Micro finance was (and is) a great way to help villagers start their own small scale business and achieve financial independence. While Banks demand extensive documentation and collateral and village money lenders charge exorbitant interest rates, micro-finance institutions (MFIs) were a boon to villagers, who were in need of a small capital to start something on their own. However, in a recent development, over 20 villagers have reportedly committed suicide in Andhra Pradesh not being able to repay the loans taken from Micro finance companies.
This post offers some insights into what has gone wrong, with inputs from some inside sources.
1. Commercialization of Micro Finance business: Once started as a noble cause to help the poor, micro finance has now become profit making business for many. SKS, for example, started as an NGO, then became a NBFC (Non Banking Finance Corporation) and is now a full-fledged for profit company listed in BSE. Meeting targets in issuing loans and recovering it became primary objective and social welfare took the backseat.
2. Non-discretional disbursal of loans: Micro-finance was supposed to be offered to those villagers and self help groups which are needy, have an intention to use the funds and do some business. However, target bound loan officers who’re told to meet their target started disbursing loans to individuals who may not really have the need/might already have outstanding loans/weren’t really keen to do some business with the money. This has lead to credit card like situation where banks force sell credit cards without discretion and then resort to using under arm tactics to recover unpaid dues. This is also resulting in a scenario wherein villagers take a loan form one MFI to payoff their previous loan and the vicious cycle keeps rotating till one fine day.
3. Giving loans in Cash: Loans are supposed to be given in the form of materials or should be paid directly to vendor who supplies the equipment/raw material etc. This is to ensure that funds are used for their intended purpose. However, when loans are given in cash by micro finance institutions, borrowers are very likely to use them for purposes other than what it is granted for.
4 Not mentoring the borrowers: Just giving cash won’t be of much help. Most of the villagers/borrowers need enough support, training and guidance in earning returns on their business. Micro Finance Institutions should also guide them how to setup, run and grow the business. If micro entrepreneurs are unable to market their products/do not know how to efficiently source raw materials etc, the initiative will fail.
5. Reduced tolerance: Any form of lending shouldn’t be treated as charity and lenders need to recover their money. Recovery rate as such is fairly high in Micro-lending due to community model of disbursal. But then, there’ll be many genuine cases wherein borrowers might need more time to repay or additional support. MFIs and its investors need to increase their tolerance level for such cases, as long as the reason for delay is genuine. If this doesn’t happen and recovery agents use under-arm tactics for recovery (such as kidnapping one’s daughter), villagers will suffer added insult to injury and might consider suicide.
Shaken by suicides, AP govt has passed an ordnance enforcing additional regulations on MFIs. But I feel the above factors need to be addressed first. While disbursal practices and recovery strategies might differ from one micro-finance organization to another, I wish the industry corrects itself for the benefit of all stakeholders
Right: Neelaveni B from Andhra Pradesh, in whose hotel business I’d invested Rs 2000, through RangDe, has repaid over 50% in past 6 months RangDe gives an opportunity to everyone, to become a social investor, with as little as Rs 100
Related: My Social Investment via RangDe * Progress of my RangDe Social Investment * My Teenage investment experience * Surviving Stock Market Crash * Analysis of MLM Companies *
This post offers some insights into what has gone wrong, with inputs from some inside sources.
1. Commercialization of Micro Finance business: Once started as a noble cause to help the poor, micro finance has now become profit making business for many. SKS, for example, started as an NGO, then became a NBFC (Non Banking Finance Corporation) and is now a full-fledged for profit company listed in BSE. Meeting targets in issuing loans and recovering it became primary objective and social welfare took the backseat.
2. Non-discretional disbursal of loans: Micro-finance was supposed to be offered to those villagers and self help groups which are needy, have an intention to use the funds and do some business. However, target bound loan officers who’re told to meet their target started disbursing loans to individuals who may not really have the need/might already have outstanding loans/weren’t really keen to do some business with the money. This has lead to credit card like situation where banks force sell credit cards without discretion and then resort to using under arm tactics to recover unpaid dues. This is also resulting in a scenario wherein villagers take a loan form one MFI to payoff their previous loan and the vicious cycle keeps rotating till one fine day.
3. Giving loans in Cash: Loans are supposed to be given in the form of materials or should be paid directly to vendor who supplies the equipment/raw material etc. This is to ensure that funds are used for their intended purpose. However, when loans are given in cash by micro finance institutions, borrowers are very likely to use them for purposes other than what it is granted for.
4 Not mentoring the borrowers: Just giving cash won’t be of much help. Most of the villagers/borrowers need enough support, training and guidance in earning returns on their business. Micro Finance Institutions should also guide them how to setup, run and grow the business. If micro entrepreneurs are unable to market their products/do not know how to efficiently source raw materials etc, the initiative will fail.
5. Reduced tolerance: Any form of lending shouldn’t be treated as charity and lenders need to recover their money. Recovery rate as such is fairly high in Micro-lending due to community model of disbursal. But then, there’ll be many genuine cases wherein borrowers might need more time to repay or additional support. MFIs and its investors need to increase their tolerance level for such cases, as long as the reason for delay is genuine. If this doesn’t happen and recovery agents use under-arm tactics for recovery (such as kidnapping one’s daughter), villagers will suffer added insult to injury and might consider suicide.
