Microfinance Focus, October 2010 (Colombo): Prominent leaders of microfinance have gathered to give their insights on current issues in microfinance during the Asia Microfinance Forum 2010. Here is a recap of some of the memorable quotes.
“I will say, be true to your wife and true to your model.”
-P.N. Vasudevan, on MFIs beginning with novel ideas then shifting to money-making models
“We have talked of all sorts of crisis but maybe we are facing a crisis of values.”
- Rolando Victoria on balancing profitability versus sustainability.
“In my opinion, when you give a loan which is not sufficient for meeting the need of poor, they take multiple loans and you start to have repayment problems and delinquency crisis.”
- Sanjay Sinha on his view that MFIs are offering loans that are too small
“The name, BWTP, not banking FOR the poor, not banking TO the poor, but banking WITH the poor. That’s the genius of the name, in my view,”
-John Conroy
“What has gone wrong, is that some microfinance promoters become impatient, and they have promoted the exponential growth, through the chase for capital.”
- Sanjay Sinha on commercialization of MFIs
“I would be deeply hurt if we become over-profitable with commercialization. As it does happen, we must be careful. When you sip with a devil you must use a very long spoon.”
-John Conroy on his hope that walking with the poor remains as the primary underlying philosophy for microfinance
“What is not natural to happen, won’t happen and what is natural to happen, will happen. You can’t expect highly commercial investors to behave in a highly responsible way. Similarly, if there is money to be made, you cannot expect investors to not go for it.”
- Sanjay Sinha recap of P.N. Vasudevan’s views that investors are not the only stakeholders in responsible lending.
“I began the opening address of the conference with 3 Es: Enhance, Empower and Enrich the poor. And I would like to end with 3Ds: Our pro-active Decisions will Determine the Destiny of these 2 billion people at the bottom of the pyramid in Asia that we represent.”
-Chandula Abeywickrema
“They are the harbinger of microfinance development and they can be considered as the road builder for microfinance. Their continuous interaction with clients also makes them conflict managers and image builders.”
-Shankar Man Shrestha, on the important role of quality field officers in boosting up microfinance operations.
“We need to create well defined job description for them (field officers) and well defined staff rules. They should be given the opportunity to make a career in microfinance and should be given chance to move up.”
-Shankar Man Shrestha, suggestions on microfinance institutes human resource
“Microfinance gives a wonderful platform to carry our other non-financial services for the poor. Even the government cannot reach them as far as we MFIs can. So we are in an extremely good position to help the poor.”
-P.N. Vasudevan on the perks of microfinance besides dwelling into credit and savings. It is a platform for BPO (Business Processes Outsourcing), Health help line, Enhancing skill levels, Linking farmers to buyers, supporting clients children in after school programmes, funding the disabled etc.
“We were looking at options of how to expand the outreach and how to offer services cost effectively without a brick and mortar office.”
-Ms. Ayesha Baig on their Bank’s partnership with the Pakistan Post in providing financial services to the poor.
“Most MFIs that we spoke to maintained an in-house MIS (Management Information Systems). A lot of them want to upgrade to mobile banking, cloud computing, smart money and are looking at building and in house IT team to perform better.”
-Aparajita Agrawal, on the move towards technology to reduce frauds in collection of clients’ savings
“MFIs may disappear if banks take on the job (of lending). Question is, Do we wait for banks to do so? Or meanwhile do we ensure some form of banking is happening to the poor?”
- P.N. Vasudevan, respond to a query that banks are a missing stakeholder in the picture of responsible lending
“Today it is the banks that are chasing the MFIs to fund MFIs, and not the case of MFIs queuing outside the bank for capital.”
- P.N. Vasudevan on the readily available capital that creates an environment that boosts rapid MFI growth
“You cannot just start a bank easily. To get a banking license, you need documents, procedures etc. Similarly, the number of MFIs set up should be capped so that those lucky to get a license will actually seriously focus on serving the target segments in the population rather than be cooped up with competition.”
- P.N. Vasudevan favouring caps on the number of players as oppose to caps on interest rates.
“Some firms should fail and exit the market, leaving the more competitive ones in the industry. But this is not happening. What are the forces keeping the MFIs in the market? Is it foreign investments? Why isn’t the market solving it? Why aren’t money lenders failing and leaving the market?”
-John Conroy questioning the absence of market forces in microfinance.
“Self regulation is the last resort of scoundrels”
-John Conroy, emphasizing the role of self regulation in helping MFIs set their standards and goals in the past.
“The new MFI knows that he needs to get the money to grow, that he needs to go to the private equity investor. And he knows that people in this conference room will give him the money because everyone is hyped up about investing in India. That will create a pool of equity for him.”
- Royston Braganza, suggesting that the problem is the environment that we have created for MFIs.
“We build a train that is running too fast, and if we don’t check the direction of the train, we will de-rail.”
-Royston Braganza, on serious consequences of high growth in MFIs that has recently taken over.
“I think interest rates should not be more than 25-30% because clients have to deal with other problems like inflation as well.”
-Conference delegate, on interest rates of microfinance institutes.
“ I would say that inefficiency in MFIs should not be passed on to consumers.”
-Conference delegate on his opinion that MFI operation inefficiency should not be hid by higher interest rates.
“Interest rates should decline when return on equity (ROE) goes up.”
-Conference delegate, on interest rates of microfinance institutes.
“There is new evidence that the price elasticity of interest rates on the demand for credit is high for the poor. So increasing interest rates leaves the poor behind. It becomes a financial excluder.”
