Opinion: Microfinance Networks in India – Sleeping Giants or Late Latifs?

By Sasi Thumuluri,

Microfinance Focus, Oct 20, 2010: Editor’s Note: Sasi Thumuluri is employed with Habitat for Humanity International as Global Business Strategy Manager, based in Washington DC. He is a microfinance professional with over a decade of experience in India and abroad. He follows the sector and keeps particular interest in India story. Below are edited excerpts about his opinion on microfinance networks in India:

With the stroke of a pen the Andhra Pradesh (AP) government has brought a $2 billion microfinance business to a grinding halt subjecting the future of the industry and credit culture of the state to huge risk! Microfinance institutions (MFIs), particularly for-profit entities, are under attack from all quarters with allegations of borrower suicides owing to inability to pay back loans and coercive collection methods. While the jury is out on how much should MFIs be held responsible for the unfortunate plight of poor villagers, the damage seems to have already been already done to the sector with the passing of AP MFI Ordinance 2010. Industry bodies that are mandated to shield the sector couldn’t care less.

There have been apprehensions from some segments for a while that microfinance in India is overheating and taking the shape of subprime and should be saved before it is too late. Some industry leaders brushed aside such fears and repeatedly assured that everything is fine and there is no cause for worry. Amidst these growing concerns Microfinance Institutions Network (MFIN) was created roughly seven months ago. While Sa-Dhan represents a larger population of MFIs across India comprising both for-profit and non-profit entities, MFIN has been carved out to specifically meet the needs of non-bank finance company MFIs (NBFC MFIs) that come under Reserve Bank of India (RBI) supervision. NBFC MFIs constitute more than 75% of market share and are significantly larger in size compared to their non-profit counterparts barring a few exceptions. About 40 NBFC MFIs have been enrolled as members in MFIN so far. The key objectives of MFIN, as stated in several interviews and reports by its founding members, constitute enforcing a code of conduct, promoting self-regulation, setting up a credit bureau and dealing with government and regulators in the interest of its membership. The code of conduct has been drawn and endorsed duly by all the members. It deals primarily with customer relations, transparency, fair lending practices and most importantly over-indebtedness of clients. The code stipulates, among other things, lending limits of 3 MFIs and Rs. 50,000 per borrower.

The new industry body, MFIN, was launched in March 2010 with much hope and hype, followed by a number of general body meetings to crank out details, and press conferences were held to announce the key decisions which included appointment of a high profile banker as its first CEO, institution of regional ombudsmen, plan for transparency studies, a whistle-blower policy to check violations of code of conduct and so on. Board members defended the interest rates charged by MFIs, rightly so, and made appeals to banks to reduce lending rates. Media reports kept pouring in almost every month non-stop until it was time for translating words into action.

SKS IPO happened in July-August 2010 with a big bang, louder than expected. The issue was so successful that in the immediate aftermath serious questions were raised about intentions of MFIs, interest rates and profits. RBI was quick to react and issued warnings of stripping microfinance off priority sector status. Finance ministry issued notices to public sector banks asking them to keep an eye on interest rates charged by borrowing MFIs. As if it was not enough, within 2 months of going public SKS has punched another hard blow by firing its CEO without explanation prompting concerns of corporate governance, transparency and business ethics.

A series of media reports on suicides across Andhra Pradesh in last two-three weeks sparked a new controversy about microfinance business practices and interest rates. Andhra Pradesh is not new to MFI controversies but current situation took a serious turn and went out of hands rather quickly for any individual MFI to handle single-handedly. Even before establishing the facts behind the allegations on MFIs the state government succumbed to the pressure from certain political elements and passed a hasty, confusing and draconian ordinance on 15th October 2010 making it practically impossible for MFIs to continue business smoothly in the state and subjecting more than 30% of $6 billion of the country’s microfinance loan portfolio of not just MFIs but of the banks too, including government owned, who lend to these MFIs to incredible stress. While it is difficult to pin-point how much of this is the result of MFIs’ own doing, one would be tempted to wonder at this juncture – what exactly is the purpose of MFIN’s and Sa-Dhan’s being? If all the members signed on to the code of conduct, how come there are allegations of coercion and over-indebtedness? If they are not guilty why no combined voice is heard in their defence yet? What mechanisms have been put in place to enforce the compliance of the code? Where are the ombudsmen and where is the whistle-blower policy?  A more fundamental question is – “where were MFIN and Sa-Dhan anyway?” Why weren’t any reports, statements, interviews or press releases seen in connection with the ongoing crises? When RBI and government were pointing fingers at the industry and arm-twisting MFIs everyone appears to have spoken up except MFIN and Sa-Dhan officials. Why has there been no representation from these bodies with the government of AP to present its side of the story before such a harsh action was taken? Why did no one come out to challenge the allegations and protect the sector?

A couple of conclusions could be derived from these actions or lack thereof. One, the industry as a whole accepts the blame and is willing to be executed as there is nothing to present in its defence. If this is the case, state government’s actions must be commended for coming out in rescue of its constituents and taking corrective (or not!) action in a very short span. MFIs should then be screened carefully and industry associations may be derecognized since they have failed to stand up to the core commitment of client protection.  Alternative, perhaps more plausible, conclusion could be that MFIN and Sa-Dhan are grossly ineffective in representing their membership. The officials have no clarity on their roles and unwilling to accept any responsibility. The leadership is weak and utterly failed the key test of representation. Under this premise these associations should be completely overhauled. Industry associations’ role becomes very critical when the industry’s existence is challenged. Current situation in India, particularly in AP, is no less. Neither Sa-Dhan nor MFIN appears to have made any conscious attempt to diffuse the situation. Perhaps each was betting on the other to act!

It sounds like the giants finally woke up and began deploying damage control measures. I hope they keep up the momentum and help bring the sector not just out of ICU but to renewed and healthy life in the earnest.

(Disclaimer: The opinion expressed here is solely that of the author and do not necessarily reflect any views of Microfinance Focus — Editor)

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