Shaken by suicides, AP govt has passed an ordnance enforcing additional regulations on MFIs. But I feel the above factors need to be addressed first. While disbursal practices and recovery strategies might differ from one micro-finance organization to another, I wish the industry corrects itself for the benefit of all stakeholders
Right: Neelaveni B from Andhra Pradesh, in whose hotel business I’d invested Rs 2000, through RangDe, has repaid over 50% in past 6 months RangDe gives an opportunity to everyone, to become a social investor, with as little as Rs 100
Related: My Social Investment via RangDe * Progress of my RangDe Social Investment * My Teenage investment experience * Surviving Stock Market Crash * Analysis of MLM Companies *
Sad to see Micro finance too getting into the fold of Capitalism which advocated only one thing profit making. In opinion, Micro finance is a purely socialistic idea in the first place. Nobel to Grameen Bank's founder Muhammad Yunus only substantiates that.
ReplyDeleteI think we should have a good set of rules and regulations on who can or should be a MFI and how do they do their transactions. What they are doing is corrupting the name of the word 'MFI' which is known for its goodwill.
ReplyDeleteAnd these large guys with such negative news are creating bumpy roads for the NGOs who work only on the social and not the financial angle.
Raveesh,
ReplyDeleteAgree. It is supposed to be a socialistic idea, but somewhere things went off track...
Sankara,
Agree. Rules is one thing and consensus among MFIs on how they want to conduct their business is another.
Let us see if new regulations offer any help.
Good analysis, but one point of clarification. On your point #3 on MFIs giving out cash versus paying vendors directly, nearly no MFIs globally take the direct payment model for 2 reasons:
ReplyDeleteFirst this is not a feasible direction in a large scale because paying vendors requires another layer of work, documentation, receipts and transactions that significantly add to the cost of the operations. The interest rates would have to soar. Imagine the MFI having to make arrangements to pay 1-10 different vendors for each micro-borrower, all of which need to be checked and verified. And then what if the vendor doesn't deliver or is not the cheapest? Should the MFI have to be responsible for this as well, as would be surely levied on them by government or socially-minded?
Second, and the simpler reason, not all business investments are in immediate assets. Maybe businesses need working capital which while it does eventually convert to purchases, may not do it all at once. They need cash to disperse and use to their needs, and need cash to be able to run their own business, make purchasing decisions, build relationships with vendors and maximize their profit between costs and sales.
Thirdly, it is in the end also a matter of respect and entrepreneurship for the poor person. We need to focus on empowering them and supporting them in their own growth, not take parental roles in taking up all the business and financial activities we don't trust them with, in the name of doing what's best for them.
It is actually OK for some of the loans to be diverted to non-business needs because that is what poor people - or any people - actually need. I take general purpose loans for many reasons, mostly consumption or life-building reasons, as do we all. So poor people do actually need this outlet as well.
The more important part - as you rightly point out - is how to not overload them with debt and underhanded selling and recovery tactics and to allow recovery percentages to come down a little. It is actually a rarely spoken issue that the MF industry and investor demands have gotten into their head that they need 99% recovery or else they are doing something wrong. From a community standpoint and based on the spectrum of lenders' uncertain lives, this might not be the right percentage to best match expectations.
It is indeed sad to see MF loose its social mission and nearly as bad to see many MFIs cling strongly to the words and marketing of having a social side when they are clearly commercial only these days. We might decide it is OK for MFIs to be entirely commercial, but then they should not lay claim any longer to their social and NGO roots and be honest about themselves. Pepsi or BP can make all sorts of claims about how much social good they do, but none of us get suckered to believing that marketing, but we allow MFIs gone commercial to cling to that "social first" line. When profit is first and second and third, then other goals will always be compromised.
Anyway, good article and thanks for posting.
Another interesting tid-bit that I caught from the NDTV report is that for all the growth in the industry, SKS Microfinance still has 20 lakh of 76 lakh, 26% of their loans, in Andhra Pradesh. So the concentration of the Indian industry at large is still extremely high in just 1 or 2 states.
ReplyDeleteMicroFinance is moving away from social agenda and that is indeed a concern. Good analysis.
ReplyDeleteThanks McKay for your details comments and insights.
ReplyDeleteMost of the MFIs have field partners who operate on the ground assisting the villagers. These partners are better equipped in ensuring that funds are properly utilized. If there're no field partners/mentors, then only MFIs will have to disburse in cash.
I see the points in your statements, but it there has to be a mechanism to verify that funds are rightly used. most of the cases community managed self help groups take care of this. Letting individuals borrow from one mfi, repay another is not wise.
Aativas, Thanks
I am not v aware of the suicide victims (think it is mostly men, right?) but sad to hear that MFIs are causing such bad problems.
ReplyDeleteThe whole basis of MF has been to lend money to women- they are better with management, saved the profits and are prudent with the business plans.
Have a look at Vibha Pingle's talk in Boston about other problems with this system and the solutions.
Ms, where can I find the Vibha Pingie's talk? youtube link?
ReplyDeleteThanks for the comment
Sorry Shrinidhi for not reading this art. earlier..it was published at a time when i was not reading anything at all..
ReplyDeleteYou came to same conclusions which I came, But I notice this so called 'sunrise' sector only when the trouble started with SKS when it fired it MD after listing...and then..there was deluge with the entire sector..
But honestly this entire episode or muddle as i prefer to call it bought back focus to the money lenders, and regulations..
Unfortunately the story is same across the world...
On other hand it also raises the questions about so called 'social' projects with charity in mind...seldom works..make it business with profit motive withing legal wherewithals..and results is up there to be seen like DMRC,
Tarun
ReplyDeleteNo probs and thanks for your insights
Update: As an impact of this, I'm being asked to write off my social investments made in Andhra Pradesh, by Rangde...
ReplyDelete:(