-John Conroy
“Politician’s first choice is to set an interest rate cap but this tends to repress lending and sustainability of MFIs and leads to queues of clients outside MFIs. It also leads to credit rationalizing which tend to lead to corruption.”
-John Conroy
“Perfect completion gives rise to a level playing field.”
-John Conroy, on the goal of a perfect market with many buyers and sellers, standardized homogenous products, with no barriers to entry to the market and customers having complete access to market prices to make informed choices.
“MFIs should establish effective self regulation or where necessary, give teeth to a regulatory watchdog”
-John Conroy on MFI compliance to regulations and giving power to regulatory organisations.
“On one side, we have private investors and on the other side the MFI. You want socially responsible investors. You do not want market funders, you do not want capital hunters to exploit microfinance. We do not want a buy and sell asset class. We want committed investors and we consider microfinance buy and hold asset class.”
-Matteo Marinelli, giving an investor’s perspective to MFIs
“Social performance may not equate to credit quality but we tend to see a trend that client protection can lead to good credit quality.”
-Matteo Marinelli
“Indeed when MFIs grow, we tend to see a mission drift, we tend to forget client protection. I think it is about creating a corporate culture.”
-Kelly Hattel, on creating a culture of informing clients about what they are signing up for.
“Give up some short term financial gains (focus on social objectives like client protection) to preserve long term gains.”
-Matteo Marinelli, suggestion to MFIs to reject investors who are not buying the client protection proposition and reject clients who do not want to hear the details of their contract for protection.
“It is fine to grow 10% a year if that is your capacity. You don’t have to grow 100%, even if your investor is pushing you. You need to select who are your investors and equity shareholders.”
-Matteo Marinelli, advise to MFIs on accepting investments.
“We’ve seen alot of MFIs growing and failing. It is a monstrous war in grow grow grow.”
-Matteo Marinelli, advise to MFIs on investments and growth.
“Form a team that can replace half the existing staff so that those staff can go on vacation. The feedback I am getting is excellent. We are able to provide relief and rest for staff as well as the environment to check savings account balances. We can now discover things that otherwise could not be discovered when those staff are in their places.”
-Ruben de Lara, on creating a second line of staff to minimise frauds
“I think that auditors do not solve the problem, because by the time you find out the problem (auditors report only comes 3-4 months after problem arises), it is already so late.”
-Ruben de Lara, on the effectiveness of internal/external audits to curb frauds in client’s savings deposits.
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When we started out in development a couple of decades ago, we instinctively targeted to reduce the influence of money lenders, if not eliminate them completely. Why? They were the traditional oppressors and exploiters in society. Micro-savings and revolving loans worked very well until the most fancied MFIs burst into the scene. MFIs operate under these two beliefs: “Having access to expensive credit is better than no credit” and “the observed rate is where demand equals supply”. These two beliefs were ironically the very same fulcrum the traditional money-lenders operate with.
The result is an “Animal Farm” situation where we are now not able to distinguish between “pigs” and “humans” and vice versa. In fact, money-lenders have got a make-over by packaging themselves as MFIs. A good example is Mohd Yunis of Grameen Bank comes from a traditional money-lending caste. And of course, he got the Nobel Prize and so did Al Gore & Pachauri. Thank God the Nobel Committee did not confer Gandhiji the same distinction, by clubbing him with these scamsters.
The IPO of SKS, one of the largest MFIs in India, saw it over-subscribed by 15 times; their Ten-Rupee share was priced at a premium of Rs 985 – showing how much the market had confidence on their profitability while “banking with the poor”. MFIs argue that they have to charge high rates to maintain profitability. Profitability, which even private banks couldn’t match! Profitability that permits SKS to pay Rs 1 crore as bonus to their just fired CEO!
And how do they attain profitability?
A month ago, SKS in the state of Andhra Pradesh was accused of a series of farmer suicides that prompted the state government to introduce new restrictions on the microfinance industry by seeking to cap lending rates and end coercive means of recovery. Last week alone, Andhra Pradesh police arrested three loan agents of SKS Microfinance and Spandana Sphoorty Financial Ltd. after borrowers complain that they were illegally pressured by the agents to repay their small loans around $1,300. For those of us in the field, this conduct of MFIs is no surprise.
MFI research puts irinterest rates between 25-30%. But my experience (and this is my 30 years in the field) put this figure several times higher. Even if we take this range which they described as the lowest in the world, the only benefit of such loans is for working capital and not capital formation. What is the kind of subsidies Rata Tata gets to produce a one lakh car? We all are aware that a mere 0.5% rise in banking rates can crash the stock market, so sensitive is their profitability linked to interest rates. Compare this with those the poor is asked to bear.
AP’s share of outstanding microfinance loans represents nearly 40% of the sector’s total portfolio, according to CRISIL. Now if MFI is all about access to the poor, we can ask the question, why the clamour to be concentrated in a state which belong to top-five in development in the country? We would have thought they would have gone to the five lying at the bottom rung of the country. But no, they avoid it like plague. It is easy to see they do this on repayment potential of states. The interests MFIs pursue are interests of self sustenance and their own growth. The poor is hardly in the radar except for rhetoric. In fact, it is on the blood and coercion of the poor, MFIs like SKS can giveaway Rs 1 crore as bonus to the CEO.
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. Rather than regulate MFIs, I for one will welcome the day of their demise.
In passing, I’d just like to say no matter what George Osborne likes to pretend will be the result of today’s budget, the real winners will again be the banks, from whom as a culture we must borrow, at usurious interest, if we want to live. Changing anything other than that is purely cosmetic. Food for thought, y’all!