The
Myths That Kept The MFIs afloat- Main Five Myths About
Microfinance
19 November 2010By Devinder Sharma
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
http://bit.ly/dveD5q
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.
©
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