principal owed. Debt is not a new phenomenon. So how does one explain these wasteful deaths?

  3. I like to add, remarkably, despite two decades of operations, if statistics are to be believed, these MFIs only reach just 20 million people in the country, a good proportionate of them, multiple counted. Yet, they succeed in gaining an attention, so disproportionate to this minuscule reach.

    So the argument that banning MFIs promoting moneylenders do not cut ice.

    Secondly, since MFI borrowers tend to become more poorer and indebted, banning MFIs might actually reduce their dependence on moneylenders.

    Thirdly, though you draw a distinction between the MFI and moneylender, not many in this country do. Though MFI was originally conceived as a strategy to reduce the influence of moneylenders, what we got is an animal farm situation – not able to distinguish between pigs and humans.

  4. there should be an escape route for a person who is just not able to repay the multiple loans he has taken,other than suicide or facing constant harassment;while a big business can be declared “sick” why not a poor individual?the microfinance institutions should offer equity rather than loan and share the profits;

  5. I am usually a silent reader of articles and more importantly the comments made. In this case I could not resist participating.

    In the first commentary, Sudhir & Panwar do not seem to understand the way Micro Finance works. If it is just the 40% rate which bothers them, then I would suggest they take a look at the Credit Card interest rates in India (average of 34% PA), but credit cards do serve a function and there are whole communities which understand the implication but are willing to use CC’s as a financial tool. Similarly in the case of MFI’s , while the interest rate seems really high when computed at the annual rate, the way the payments are structured are such that they are met comfortably.
    Now the question still arises, why still such high interest rates? That is because of high cost of operations which the MFI’s have to take on.
    There is a confusion about the difference between Money Lenders and Micro-Finance institutions. While MFI’s are money lenders, money lenders are not MFI’s. MFI’s are focussed on lending and managing funds for productive activities, also they help form support groups for the borrower to be able not only to participate in a group towards something productive, but also this way the group ensures that the energies created by such finance are not dissipated in non-productive activities.
    The poor unfortunately, today are not included in the financial system and simply dont have any way of raising funds from a conventional source. Hence unconventional methods are required.
    YES, there are rouge’s in the garb of MFI’s who do squeeze, abuse & tar the MFI communities name, but amputating a leg just because one part is itching has never been a solution.
    Many many times more people have benefited from MFI’s than those harmed. MFI’s have the potential of uplifting a whole section of society and making them independant, and that is not a small thing.
    There NEEDS to be regulation, but not the way it is happening. It is absolutely clear that Politics and a Vote-bank capturing subversion is happening right now.
    Politicians are very clearly afraid that MFI’s may improve the lot of common man in rural area and hence are trying funny money idea of saying that the government run programmes would be the ones disbursing the much required funds in the lower strata. We all know how many times governments in India have been succesful in such programmes.. corruption, blackmailing, politics et al are just waiting to happen along with the next 1000 + crore of NPA’s thus created.
    This whole subversion is totally covered up by sensationalising and sloganeering of “40% usurious rate”. What a colossal tragedy
    Since the AP govt is a congress govt, the center will not take an immediate stance (for the fear of creating rift). The commitee formed will come out with recomendations in 3 months, meanwhile MFI’s will be conveniently killed (since collections are not happening, working capital cannot be managed and so bank loans of the MFI’s will not be honoured leading to probable bankruptcy). The poor of rural areas will be sent back to darkness with no hopes of redemption and no chance of upliftment. Every 5 years, the local politician will come in and make promises and break promises (now that he knows no upliftment is anyway possible without his intervention, no poor dare question him)… sigh and the saga will continue…

    Disclaimer: I have not invested in any of the MFI’s, do not work with MFI’s & don’t have any dependancy on MFI’s. Am just another educated common man who thinks he is keenly observing the events unfold

  6. Yes your article is apt. Unfortunately the mainstream media is acting as an agent of these vested interests who want to kill the MFIs. Moneylenders collect not less than 5% per month (i.e., min. 60% per annum). I have not seen a single report of this in any of the mainstream newpapers. The ultimate victims are poor people.

  7. CMA.Devarajan Swaminathan

    MFI’s should maintain cost accounting records and subject that to cost audit, to substantiate their claim of high cost of operations being the main reason for high interest rates.

    It will also throw some light on the efficiency and performance areas too.

    Can the MFI;s start doing that voluntarily.

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