17 Mar 2011

The Indian microfinance crackdown

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Many reasons lie behind the current crisis of the Indian microfinance market. Among them, 4 heterogeneous factors emerge as the key-triggers of the widest systemic incident ever experienced in this relatively young industry.

The Indian microfinance crackdown
There has been an abundant literature on the crackdown of the microfinance sector in India that has been surged since 2009 with a pick in the fall 2010.
What has it happened then ? Why has it occurred in India ? We will try in this article to summarise the most relevant ideas and reflections that have been released in the press, on blogs or through working papers.

Around 2009, it was released the case of multiple suicides of microcredit beneficiaries in the state of Andhra Pradesh. Microfinance institutions (MFIs) were alleged to put a dramatic pressure on borrowers to pay back their loans, while they were being facing growing difficulties. It has shed light on an emerging problem in the microfinance world : the phenomenon of overindebtness.

1 – Microfinance : a strong arm of the Indian development policy

The first thing to know is that the world’s biggest microfinance market is India, with 5,3 billion $ loans in Sept. 2010.

It partly results in a favourable economic environment with the government having made inclusive growth – mainly financial inclusion – a key-element of their policy. In this view, the government has encouraged the set-up of Self-Help Groups (SHG) throughout the country with the financial support of banks, aiming at facilitating the access to credit for the poor. This model has been a very favourable ground for the microfinance industry. The latter has taken strong roots in the state of Andhra Pradesh where it makes up 30 to 35 % of the total Indian microfinance.

Since 2000, microcredits have been official ranked among the most important financial tools to serve the poor. The Reserve Bank of India has enforced the financial sector to pour 40 % of their volume of credit into the economic sectors officially set as a priority : agriculture, small and medium enterprises, the informal sector.

2 – “Business” microfinance vs. social microfinance

Why does Andhra Pradesh happen to be Nr 1 in this sector ? This state is among the top-five regional economies in India. Despite having a mission to serve the poor in their original mission, most of the microfinance actors tend to target, geographical areas with a high density of population (in order to reduce their operational costs) but also with a good potential for absorbing loans. With the time being, the financial results have by far surrounded the social ones. Being the fifth largest Indian state in term of inhabitants with 76 million people, the major microfinance operators are all established in Andhra Pradesh, of which SKS, the Nr1 in India and most controversial world leading MFI, since its several times subscribed IPO in July’10.

In Andhra Pradesh, like in several parts of the world, the commercial microfinance has taken the lead on the social one. In this state, the commercial practices seem also to have been encouraged by the political environment.

3 – SKS, the bad example ?

I reported the fears raised by the microfinance community about SKS last year, on the 8th August 2010.
The case of SKS is significant of a major business case in microfinance that might be somehow worrying : the entry of foreign funds (from the developed countries) who have seen a growing opportunity to diversify their investments along with a good risk return till now. The flow of foreign capital has been particularly exacerbated since the financial crisis in 2007. The microfinance sector has shown some resilience during the economic downturn that has followed the crackdown of the financial markets. Microfinance has suddenly appeared to be a low risk industry, as it has proven almost 100 % repayment rate since the beginning.

SKS is part of the MFIs belonging to the Tier 1 . They have started their activities in 1998 in the Andhra Pradesh, as a NGO, before being incorporated as a for-profit company in 2005. On July 2010, SKS Microfinance, India’s biggest MFI – 5.8 million clients in 19 states across India and total assets worth $ 900 million (Sept.’09.) – made its debut on Bombay Stock Exchange.

Being fuelled by an almost unlimited source of funding through its IPO, while being in the same time under growing pressure to increase its revenues, SKS has been enrolled in a race for lending along with many profit oriented MFIs, leading to a culture of multi-lending to the same client.

Some experts one of which was Muhammad Yunus, expressed doubt that Vikram Akula (SKS’s CEO) will be able to juggle SKS’s social mission with the demands of a traditional profit-maximizing business : “By offering an IPO, you are sending a message to the people buying the IPO there is an exciting chance of making money out of poor people. This is an idea that is repulsive to me. Microfinance is in the direction of helping the poor retain their money rather than redirecting it in the direction of rich people” Yunus said .

4 – Flawed institutional bodies

The regulation’s shortfall in the microfinance sector gets the MFIs a free access to any potential clients and no limits to the amount and the number of loans a family can sign up.

The industry lacks central databases – shared at regional and national levels – that would collate the outstanding microcredits per family and help assess the indebtness ratio of every microcredit beneficiary. The on-going set-up of such information tools in various countries appears to be one of the first lesson resulting from the Indian crisis.

Two events are reported to have unleashed the backlash. According to private source of information, some local NGOs active in microfinance would have been under the control of politicians and influent business men who might have benefited from preferential lending terms from government banks and to borrow the money at high prices, transferring the profit realised on private accounts abroad.

The second but not the least event would have been the unmet promise of the state’s government to provide the SHGs with an announced lending amount. Only a tiny part would have been disbursed, thus pushing the SHG‘s members to look for further funding in the microfinance community.

Be there certified statements or allegations only, these facts tend to prove some deficiencies in the overseeing of the microfinance industry at states-level.

Conclusion

This last observations may apply for the rest of the world as well. There are always been a risk of making microfinance a business case as any other financial activity. The concern lies in the definition of microfinance : should it be seen as an innovative financial solution to help the poor access more easily money, with the assumption they can successfully enter into the business ? Considering this option is a very wrong bias, as the poor can already access money through the money lenders. If the funding were the only thing they were lacking in order to get out of poverty, they would have been any longer poor for a long time !

Alternatively, shouldn’t microfinance be approached as a global solution where the access to money is just a conditional piece that gets a leverage if and only if it is – simultaneously and closely – associated to a non-financial assistance including training, health care, along with some sort of lobbying with the authorities in the field to reinforce the political institutions ?

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2 Responses to The Indian microfinance crackdown
  1. அதியமான்,Microfinance பற்றிய இந்த புத்தகத்தை பரிந்துரை செய்கிறேன். WHY DOESN’T MICROFINANCE WORK? The destructive rise of local neiloberalism By Milford Bateman Published by Zed Books.2010அதில் MF பற்றிய மாயைகள் என்று அவர் குறிப்பிடும் பட்டியல்:Basic MythsMicrofinance supports income-generating activitiesMicrofinance ‘empowers’ the poorMicrofinance impact assessments ‘prove’ that microfinance worksMicrofinance is what the poor ‘want’ and ‘need’Microfinance availability is increased by formal property titlesMicrofinance directly helps the very poorestMicrofinance empowers womenMyths about new wave microfinanceAccumulating great wealth through microfinance does not mean that the poor lose out: it is a ‘win-win’ situation.Demand for microfinance vastly outstrips the supply.Commercialized MFIs will always respect their social mission.High interest rates are not a problem for the poor since it is the availability of microcredit which matters most to them, not its price.High repayment rates ‘prove’ that borrowers are succeeding with their expensive microloan.MFIs can be self-sustainingஇந்தியாவில் MFI விக்ரம் அகூலா போன்ற புதுப்பணக்காரர்களை உருவாக்கியதைத் தவிர வறுமை ஒழிப்புக்கு எந்த வகையில் உதவியுள்ளது என்பதை விளக்கமுடியுமா?ஆந்திர (தற்)கொலைகளை நியாயப்படுத்துகிறீர்களா?


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