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Rework the MFI model
The more aggressive are rocking the boat The woes of micro-finance institutions (MFIs) have multiplied after the Andhra Pradesh government issued an ordinance imposing all manner of do’s and don’ts, and sharp penalties for non-compliance. Paperwork will increase, without any certainty that the poor will be better protected, so there is a danger of micro-finance becoming both costlier and harder to come by. But is the original sin that of the MFIs? Did they invite the regulatory attention that will now burden the whole sector? If matters are not to get worse, they need to address the concerns created by reports of suicides resulting from coercive recovery. And Andhra Pradesh will set the lead for the rest of the country, as it has the largest share (23 per cent) of micro-finance clients in India. If micro-finance is to become a nationally successful model for providing institutional credit for the poor, it has to get its act right in Andhra Pradesh.
There are three issues that MFIs need to address. The first is the rate of interest. Most of the public discussion is over whether MFIs are overcharging, but it is not clear what they are charging in the first place. MFIs have to come forward and declare the effective rate of interest, all things considered, that borrowers have to pay. They have not done this till now, and large MFIs which are constituted as NBFCs are as culpable as the rest. Since these latter are the ones that matter — making up the bulk of MFI lending — and come under the supervision of the Reserve Bank of India, the regulator has to act promptly to promote both transparency and informed public discussion. Questions have been asked in the SKS context, of how high interest rates can be justified if profit margins are also high; if the high interest rates are warranted by the risky nature of the business, the high profit margins don’t support the argument about risk.
Second is the issue of multiple lending. Large, aggressive MFIs have earned the hostility of the state administration by seeking to entice members of self-help groups which come under a state-sponsored micro-finance programme. Multiple lending is the bane of the micro-finance movement, and it is rampant. Leading MFIs which have already formed the Micro-finance Institutions Network have to announce a road map to roll back multiple lending.
The third issue is group guarantee. The recent suicides have been attributed to coercive recovery methods. The recovery rate is one of the criteria that go into calculating the incentives for MFI field staff, so it is easy to see how pressure can build up. Micro-finance has to get out of the group guarantee format, as the path-breaking Grameen Bank of Bangladesh has done. Group guarantee has enabled MFIs to achieve a nearly perfect recovery rate, allowing them to flaunt a level of distressed assets which is far lower than that of commercial banks. But that too undercuts the defence of high interest rates.
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