The good, the bad and the ugly of the microfinance sector…..P S M Rao
The success of this self-help group (SHG) movement, which can be classified as formal microfinance or SHG- bank linkage programme, has attracted the attention of the other type of microfinance, called informal microfinance (which has several sub-segments in it). Or, for simple understanding, the private MFIs, whose motive is nothing but profit making through lending to the poor.
This, allowing private MFIs, was the major mistake and a very bad decision, although there were other distortions brought out through the schemes such as Swarnjayanti Gram Swarozgar Yojana (SGSY), which curtailed the freedom of SHGs on the purpose of borrowing.
Without this type of MFIs, Indian microfinance -SHG-bank linkage programme- was not only good, but much better than the most acclaimed Bangla model. Space in this article constrains justifiable explanation of that position. It needs another detailed essay to explain all the factors to show how Indian SHG model is far superior to Bangla gramin model.
This is not to say that the formal microfinance was perfect and has no drawbacks in it. That too is ridden with many problems. The scheme could not ensure any benefit beyond easy access to the consumption credit needs of the poor and some investment needs related to agriculture and allied activities. The scheme was beneficial to some extent to the poor, but not to the very-poor, because group formation was linked to the savings of members, which is unthinkable in case of the very poor. From where could they save when their incomes were below subsistence level?
There are not many non-agricultural activities in the country that can survive the competition of the big. Micro credit, by itself, cannot address this problem. Similarly, it is not an easy task for the groups mostly comprising illiterate or semi-literate women to maintain book keeping. The biggest failure was in the area of training groups in understanding the concept and maintaining their own accounts, which of course is not an easy task.
Yet, the groups survived. The peer pressure in this model was not absent, but that was not at the level of private MFI model. Interest rates too were reasonable here and benefits such as subsidies, interest relief and revolving fund benefits accrued to the groups and the members themselves.
These features were not at all present in the MFI lending model. They instantly formed the groups and lent to them without bothering about any experience on in-lending (that is groups lending to their members) etc. Their pace of growth is much faster than the formal sector. The State of the sector report 2009 of the ACCESS Development Services, gloats over its rapid pace and says that the sector has grown 13 times in four years from `897 crore outstanding advances in 2005 to Rs11,700 crore by 2009.
Together with the SHG-bank credit of Rs24,196 crore the total micro credit that year aggregates to Rs35,939 crore
Together with the SHG-bank credit of Rs24,196 crore the total micro credit that year aggregates to Rs35,939 crore
The report says that the MFIs had the client outreach of 5.4 crore by 2009. MFI and SHG-bank model together have seven crore borrowers after adjusting the overlapping. This confirms coverage of the 50% of the poor households in the country.
More interesting revelation of the report is that three southern states AP, Karnataka and Tamil Nadu have got `22,644 crore which accounts for 63% of the micro credit.
More interestingly, AP alone got Rs12,386 crore, which is equal to 34.46% of the total micro credit in the country.
And Ugly
The most startling finding about the state was that as many as 2.07 crore households were given loans as per the available data as of 2009. But the total households of AP, as per the same source, are 1.6 crore and the poor households 25 lakh. This means the loans were given more than eight times the number of poor. This is nothing but to say a single person is given loans by several MFIs.
The most startling finding about the state was that as many as 2.07 crore households were given loans as per the available data as of 2009. But the total households of AP, as per the same source, are 1.6 crore and the poor households 25 lakh. This means the loans were given more than eight times the number of poor. This is nothing but to say a single person is given loans by several MFIs.
So, the loan sharks, it is difficult to use any other word, generously gave the loans and coercively recovered them not minding even when the borrower committed suicide in the process.
Now, after the catastrophic experience, that is after the death of several microfinance borrowers, the AP government brought an ordinance to check the menace. Among other things the ordinance wants the compulsory registration and bans coercive recoveries.
And the RBI, on its part, appointed a subcommittee under the chairmanship of YH Malegam to look into the microfinance issue.
The terms of reference also includes reviewing the definition of the microfinance itself.
But the microfinance trouble has not started all on a sudden or with the death of many persons about the same time in AP. Similar incident of a suicide occurred in early 2009 in Kolar district of Karnataka, where majority of the population is Muslim. After the incident the microfinance practice there was found to be un-Islamic. The local Anjuman Committee issued a fatwa.
Some youth even beat up the employees of MFI when they went to collect the dues as usual. Although people were so angry initially, the micro credit has not disappeared from Karnataka.
The reason is that the poor people want credit. Their needs are pressing. They dont mind taking loans on whatever terms they are offered. So the solution is to look at the elimination of poverty in the country and work towards enhancing the incomes of the people. The fatwas and ordinances will be of no avail as long as the underlying causes continue.