The news on the Micro Finance Institutions (MFI) has come not a day too soon. SKS was mighty lucky in that its public issue preceded the adverse reporting.
It is unfortunate that once again, as in the case of NBFCs the press have gone to town with little or no investigative journalism. Regrettably today's editorial in the Business Standard also misses a crucial aspect of MFI businesses which would be evident no sooner we meet a borrower.
The micro finance movement had its origin back in the 1970's under NABARD (then a refinancing Institution and a subsidiary of the Reserve Bank Of India-RBI ) in a cautious and gradual manner,to replicate a successful movement in Bangladesh. The legendary Mr Yunus of Bangladesh conceived of "micro lending" with a unique weekly repayment system, with the money lent essentially for an economic activity. The story of the basket weaver hardly making any money as most of sale proceeds went to service the loan taken from private lenders at exorbitant rates is well known . Please note, exorbitant then meant rates of 75% per annum! Even a reduction to 36% would have doubled the return to the weaver/seller. And thus was micro finance born.
NABARD approached the activity quite differently, designing it around two critical objectives they desired to meet . Firstly, NABARD wanted to bring in a savings culture in rural India and secondly, it wanted this culture to be imbibed amongst the women. The route was to set up Self Help Groups (SHG) of women only within the village community , who would first spend 52 weeks cultivating the savings habit by setting aside a small sum every week.The size of this Group was between 10 and 15. At the end of that period a member of the Group would be entitled to a limited loan to be repaid strictly in 52 weekly instalments. The process of loan approval and relevant documentation was carried out by the Group members having been trained by NABARD or the Rural Bank Co operatives it refinances. All members of the Group, were in a legal sense, co guarantors to the repayment by the borrower. The servicing cost had to take into account the costs of training, the logistics costs of weekly collections in rural settings and the possibility of default. It was the third aspect that came as a pleasant surprise. In the NABARD dominated days the defaults were less than 1%! Was this because of a "low" interest rate ? Never! It was because the members of the SHG took pride in their ability to manage money and the bonding amongst members not to let anyone down. I would guess that the interest rates even then were in the mid twenties.
So what happened? Somewhere along the line NABARD's mandate underwent a change .To stress its rightful role as a regulator, the RBI decided to divest its holding and control of NABARD, the IDBI and similar development finance institutions under the principle of not having any clash of interest being a financial regulator and also being involved in running financial Institutions.. With its freedom NABARD took on a wider canvas to operate and in the process the focus on microfinance was lost.
Enter the private sector. And they come in all sizes and manner of operations. There were the well meaning ones like Basix in Hyderabad set up by a management professional with a passion to eradicate poverty in rural India and there were the bloodsuckers who, taken in by the dream combination of less than 1% default rate and 24+% interest rate felt they chanced upon a gold mine. It takes a day to form an SHG and a day later to, to lend and save simultaneously!. The innocent simple folk ( both men and women now) were addicted to borrow even if they had no needs!. The discipline of joint liability was thrown to the winds , the training was inadequate and superficial. NABARDS painstaking efforts of years was lost in the dust thrown up up the breed of Organized private financiers strutting about rural India. Even the old trusted pawnbroker faced a changing client segment, who now felt they had an option of a collateral free loan from the MFI ( Micro Finance Institutions).
In all this mind you , interest was NEVER a factor. If it was, trust me, no woman would have borrowed. Rural folk may be simple , but ignorant they are not. Respect from the community is paramount and if they even had the faintest inkling of their inability to service the loan they would not have borrowed. To us city folk , suicides are a statistic. The reality is that a suicide is a reflection of the persons "loss of face" in his community a loss far more hurting than facing up to any moneylender.
What went wrong , horribly wrong, is that over the years a fundamental requirement was ignored. Remember Mr Yunus? He lent for an economic activity. NABARD , most regrettably drew away and let the private financiers do their worst.
I am sure a sixth grader would know the difference between a loan for consumption ( like acquiring a TV or a scooter) and a loan for an economic activity ( like acquiring a sewing machine for a tailoring business). In the first type of loan the borrower needs to repay from her existing income sources, whilst in the second she repays from her earnings from the "productive asset"she acquired. I am also sure the sixth grader would know which of the lending is more secure from a repayment perspective.
The AP government may mull over its ordinance , the Prime Minister may be approached to "rope in" the bad private sector. The interest rate may be capped by an Ordinance and just like the 2000+ NBFCs
The solutions being offered does not address the source of the problem . Once the "bad guys" and the rotten apples are removed, we still need to address the core issue in we are to avoid closing this activity. Our regulated Banking Sector earned praise from the developed world for being untouched by the disaster that hit Banks in the USA and Europe. One of the reasons was that their loan portfolio was subject to strict guidelines and limits. Why should MFIs be treated any differently?
Pity... my respected financial daily also missed this point in todays' editorial.
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