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Shut shop of MFIs
By Sudhirendar Sharma



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.

With bailout packages being viewed with utter disdain, it is unlikely that such plea from beleaguered microfinance sector would evoke any different response. The microfinance sector is seemingly close to seeking a bailout should its dismal run with outstanding loans and shrinking capital base was to continue. Once an estimated Rs 30,000 crore industry, the MFI today has shrunk in size with offices being closed down and employees being retrenched.

Spate of suicides by micro-lenders during recent past had unleashed punitive action by the government to regulate loan recovery. Consequent to tightening of noose on loan recovery methods, loans repayment has dipped to an all time low of 10 per cent. As commercial banks are holding back fresh loans to MFIs, not only has customer outreach declined but growth of outstanding loans has slid from a high of 56 per cent to an alarmingly low of 13 per cent.

With a dwindling loan portfolio, it is tough for the MFIs to salvage the situation. Even insiders now admit that what was once seen as a magic bullet having the ability to pull the economically backward people out of poverty is now under a shroud of deep controversy across the world. To gain empathy, it is however being argued that the death of the MFI industry will push the poor into the grip of moneylenders and may deal a blow to the government’s financial inclusion drive.

However, such arguments are unlikely to count as the present problems are mostly of the MFIs own making. Accumulated bad assets worth Rs. 6,500 crore and a lurking capital inadequacy ratio (Rs.15 capital for every Rs.100 loaned) leave little options for the sector to resurrect itself. Unless the MFIs re-establish their relevance before a doubtful state, regain the confidence of suspecting banks and recapture the hesitant customer base the door will shut on them soon.

Unless the MFIs re-establish their relevance before a doubtful state, regain the confidence of suspecting banks and recapture the hesitant customer base the door will shut on them soon.

And, there are good reasons for the government to ignore the cries of MFIs and focus instead on customer protection as the MFIs have not only been proven exploitative but have been cause for a spate of suicides by borrowers too. In a rush to show high growth and high profitability, the microfinance institutions not only jumped their brief but took the inadequacy of banking services and absence of collateral for the poor to access soft loans in rural areas for granted.

The manner in which the MFIs have exploited the absence of banks and banking services in rural areas smacks of criminal conspiracy as it not only trapped the poor into perpetual debt but helped the sector amass great wealth in the name of eradicating poverty too. In fact, some of the leading microfinance institutions became ‘twice as profitable as the world’s leading commercial banks’. And for rightful reasons, these are the institutions which now face the brunt.

The government is committed to turn things around now. The free run for the private microfinance institutions will soon be history as new competition is being injected into the sector by strengthening the self-help group model. Further, the government has drawn plans to cover the remaining 73,000 villages, out of a total of 600,000 villages, with banks or banking services by 2013 – at least some form of financial service for each population segment of 1,000 people.

Without doubt, the microfinance industry could not have been any better than what it had turned out to be as the economists had long cautioned that on a small scale microfinance holds promise but when scaled-up it becomes the case of ‘a fence eating the grass’. That is precisely what has happened. And, it is now for the leading MFIs viz., Spandana Sphoorty, Share Microfin, Asmitha Microfin and Bhartiya Samruddhi Finance to face the flak!

Though ignored in the past, realization has now dawned that micro-credit is a social obligation which the elected government must fulfil.

Although it has been at the cost of several human lives, the realization by the government that microfinance as a free-market strategy cannot be allowed to harness the vulnerabilities of the poor has come little too late. Yet, by planning to appoint business correspondents in all villages and backstop them with the network of banks, the democratically elected government has finally conceded that a few MFIs cannot be allowed to make ‘capital’ out of its poor.

There isn’t any doubt that credit is a necessity to fill the gaps between temporary mismatch in cash flow faced by the poor. But a government that extended Rs. 60,000 crore debt-waiver scheme for poor farmers in the recent past can do it better than any profit-making microfinance institution to plug the ‘gaps’ in cash flows. Though ignored in the past, realization has now dawned that micro-credit is a social obligation which the elected government must fulfil.

There is no dearth of evidence to suggest that profit-making microfinance sector has no place in a country that is taking inclusive growth to the doorsteps of its people. Be it through employment guarantee or upcoming food security provisions for the poor, the state has clearly demonstrated its intentions of providing safety nets for the poor. In such a scenario, it would be a paradox to support microfinance sector that has long been known to make lives of its borrowers ‘unsafe’.

The strengthening of self-help groups a’la thrift-credit societies; extending banking services to all the villages; and creating Rs 500 crore special fund to assist self-help groups are all indication of a change wherein the microfinance institutions would be made to struggle for survival. The writing on the wall is clear!

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

Macro design behind micro-finance
Sunday, January 23, 2011

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.
 
 Other Articles in Socio-Economic Development
 
 
Corruption Watch

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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