By Dr. L. H. Manjunath,
Microfinance Focus, December 19, 2010 : This is in response to the article from Mr. Gurcharan Das in leading news papers on the status of micro finance.
First of all it must be understood that the events and institutions responsible for the ordinance of Andhra Pradesh and for viewing the micro finance institutions as villains originate from none other than Gurcharan Das’s SKS micro finance institution. It is wrong to say that SKS microfinance is a non profit making NGO. It is already four years since SKS has converted itself into a NBFC U/S 24 of the company’s act. Registered under this act SKS cannot be a non profit organisation, but a company which assures maximised profits to shareholders. That is the reason why SKS IPO was valued at Rs. 990/- on a face value of Rs. 10/-. It is therefore not surprising that these shares opened in the Bombay stock exchange at a flattering Rs. 1,400/-.
Have you ever wondered why SKS shares were marketed at Rs. 1,400/- when most shares of the scheduled commercial banks with the face value of Rs. 10/- are trading at rates between Rs. 100/- to Rs. 200/- years after their IPO’s? What business does SKS do that the shareholders expect such a huge profit as to make them buy a share of Rs. 10/- at Rs. 1,400/-? As the writer himself admits, the company gives credit to the poor. Does business with poor earn so much of profit? Even if it does, can it be passed on to the shareholders? It is true that the companies should earn profit to make them sustainable. But should profiteering be the motto? Should this be advertised so vehemently? Should we not realise the difference between profit making and profiteering? When the facade of SKS was thus uncovered to show the profiteering face of SKS is it any wonder that common people all over the country turned their anger against micro finance institutions in general?
The truth is that funds are available in the Indian financial market for microfinance at 10 to 12%. The Govt. of India has declared lending to MFIs as priority sector. Experience has taught us that it will cost us 5% to manage these funds. Even after considering a provision of 2% to 3% there is no justification for charging interest rates in excess of 20% to the poor. As the volumes of business go up as in the case of SKS the cost apparently comes down drastically and the benefit ought to have been passed to the poor instead of the shareholders.
Inspite of calling themselves as pro poor most microfinance institutions in the country charge 24 to 48% on the loans given by them to the poor. Most loans have tenure of one year, creating pressure on the borrowers to repay at weekly intervals. The poor who begin with small loans drastically increase the size of the loans between Rs. 30,000/- to Rs. 50,000/- after three to four cycles. The MFI insists that such big loans also be repaid in 50 weeks. They also charge high rate of interest as already explained. Many loans have disguised costs like compulsory insurance, compulsory health insurance, surcharge etc. Poor people who borrow such loans by paying the disguised costs, naturally become depressed when pressurised for speedy repayment.
When one analyses the reasons for charging high rate of interest another black spot of the industry also gets exposed. The pay packages of senior executives and officers working in micro finance institutions appear to be much higher than their peers in the Indian scheduled commercial banking sector. The documents released by SKS during its IPO declared huge pay outs to their Executive Director amounting to crores of rupees. The Chairperson of SKS who was once called modern Gandhi also was drawing substantial pay package. Should servants of poor be enjoying such huge packages? It is becoming more and more apparent that many Indian MFIs look to foreign venture capitalists for equity and debt funds. The tax payers of the advanced countries who cannot even get 2 to 3% interest on their bank deposits in their own countries are investing Rs. hundreds of crores in micro finance business in this country. There are many agencies who act as intermediaries in this business. The poor of this country are made responsible to bring more profit to the venture capitalists, the shareholders, pay high wages to their own servants, also meet the expenses of the venture capitalists. So for whom are the poor people are working? Most poor are trapped in the vicious debt cycle, they are moving one loan to another just to service their depts. Most micro finance institutions in the name of poverty alleviation have become wolves in a sheep pack. They call themselves NGOs when talking to poor and declare themselves NBFCs when talking to investors. They are clearly dichotomous. The most surprising fact is that these wolves when faced with local finance companies who try to copy the wolves will immediately start yelling fraud, bogus and cry injustice!
The microfinance institutions develop a very close rapport with the poor, entice them with easy loans and pressurise them for recovery by blackmailing them on their trusted values. The poor naturally come under tremendous pressure which gets exploded when politicians who live in the name of the poor start a war of words against the MFIs. The law enacted in Andhra Pradesh is the sum result of all these factors.
The Andhra Pradesh the microfinance law is so harsh that the even emergency ordinance of 1975 is feeling shy of the AP enactment. This act will no doubt lead to license raj, corruption and untold miseries. This is also acting as stimulant to the politicians of various other states to try to become popular with the people by passing similar enactments.
Interestingly, there is another question. In our country where there is a bank branch on average for every 12,000 population meaning 3,000 families, why should micro finance institutions be functioning? The truth is that the failure of the banks is the victory for microfinance institutions. As revealed in the NSSO survey 2003 and as often quoted by the likes of Dr. Rangarajan more than 70% of the Indian farmers have not received credit from scheduled commercial banks. The financial inclusion programme of the Govt. of India has so far remained a facade.
Ground reality being such that, enactments of Andhra Pradesh will completely destroy the financial oasis of the wolves in the garb of MFI from providing even the trickle of funds that is now flowing to the poor people. Such acts will lead to more suicides without money than suicides having to pay them back.
We cannot compare our country to Tunisia, Colombia, Bangladesh. Our country has a lot of fund flow, it is possible to reach the funds to the poor without profiteering. The networks created by the micro finance institutions and self help group movement can achieve this. But the govt. must to pro actively respond as under
1. Check the profiteering attitude of the MFIs. Cap the interest rate to 7% to 8% above the cost of funds.
2. Instead of passing crazy ordinances, make effective use of the law of the land to deal with tragedies like suicides.
3. Give a further fillip to the SHG movement and the business correspondent programme by making necessary changes in the programme.
