Champions of Financial Inclusion

Friday, October 22, 2010

Suicidal Microfinance, Desperate Actions: Why Business Correspondent Model Is an Effective Policy Prescription for Micro-banking Customers in India?

Recent spate of Suicides committed by reportedly 30 microfinance customers or their relatives in Mecca of the Indian microfinance - Andhra Pradesh has shaken the policy echelons at all levels. The Government machinery flung into action with an extraordinary swiftness and resulted into issuing  a   Special ordinance to rein so called rouge MFIs which is in addition to the Reserve Bank of India’s sub committee to look into MFI functioning . Thankfully, the Ministry of finance’s response has been cautious but with discernable strong signals about introduction of legislation on MFI sector in the parliament.
 The first glance and most of us would appreciate the public policy response of state actors to tighten noose around ‘Suicidal Microfinance’ amid of high passions for the breavered families; for which like all of you my heart also goes with the family members of those who committed suicides in Nizamabad and other places. But the question I pose here is slightly contrasting one: Is the fire fighting action initiated by the state Government going to create more problems than solutions for poor? Not only that, what could be the impact of ripples effects on MFI clients in days to come?  Especially at a point in time when the sector is gradually making transition to integrate itself with the mainstream capital market and lower its dependency on lenders for high cost of capital which ultimately factors into higher interest rates for micro clients.  The first market signal is 9% bottom dip in the share value of SKS microfinance - The only India listed Microfinance Company which had lent micro loans to 17 of those who committed suicide. All this is a reason for concern, but the policy response may also not be a welcome move for the Indian microfinance sector, particularly for those players which may plan to go public in coming days.
If suicide is a parameter, I would like to share some pieces of data here, According to the National Crime Records Bureau, between 1997-2009 reportedly 2 lakh farmers in India have committed suicides due to reasons like crop failure and inability to repay  bank loan, but we not seen similar “supra regulatory” actions against lending banks, instead Government actions were  mature  and no one can deny role of  policy  in enabling  the Indian mainstream financial system (which consists of Commercial and Scheduled Banks ,Regional Rural Banks, PACS and cooperative credit structure) to deal with the farmer suicide crisis . Not only was credit bailout option offered to farmers, rescheduling of loans was also carried out and debit refinanced by the Government – worth noting here no bank faced stifling noose of regulations. Basically, Policy actions empowered the end customer to choose her lender and thus reinforced tenets of free market and rational choice theory.
Unfortunately, actions in the microfinance saga are diagrammatically opposite as these signals lead to ‘more regulations and less free market’. Here it is worth mentioning about success story of the Indian Mobile telephony where supra regulations did not create fetters for MNOs at least in formative years and facilitated market competition due to which today mobile phone penetration in India is more than 670 million and is growing exponentially.   Defining role of Public Policy in free market is facilitation of business and ensuring fair competition for firms and offering choices to customers without creating distortions.
Finally, the question one might be tempted to ask; what is an alternative?  . Answer is, a dedicated Business correspondent (B.C) which offers door step banking facility to micro customers.  
The B.C is an ultra low cost technology driven banking channel which acts as extended arm of prudentially regulated financial institutions like banks and insurance companies and take their products and services to the nooks and corners of India – Product and service ranges from No frills savings accounts to remittance and insurance to low cost micro credit and payment solutions. B.C plays an important role in creating healthy competition in the micro-market and provides choice options for end customer to choose her financial service provider. On the top of this, BC is fully complaint to banking rules and regulations and works on razor thin margins.
Dedicated BCs which offer doorstep services have potential to transform not only “scenarios of suicide” but face of unbanked and under banked in India. Therefore, strengthen free market competition   that too, without low or no distortions if facilitated adequately by policy, can be a sustainable solution.  If we compare cost of delivery of services, BC’s cost to serve a customer at her doorstep is around INR 4 -5 per Customer whereas typical MFI cost is much higher. A BC earns average revenue of INR 100 per customer per year and still survives but a typical MFI at present is not designed to operate on such thin margins, it earns on an average 5% of net profit per loan (which is around INR 500 for INR 10,000 loan size).
Finally, what will address the issue adequately and sustainably is not more stringent regulations or predatory policies but policy actions enabling free market principles and offering more supply side choices to the end customer.
                                                                                                                                             -  Jatinder Handoo.

1 comment:

  1. Interest rates: The Poisonous Fangs of MFIs

    MFIs were touted to provide the poor access to affordable credit, reduce poor people’s need to use moneylenders and indebtedness. In short, provide a much kinder, cheaper alternative to the village loan shark. Instead, they evolved as the new class of institutionalized loan sharks which neo-liberals gave respectability to. MFIs did improve access to micro loans but failed in their touted mission to provide affordable and gentler credit and above all, one that lifted people from the clutches of poverty. Objects of institutional financial sustainability exhort them to charge interest rates and fees high enough to cover the costs of their lending and other services.

    MFIs argue that they need a spread apart from all costs to provide for contingencies and growth. Fine but the moot question is how much should be this spread.

    MFIs argue that economies of scale and competition will drive interest rates down. This remains only a theoretical argument. “Mexican micro-finance institutions charge such high rates simply because they can get away with it”, said Emmanuelle Javoy, the managing director of Planet Rating, an independent Paris-based firm that evaluates micro lenders!!

    If at all, the average Indian MFI interests rates appear more benign than in Latin America or Nigeria, then it simply because other than factors internal to the MFI industry, the sector faces strong competition from governmental and NGO SHG micro-saving programmes in the absence of which, these MFIs would have formed a cartel. Past angry public and government reactions that resulted in a backlash against them, which included the arrests of MFI top leaders, like Uday Kumar of Share Microfinance Ltd as in 2007, keeps their profiteering impulses under check.

    The sooner MFIs are seen as profit enterprises, the better. The longer they pretend they are pro-poor, the longer they discredit the NGO sector that gave birth to a Frankenstein. By 2014, they target to reach 110 million borrowers. 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. Act now to prevent they becoming an epidemic in the country. Act now, when they are most vulnerable.

    And how do know they are vulnerable? Because Vijay Mahajan, the father of MFIs in India tells us so:

    “We are facing collapse. Unless something changes on the ground, the industry as we know it is basically gone. ”

    Mahajan, we have news for you. The day when the likes of you are gone, that will be the turning point for the fight against poverty!

    What’s wrong with Micro-finance Institutions? Practically everything as the case of SKS illustrates.

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