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Macro design behind micro-finance
By Sudhirendar Sharma

Microfinance has emerged as a dubious construct of the financial markets to ensure high income on the otherwise useless capital. That the poor will be trapped in this treadmill of 'poverty capital' has always been part of the microfinance design.


The microfinance industry has pushed the poor into an unending debt-trap

The good news is that a 24 per cent cap on the interest rate being charged by the microfinance institutions from the borrowers has been proposed and the not-so-good news is that recent tightening of noose around microfinance institutions has enthused traditional moneylenders to return to the fray with pushed up interest rates. On both accounts, it is either Peter or Paul who stands to gain at the cost of the poor borrower.

Alongside proposing a blanket cap on interest rate, the Malegam panel set up by the Reserve Bank of India has proposed a series of measures aimed at reforming the industry that has grown on unrestricted high interest rates as well as on high operating margins. It has sent jitters across the Rs 20,000 crore microfinance industry that is already facing a tough time in Andhra Pradesh on account of a state law that was enforced following widespread suicides by poor borrowers.

Micro-lending agencies and their agents in media argue that a ceiling of Rs 50,000 on the annual family income of the borrower and a Rs 25,000 ceiling for loans to a single borrower proposed by the panel will cause a drop in growth of this burgeoning industry by 10-22 per cent each year. Ironically, much of the mainstream debate on the panel’s recommendations centres on protecting the interests of the micro-lenders and less about the survival concerns of the poor borrowers.

In drawing its listing of recommendations, the panel has laid to rest the most egregious myth about microfinance that it is a panacea to dispel poverty. Microfinance has a role limited to filling the gaps in cash flow to the poor. Should gap-filling micro-credit be permitted to choke the lives of its borrowers is the question worth considering?

From 2007 to 2010, during which microfinance industry had flourished has also been the period during which outstanding loans had accumulated with the borrowers. While the outstanding loan accounts serviced by the industry more than doubled to 26.7 million, the cumulative loan amount with the poor borrowers had multiplied six times to Rs 18,344 crore during the period. Had it not been grounded, the microfinance industry could have taken the poor on an unending debt-ride!

Could microfinance industry been any better than what it has been? Economists have argued that although microfinance has a promise on a small scale, history suggests that when scaled up, and especially when used as an instrument of government policy, it will create problems. By promising to reduce the scope and scale of the microfinance industry, the proposals by the Malegam panel would do what the economist consider best.

While the outstanding loan accounts serviced by the industry more than doubled to 26.7 million, the cumulative loan amount with the poor borrowers had multiplied six times to Rs 18,344 crore during the period. Had it not been grounded, the microfinance industry could have taken the poor on an unending debt-ride!

Since microfinance is an important frontier of capital accumulation, the industry will contest the Malegam panel’s recommendation on the ground that it helps the very poor. In doing so, it will hide the crucial fact that leading microfinance institutions are ‘nearly twice as profitable as the world’s leading commercial banks’ and are consequently cushioned against economic crises.

Work of leading micro-lending institutions reveal that the pro-poor markets being created are new subprime frontiers of capital accumulation, making navigation in the ‘ocean of money’ a suicidal act. No wonder, the influx of private capital into the microfinance industry has diluted its poverty-alleviation focus in the face of increased pressure to generate profits. Curiously, therefore, the commodity that the microfinance industry is producing, trading and valuing is debt.

If the above arguments are any indication, the fundamental premise of microfinance seems flawed. It is erroneous to believe that soft loans at an interest rate of 24 to 36 per cent can erase poverty, because business opportunities that can get return on capital investment in excess of 36 per cent literally don’t exist under rural situations. Ironically, the road to hell for the poor in Andhra Pradesh was paved with such good intentions.

Should then a flawed economic model be perpetuated? Economist Thomas Dichter argues that poverty lending is bad social policy, a bad development strategy and a bad business. Yet, the Consultative Group to Assist the Poor, a donor forum based at the World Bank, has sought to construct a global microfinance industry (of which Indian MFIs are an integral part) integrated with financial markets, a seductive promise of economic opportunity and freedom.

No wonder, microfinance has emerged as a dubious construct of the financial markets. In simple terms, microfinance helps sustain demand for consumer wares in the face of falling income share by the poor. Easy credit provides both effective demand for goods and, through interest payments, an additional source of income to capital. That the poor will be trapped in this treadmill of ‘poverty capital’ has always been part of the microfinance design.

The Malegam panel has sought to correct the distorted picture of microfinance in the country. The panel is not writing off microfinance as yet but is surely trying to cast a protective net around the poor. Embedded in its proposal is the notion that microfinance as a free-market strategy cannot be allowed to harness the vulnerabilities of the poor. And a democratically elected government cannot allow the privileged few to make ‘capital’ out of its poor.

The views expressed above are personal and do not necessarily reflect the views of d-sector editorial team.

Sudhirendar Sharma  |  sudhirendarsharma@gmail.com

Dr Sudhirendar Sharma is an environmentalist and development analyst based in New Delhi. Formerly with the World Bank, Dr Sharma is an expert on water, a keen observer on climate change dynamics, and a critic of the contemporary development processes.

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Microfinance Titles

Kumarian Press has new microfinance titles that you may enjoy. To view a full listing of our titles click here: http://www.kpbooks.com/Books/SearchResults.aspx?str=microfinance Feel free to contact me if you are interested in reviewing or purchasing any of our microfinance titles.

Posted By: Jennifer Kern
Dated: Friday, October 28, 2011

 Other Articles by Sudhirendar Sharma in
Socio-Economic Development  > Indian Economy > Business and Industry

Shut shop of MFIs
Monday, January 30, 2012

For long, profit-obsessed microfinance institutions had a free run behind their stated ideal of providing micro-credit to the economically marginalised sections. However, they are in trouble now as governments have begun to realise that unrestrained MFIs are no better than the exploitative moneylenders.
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The bad news is that corruption has not only sustained but has grown in size and stature in the country. With scams being a regular feature, seventy per cent respondents in a survey have rightfully opined that corruption has continued to increase in India. One in every two interviewed admit having paid a bribe for availing public services during last one year. Transparency International's latest survey reveals that the political parties top the chart for the most corrupt public institutions, followed by police force and legislatures. No wonder, India continues to make new records on the global corruption arena!

The shocking revelation is that the health and education sectors haven't remained untouched by this phenomenon. With 5th and 6th positions respectively for these sectors on the public perception chart on corruption, corruption has crept insidiously into these sectors of hope for the masses. With bureaucracy being fourth in the list of corrupt institutions in the country, corruption seems to have been non-formally institutionalized with little hope if public services would ever be effective in the country. With economic growth having literally institutionalized corruption, are we now expecting corrupt to be socially responsible - a different CSR.

Poor. Who?

Not giving 'aid' to India is one thing but calling it 'rich' is quite another. If one in three of the world's malnourished children live in India, what does average daily income of $3 indicate? It perhaps means that there is a relative decline in poverty - people are 'less poor' than what they used to be in the past. But having crossed the World Bank arbitrary threshold of $2 a day does not absolve the 'developed' countries of their obligation to part with 0.7 per cent of their Gross National Income in development aid. Should this three-decade old figure not be revised?  

An interesting debate in UK's House of Commons delved on future of development assistance by the British Government. While prioritizing limited resources has been a concern, there has been no denying the fact that development aid must be guided towards tangible gains over a short period of time to start with. There are difficult choices for elected governments to make - should they invest in long-term primary education or in short-term university scholarships? Which of these will bring gains and trigger long-term transformation in the society. As politicians continue to be divided on the matter, poverty persists!!   

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