4. The governments and more specially the politicians should refrain from making false promises that they will give credit at subsidised rates to every one.
5. Even though we blame micro finance institutions as wolves we should realise that they also are playing a major role in nation building. Instead the mainstream institutions should effectively compete with the micro finance institutions. There are many instances where the public sector have successfully competed with the private sector to bring in equality.
Most importantly, a time has come for the micro finance institutions to introspect. Is this the goal the MFIs set out to achieve? Should business with poor lead to profiteering or healthy sustenance? If the intelligentsia involved in the sector donot appreciate the thin line between profit making and profiteering, they are sure to be cursed by the poor.
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About the Author : Dr. L. H. Manjunath is the Executive Director of Shri Kshethra Dharmasthala Rural Development Project (R.) This MFI has recently awarded by The Micro Finance Institution of India award ,2010
Disclaimer : Views expressed in the article by the author are his own and do not necessarily represent those of Microfinance Focus. Microfinance Focus does not take any responsibility for correctness of the data presented by contributor.
I strongly believe that government sponsored subsidized SHG bank linkage has done a lot for women’s empowerment. However on financial needs, the SHG members tend to borrow additionally from individual moneylenders. This is where MFIs can play a good supporting role in a responsible manner by providing such financial access on reasonable terms. However, to ensure this, the following steps are required:
1. Tightly regulated MFI model where MFIs cannot charge usurious interest rates, be transparent on all inclusive interest rates and adopt fair recovery practices
2. Establish an integrated credit bureau for both SHGs & MFIs to avoid multiple borrowing, I believe that even if given at 0% interest if a poor women has borrowed beyond her means to repay, she will anyway land in a debt trap
3. Clear norms on multiple lending to be adopted by all MFIs; coupled with stringent penalties for any violations
4. MFIs should have sound credit plus CSR activities to ensure their members quality of life improves and just not stop by being a lender
The entire MFI sceanerio has been changed from the day SKS entered the share market with their highly publicised profit making capability. Simultaneously the infight between Mr.Vikram Akola and Mr.Gurumani during the same period and many suicidal deaths in AP has created a situation for the politicians to poke their nose in the guise of protecting the poor.
Mr.Manjunath has analysed the problem throughly and his suggestions for its rectification is good & thought provoking.
Will the Central government and RBI act responsibly and regulate the industry or strangulate it to get few more votes during this difficult period is a million dollar question?
We hope that in 2011 , things will change for the betterment of poor people of this country.
I would urge you to get your data correct and not mislead people. On an average the interest rate which banks charge MFIs is around 15-16% and not 10-12% as has been mentioned by you. Over that they charge some processing fee of around 1.5-2% and also some collateral. It rounds upto 18-20% overall. Now if we add the 5-7% operational cost and 1-2% default risk, how is it that a for profit MFI will function, if they do not charge something in the range of 27-30%?
Dear Sir,
It was an interesting reading. It is true that a country with majority of population below poverty is able to afford to such a system of micro-financing. The ROA of MFIs hover around 3 – 4% whereas the banks which lend to these MFIs is normally below 1%. This despite the fact the top executives are paid heavily in MFIs.
But the BC model to be implemented, the same banks/FIs lay down so much of guidelines. How one has to overcome this is the question remains to be answered? The bank and FIs like SIDBI, NABARD should encourage BCs to extend credit to these poor @ 7%.
Regards,
Mohan
I deeply appreciate Dr Manjunath’s article on this subject. He runs one of the largest MFI of the country based on SHG model and hence his views are important.
As Dr Manunath points out, India is fairly well Banked country. But Banks’ due to their internal and depositors’ management pressure have not developed enough policies and practices to favour poor customers. SHG movement has filled this gap to some extent. But MFIs have developed a very professional approach to this issue. The client identification, loan disbursement and loan recovery mechanisms are extremely systematic and infact MFIs should be credited for bringing repayment (if not credit) culture among the borrowers. Otherwise in our country, repayment rates have been always very low and hence Banks are also reluctant to lend to small borrowers.
Dr Manjunath’s views on profiteering need serious attention and MFIs should look inwards on these issues.
If Banks’ become more flexible and open, MFIs can become BCs for them and thus we may create a unique micro finance institution based on India’s strong Banking network.
Who said 5-7% opex is sacred? Why can’t the MFIs bring it down? Why can’t they negotiate for interest rates lower than 12-15%? How many car owners pay this rate of interest? let’s get priorities right.
Very accurate account Dr. Manjunath. You deserve the recognition you have received so far and I hope your message travels far and wide.
As a Development consultant and a promoter of a very small community owned micro credit institution, I endorse the views of Dr.Manjunath. I am of the firm opinion, NGOs can innovate and pilot many useful initiatives to help poor to get out of poverty. Small initiatives are always better for local communities. It is the responsibility of the Government to take lessons from such initiatives and upscale it to reach more population, for they have the resources and apparatus necessary for massive expansion.
I feel that the world is becoming a Smaller place day by day. Controlling Interest Rates on MF lending is not all possible. Only the Best & affordable Techonology, Good MF products for POOR can be good practicle solution for Such issues. In todays Open Economy Unnecessary Control on MF Interest Rates is not the Solution. Let Poor have the wide options. Kiran Parkhi Pune
Great info. Thanks a lot for the heads up! I am fresher looking forward for opportunities in Micro finance!
Make MFI’s subject to the provisions of maintaining cost accounting record rules and subject that to Cost Audit by a Practicing Cost Accountant.
Everything will come to light.
Will the MFI’s voluntarily do it to substantiate their claims to high cost of operations.