Course correction for Microfinance
Microfinance has been a buzzword in the past few years and mainstream opinion of it has largely been positive. While it has been around in different forms since decades, in its current avatar, it has been championed by Muhammad Yunus who, along with his Grameen Bank, have become the face of microfinance ever since winning the Nobel Peace Prize in 2007. India too, has borrowed and adapted the concept, as an important means of rescuing people from being part of the largest poverty stricken population in the world.
But a lot has changed in the past few weeks and the current microfinance crisis in A.P. is a wake-up call to all the stakeholders in this industry. India has one of the largest and fastest growing microfinance industries and a lot is at stake. For those not familiar with the developments, a quick backgrounder: A. P. is the hub of microfinance activity in the country and Hyderabad it's 'capital' with most of the major microfinance institutions (MFIs) having their head offices in the city. It also has by far the maximum number of clients and penetration within the state. However, the state government has issued an ordinance to curb alleged excesses committed by some MFIs that are purportedly the cause of a spate of suicides amongst MFI clients. Excessive interest rates and coercive collection practices have been blamed and the ordinance grants the state power to strip any MFI its license to collect loans. This has led to MFIs being unable to collect repayments for their outstanding loans, with politicians and other vested interests promoting mass non-repayment amongst borrowers. This could destroy the admirable credit discipline that borrowers have historically shown and cripple the industry.
If you've read Muhammad Yunus' book or interviews where he talks about his inspiration and motivation for starting microlending, you'll realize that it seems like money is the only thing required by the poor. It is as if they have the means, knowledge and access to generate sufficient income and a small amount of cash is the only missing piece of the situation that has billions stuck in a poverty trap. Microfinance, by providing that sole missing element completes the picture and everyone lives happily ever after.
Or do they?
Having been engaged in doing secondary research on MFIs in the past few weeks, I've realized how little is known about the end use of the loans lent out by MFIs. All the lenders are aware that their money needs to used for income generating activities and not immediate consumption by the borrowers, so that over the long run, they are able to own and produce enough to be able to raise their standard of living. However, this is the poor and extremely poor we're talking about, for many of whom the next meal is the most pressing concern. We've seen such a scenario, though milder, play out earlier. Remember sub-prime mortgages? Runaway consumption facilitated by easy credit? Is it too hard to imagine that when access to easy credit could induce irresponsible consumption behavior by a literate middle-class, the same would not happen with an illiterate and desperately poor? There is anecdotal proof that multiple lending is present and in some areas widely prevalent and that is just inviting trouble.
In my view, the rapid growth and acceptance of microfinance as a vehicle for good is partly due to its apparent simplicity. But there are several other missing pieces of the puzzle of poverty that are being inadvertently ignored. Skills enhancement, financial literacy inculcating investment & saving discipline are all critical pieces without which any permanent upliftment is impossible. That is where the big gap now lies that needs to be filled by someone. To be fair, some of the more enlightened microfinance operators have realized this need and moved away from offering just credit towards more holistic services required by the poor. (See Basix, that has moved from being just an MFI to becoming a 'livelihood promotion' institution) But unfortunately, such instances of enlightened management are relatively scarce in an industry that has experienced explosive growth over the last few years and resulted in a windfall for the most aggressive ones. The SKS IPO, a topic of heated debates on its own, has shown just how much of quick wealth can be made by MFI promoters and is it not reasonable to expect that some of the new entrants do not have similar ambitions?
The case of suicides by poor clients in the wake of harassment and coercion at the hands of MFI recovery agents is a tragic wake-up call for all. This scenario could and should have been seen and prevented, but individual greed always initially trumps collective conscience. But now that everyone has been temporarily stung, it is my hope that the government can provide an effective and much needed regulation (not in its current draconian form) that brings back the mission with which MFIs working for poverty alleviation ought to work.