Microfinance is under attack. Even the normally reticent pink newspapers have now begun to bring out the inherent flaws in the microfinance model. While Finance Minister Pranab Mukherjee and the Reserve Bank of India governor Mr D Subbarao refuse to take notice, public outcry against the criminal micro-credit system that has actually grown with state support, is building up.
It hasn't been that easy. When I first began exposing the fraudulent credit system in the name of the poor, I faced a barrage of criticism by the MFI employees who accused me of not appreciating the difficulties under which they were operating. Short of calling me names, they kept on expressing their 'disgust' at what I wrote, and how much little I knew about the 'wonderful' and 'humanitarian' role they were playing. Someone even went to extent of comparing the MFIs with Mother Teresa !
Nevertheless, as I went along, people began to take notice. A week after my first blog post on MFIs some months back, two young employees working in a microfinance unit contacted me, and thanked me for the "courage" demonstrated in taking the 'bull by the horn'. A day later a journalist called, and she came over to understand my perspective. I wasn't surprised when she told me that somehow she carried an impression that microfinance was a tiny loan at a tiny rate of interest.
Gradually the issue began receiving attention. More and more articles began appearing in newspapers, including vernacular language dailies. Media dug out reports submitted by district collectors in Andhra Pradesh, which showed the killing ways of MFIs. All this helped built up public pressure. Later, some Lok Sabha MPs reached me, and expressed their 'disbelief' over the unbridled exploitation of the poorest. Meanwhile, reports of suicides from Andhra Pradesh began to trickle in. The local TV channels and the print media highlighted the tragedy.
It then became a political issue. Andhra Pradesh government decided to bring in an ordinance to reign in the MFIs. Former Chief Minister Chandrababu Naidu gave a call for non-repayment of the dues.
SKS Microfinance was forced to 'reduce' interest rate to 24 per cent. This kind of window dressing has to be condemned. What a reader wrote to me yesterday is so telling: “I’ve made a tonne of money… more than I ever thought I would make in my lifetime and my kid’s lifetime combined,” says Vikram Akula in a recent interview to Business Standard.
'Yes no one would crib if he became overnight a multi-billionaire tycoon. Except that he made this money by squeezing the blood of the poor and pressurizing them to take their lives while all the time cultivating an image of the "saviour of the poor,"
I am convinced that microfinance is actually a scam. It is inherently a flawed model in the name of reaching small credit to the poor. In reality, the MFIs are no different than the villains of the story -- money lenders. You have just read above what Vikram Akula told a newspaper. I don't have to say more. But don't think that only MFIs in India are bad. MFIs everywhere in the world are bad. In fact, if you have to see their ugliest face, just follow the MFIs in Latin America.
If we really need to pull the poor out of poverty, the MFIs must go. I know it is not going to be easy. I am aware of the hawks sitting in World Bank, UNDP, Ford Foundation and among numerous donors (both private and public) who are not going to let go so easily. Only public pressure can bring down the shutters on MFIs. So don't think your job is over. It has just begun.
I want you to read an excellent article in today's Economic Times (Nov 11, 2010) 'Five myths about microfinance' by T T Ram Mohan. I have never met him, but I must acknowledge that if there is one economic writer that I respect, it is T T Ram Mohan. I love his incisive writings, and admire his analytical ability.
Five myths about microfinance
By T T Ram Mohan
Economic times, Nov 11, 2010
The microfinance bubble has burst. The AP government ordinance, the AP opposition's campaign asking borrowers not to repay and the sheer public hostility towards MFIs . all these have put the brakes on MFI activities for now. We need to rethink the role of MFIs in the rural economy . In order to do so, we must first grasp some of the myths on which the MFI sector has rested th US far.
MFIs are crucial to financial inclusion: The big impetus to financial inclusion came way back in 1969 following the nationalisation of banks. Secondly, financial inclusion is not just about giving small-ticket loans. It is also about taking deposits and providing basic banking services.
MFIs are hardly the pioneers in microfinance. The early initiative came from the self-help group (SHG) movement started by the government of India in 1992 under the auspices of Nabarad and with the involvement of banks. This is the biggest outreach programme of its kind in the world. It covers 86 million poor households and has extended credit of Rs23, 000 crore. MFIs cover 30 million customers and have lent over Rs 30,000 crore.
Under the SHG scheme, credit is linked to savings (unlike MFI credit). There is focus on capacity-building among borrowers. The rate of interest is 8-10% with monthly repayment. The suggestion that MFIs are crucial to financial inclusion is only part of an attempt to give respectability to what is increasingly a profit-driven activity.
MFIs have reached out to those ignored by banks: The contention is that MFIs complement the efforts of banks by reaching out to those ignored by banks. This too is not true. AP has an average credit/deposit ratio of over 105% and a ratio of over 80% in half the districts. (The national average is 63%). AP does not lack credit. MFIs would have been made a real contribution had they fanned out to states where the redit/deposit ratios are low. Instead, they have focused on AP.
They have done so because AP houses nearly a quarter of the SHGs. MFIs chose the easy route of tapping into established SHGs for making loans. This was viable in the early stages but, over time, it has led to the problem of multiple lending and excessive debt burdens.
It is no different from private banks in India marketing consumer loans or US banks marketing subprime loans. œ MFIs are an important mechanism for alleviating rural poverty: Credit is only one of several instruments needed for fighting poverty.
Secondly, credit can help alleviate poverty if it goes into income-generation schemes. MFI credit, for the most part, is for consumption. Thirdly, returns to agriculture are so low that it is inconceivable that it can service interest rates of 24% and above that MFIs charge. Since agriculture is the key to rural poverty, it is ridiculous to suggest that MFI credit can help alleviate poverty.
MFIs have substituted moneylenders who used to charge even higher interest rates: The comparison with moneylenders is flawed. Moneylenders donft go out and market their loans as MFIs do. Besides, moneylenders make loans strictly against collateral and this is a built-in check on lending.
Secondly, MFI interest rates in AP are said to be have been in the range of 24-60%. At the upper end, the rates are no different from those of moneylenders. Yes, MFIs did substitute moneylenders in a way because many moneylenders found it expedient to set up MFIs themselves . they could then have easy access to bank funds!
High operational costs means that smallticket loans cannot cost less than 24%: If this is true, how is lending to SHGs viable? The high lending rates of many MFIs translate into fat salaries for executives and abnormal returns. (Some have return on assets of 5%; a bank is lucky if it makes 1%).
Public sector banks (PSBs) have long had branches in the rural areas. Small loans will be one element in their portfolio which will include low-cost deposits and other products. With branch costs fully written off, it is hard to see why microfinance provided by PSBs needs to be priced at 24%. If indeed the operational costs turn out to be steep in some areas, then the bank correspondent and other models need to be developed.
PSBs have not put their best foot forward in respect of microfinance because they lack the incentives to do so. Most are listed now and have had to focus on earnings growth, which is easily provided by corporate and retail credit. The regulatory cap on interest on small loans was a dampener. (The cap is now gone). Lending to MFIs qualified as priority sector credit, so PSBs could not be troubled to build their own portfolios.
Many people think the recent problems with MFIs were the result of some excesses. With a little tweaking here and there, MFIs can be in the forefront of financial inclusion. They are wrong. The entire MFI model needs revisiting. At least PSBs are much better placed to pursue financial inclusion on their own. The AP ordinance and its fallout ensure that the go-go days for MFIs are over. And that is all to the good.