Losing sight of the real issues
Microfinance can help in financial inclusion but it must come with checks and balances.india Updated: Oct 27, 2010 22:53 IST
Thirty people allegedly committed suicide in the last 50 days in Andhra Pradesh because they could not pay the high interest rates to the microfinance institutions (MFI) and handle their rowdy recovery agents. If investigations do prove that these deaths indeed happened due to the above reasons, the guilty must be punished. Yet politicising the deaths and jumping to conclusions that the MFIs were solely responsible for these untimely deaths, even before unraveling the real issues, would be imprudent and unprofitable in the long run. On its part, however, the Andhra Pradesh government has already pulled the trigger by passing a stiff law, the AP Microfinance Ordinance, on October 15, which has made the “sunrise industry” look like the villain of the piece. Yet, no FIRs have been lodged against the so-called “erring” companies or any judicial inquiry announced.
But to many, this tension between the state government and the MFIs is not new, it has been brewing since 2006, when thanks to a large infusion of funds and competition among themselves, MFIs outpaced the government’s Self-Help Group (SHG) programmes in terms of reach. According to social business advisory firm Intellcap’s White Paper, the state government believes that its SHGs serve the needs of the poor adequately. In fact, it has plans to disburse Rs 100,000 crore loans to SHGs by 2014. At the same time, the MFIs have been attracting borrowers at a tremendous pace thanks to its combination of doorstep service, easy credit, frequent small value repayments and group insurance. So in a way, it’s a straight fight to hold on to a pool of borrowers. The fact that MFIs have grown at this rate shows that possibly the SHGs have not been able to fulfill the requirements, not only necessarily of cash but also the quality of service.
With it high growth rate, certain negative issues have started creeping into the industry: too many MFIs operating in the same region and giving loans to the same family with no checking of over-financing. The MFIs also perhaps refused to accept the State as a key stakeholder. This attitude is self-defeating because both cater to the low-income group and have similar services and products. Instead of any knee-jerk reaction, certain structures need to be put in place regulation and not blame the industry as a whole but the erring members, and also support the initiatives the industry is taking: setting up a credit bureau, evolving a code of conduct (not more than three loans with Rs 50,000 as the total upper limit) and client-friendly ombudsman in different geographies. The commercial MFIs are not NGOs and have investors demanding high returns, yet it is a social business. Thanks to the nature of their business, the companies will also need to walk the fine line to balance their commercial needs with “social and moral” expectations of a wide variety of stakeholders.