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Many MFIs which started off as service-oriented NGOs to provide succour to the downtrodden and the neglected sections of the rural population have assumed commercial complexion, working for profits.
M. Sitarama Murty
In the recent weeks some ripples have surfaced in the hither to calm waters of micro finance.
It is sad that several precious lives are lost reportedly because of the high indebtedness and strong arm methods of the lenders. Not so faraway in the past, farmers committed suicide burdened with debt compounded by crop failures, poor harvests or un-remunerative prices. The debt waiver scheme brought some relief. This time around it is a case of rural poor engaged in a variety of small enterprises besides agriculture, who have availed themselves of credit for consumption expenses, marriages, healthcare and funerals.
Beneficiaries, social groups, political parties and administrators have reacted on predictable lines. There were arrests, raids on offices of the MFIs, demands for regulation of MFI activities and an announcement by a State Government of an Ordinance to discipline them. The significant role of the MFIs in the rural areas and their size of operations do not warrant any knee jerk reactions, which can, besides directly affecting the MFIs, trigger avoidable upheavals in the financial sector. Caution is the watchword for any action.
Causative factors
Before offering prescriptions it is necessary to look at the causative factors that led to the present scenario. There is no gain saying the fact that many MFIs which started off as service-oriented NGOs to provide succour to the downtrodden and the neglected sections of the rural population have assumed commercial complexion, working for profits.
Eyeing their success, huge business potential, profit margins and relatively easy availability of resources, many big players, including some international institutions, investors and commercial banks, took active interest in micro credit and MFIs. There has been a mushroom growth and huge flow of funds in to this sector. And not all of them can claim that service to the poor is their sole motto.
Banks' support
The support extended by the commercial banks has been a critical factor. Their reluctance as well as inability to lend to the rural and urban poor prompted them to choose the easy option of supporting the MFIs for achieving twin objectives.
Perceiving the risk as low with MFIs reporting near cent per cent recovery performance, banks lent support to the MFIs in a big way to secure volumes and more importantly to achieve the benchmarks of 40 per cent and 18 per cent lending to priority sector and agriculture respectively.
It is not new to the foreign and private sector banks to participate or buyout a portion of the priority sector advances of other banks before the year-end. They are saved from the hassles of canvassing, servicing and recovering the numerous small loans and also ward off criticism of the Government and the RBI.
It is a different story now that the public sector banks too have joined the queue for lending to or buying out priority sector loans from the MFIs, making it much more easy for the MFIs to raise resources at low rates. While loans to MFIs would count as priority sector advances, buyout of agricultural advances with credit risk would help achieve the benchmark for agricultural lending.
Reminiscent of the sub-prime lending in the US, the easy access to resources tempted some of the banks and MFIs to go in for the ‘desi' securitisation and rapid expansion. Quality suffered as seen from the shortcomings that surfaced in the recent events. Relatively large amounts, unrelated to the repaying capacity have been granted, distorting the concept of micro credit, dragging the borrowers into a debt trap, which proved counter productive.
Easy access to credit and speedy delivery have been the two plus points of micro credit. But assessment of credit needs has not been a virtue. The net result seems to be that the family's entire savings go just for servicing the debt. Growth and competition also resulted in duplicate and multiple financing, leading not only to over financing but distorting the recovery performance too, fresh loans being raised for refinancing existing debt or servicing it, giving a false comfort of recoveries.
Training recruits
The other crucial area which needs more attention is the training of the large number of fresh recruits handling the sensitive area of loan disbursals and recoveries. Lack of appreciation of the larger issues such as financial inclusion, employment creation, income generation, repaying capacity and proper credit appraisal seem to have contributed in ignoring the means for achieving the goals of business growth and recovery performance.
The rural background with a local feel was expected to make them more pragmatic, with better understanding of the ground realities. But the business pressures have impacted their approach in acting as mere agents than managers.
The oft repeated argument that easy access to credit and speed are more important appears to have been stretched beyond a point in resorting to high rates of interest.
The banking industry charges 7 to 12 per cent for small loans to weaker sections. Because of wage structure and low operative costs, even after allowing for higher funding costs, the MFIs should be able to earn profits and still peg down the interest rate below 18 per cent.
With the recoveries at ideal levels of 95 to 100 per cent and the risk of NPAs being low, which is not the case with banks and cooperatives, MFIs can't aim at higher rewards either. The situation warrants intervention of the government or the RBI. After a careful evaluation of the costs, earnings and profitability of their operations, a view on the interest rate structure can be taken.
Voluntary guidelines
To avoid unhealthy competition, demarcation of areas/villages may not be desirable or acceptable but it is feasible to adhere to some discipline with the aid of technology. MFIs can also evolve some voluntary guidelines on the lending and exposure norms.
Government agencies, in their anxiety to protect the interest of the borrowers, should avoid any drastic measures to give an impression of ‘ sarkari' intervention leading to another round of debt waiver. This can vitiate the repayment culture in the SHGs, many of which are doing a good job, and in turn, could destroy the micro finance system.
Government functionaries raiding and/or seizing records smacks of excessive reaction and amounts to barking up the wrong tree. It may send wrong signals to the market and precipitate our own backyard sub-prime crisis.
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