Sunday, September 5, 2010

Rural Credit - Commercialization through MFIs vs SHG Bank Linkages - for whose benefit?

Poverty and vulnerability reinforce each other in an escalating spiral downwards. Informal strategies for coping with risks tend to marginally cover them and often at a higher cost. Micro insurance is the protection of low income people against specific risks in exchange of premium supposedly proportionate to the likelihood and cost of risk involved. Micro-insurance could be to meet the credit requirements (Micro Finance(MF)), Health and health services, income based and to cater the specific needs of women and children.
Villagers’ especially rural women had great difficulty in meeting their short term credit requirements in till the 80s and early 90s. Banks had limited access in rural India and were often reluctant to lend to individuals fearing non repayment. The only way available with villagers was the private moneylender who would charge exorbitant interest and often against mortgages which ultimately went in the hands of these moneylenders. It was against this background that Micro Finance (MF) started as a community based solution to the problem of access to financial services for the poor. The Self Help Group (SHG) model, based on informal norms of mutuality and trust has undergone various experiments since early 90s.
The MF sector in India can be divided into 3 categories – i) SHG Bank linked MF which is predominantly informal. Some States Governments such as Andhra Pradesh, have played a major role in promoting Bank linked MF among the SHGs. It is estimated that as on March 2009, for every 1000 rural households in AP, 279 were a part of SHG (Foullet & Augsburg 2007). Similar success interventions of Governments are there under Kudumbasree in Kerala and under “Mission Shakti” in Orissa. In 2008-09, the number of Bank linked SHGs were about 4.5 millions covering about 60 million households with cumulative Bank loan availed at Rs 220,000 millions; ii) the second category is not-for-profit NGOs-Micro Finance Institutions (MFIs) & cooperatives. CRISIL (2009) estimates that top 50 MFIs have a membership of 12 million and portfolio outstanding of Rs 76,500 millions; iii) the third category is NBFCs which are regulated and commercial and are fast growing.
However, with the entry of MFIs and NBFCs in MF, the focus seems to have shifted from serving to meet the requirements of rural poor with minimum margin and often self regulation by SHGs to profit maximization and investor’s returns and this is a cause of serious worry. Commercialization of MF, patronized largely by the traditional financial returns and furthered by the same financial technologies as applicable in the mainstream capital markets seriously undermine the social value creation role of MFIs. The current phase of expansion of MFIs in India is unfortunately marked by the rise of a class of profit seeking MF promoters, the progressive marginalization of poor MF clients and increasing influence of investors’ interests in the governance & management of transformed MFIs. There is an inherent contradiction in ‘profit maximizing poverty alleviation strategy’, best exemplified by SKS, the largest MF company in India as the first IPO in Indian MF sector and second in world after Banco Compartamos of Mexico. CRISIL report of 2007 indicate that during 2007-08, the net profit of Spandana Spoorty increased by 1700% and that of SKS (Swayam Krishi Sangham) went up by 700%. What is worrisome is that despite a very healthy capital adequacy ratio of 24% (as against RBI’s norm of 12%), SKS chose to go public to help investors’ exit and employees’ encash their equity option. The uncomfortable prospect of using clients as sheer instruments to build promoters profits is blatantly visible and growing. Most of the current leaders in for-profit MF companies- SKS, Spandana Sphoorty, Share microfin and Asmitha Microfin did start off from ‘community ownership’ model and did progressively dilute the community stake by bringing in external investors. A situation is emerging where the poor at best are dependent stakeholders lacking any power in decision making. Working within the logic of maximizing profit & investors’ returns, the strategic focus of MF has shifted from catering to the needs of poor borrowers to profits. Also worrisome is the fact that agencies like IFC, KfW, GTZ and Allianz have started extending finance on a ‘near commercial’ basis to MFIs and in the process, the focus seems to have got completely lost.
I still recall my days as District Collector in Khammam District ( 2002-2004) in Andhra Pradesh and the systematic manner in which we, the District officials including those in DRDA, PR department, and Women and Child Welfare Department used to go around forming SHGs and linking them up with the Banks for credit linkage. It was with a sense of urgency, pride and tremendous self satisfaction that these SHGs became a torch bearer of success in MF with loan repayment percentage being as high as 99%. There used to be so much passion among all of us to spread the concept and ensure that SHGs own it up. In fact, the concept of SHG Bank linkage is so popular in AP that successive Governments have tried to take the credit for its success. It started as ‘Velegu’ and later, with the change of power, it was rechristened ‘Pavala vaddi’.
It gives me a strong creepy feeling that the private money lenders and exploiters of rural poor are replaced by fancy sounding MFIs with the same motive – profit maximization. And it’s time we put some sort of check on such blatant exploitation of rural poor in the name of MFIs. The concept of SHG and bank linkages for meeting credit need, based on self regulation and discipline, originated in emerging countries (Grameen Bank of Bangladesh) and SHG movement in India and it is baffling how this sector too now is getting dominated by the fancy ‘experts’ and ‘consultants’ full of WB type insights into how to run & manage MF! And it is a sure sign that unless the Government puts a regulator in place to check exploitation of the poor by the MFIs, this wonderful and highly successful model of SHG based bank-linkages will surely die sooner than we expect. And the poor will be the worst sufferer.
While entry of MFIs in the rural credit market is not banned, the misuse of this market and by exploiting poor rural folks for the sake of profit maximization however is something that needs greater attention at the policy making level and I feel there is a need to have a regulator to monitor and supervise the rural credit market by private operators for profit maximization.

1 comment:

  1. agree with all your points sir... in simple terms, the MFIs are the moneylenders of our age! in fact, the aforementioned examples of micro-finance may be defined as legalized money-lending!

    however, from a more objective perspective, any sustainable business model for MFIs has to be built around the search for profits, albeit tempered with some form of social motive. while i share your concerns about the triple and quadruple digit profits of for-profit MFIs, a reasonable rate of return cannot be denied.

    i would argue that it is an indication of the lack of depth and breadth (coupled with massive demand) in the market that these MFIs are able to act as Shylocks and still make these usurious profits. in fact, such profits are also the feature of any virgin market where the first movers have the advantage of making away with windfall gains. so what is the way out...

    do we regulate MFI's? maybe, though it is debatable whether we can regulate interest rates they charge.

    how about liberalizing the market for NBFCs? can we legalize moneylenders? (i would argue that the willingness of consumers to access MFIs at their usurious rates, despite the presence of the moneylender at more or less same rates, is itself and indicator of the pent-up demand for accessing the formal credit markets) i feel this approach holds out greater promise... and it is also certain to promote competition.