| MFIs as engine of inclusive growth………Vijay Mahajan
For those of us, who have been in microfinance since its origins about 20 years ago, we remember the days when no one paid much attention to us except other colleagues in the development sector. Much has changed in the past two decades and microfinance has evolved into a thriving sector. Today, microfinance even creates newspaper headlines, sometimes adulatory, and at other times sensational. The truth lies somewhere in between. Microfinance is not a panacea which removes poverty in one go, nor is it a new form of money lending to exploit the poor. Many people in mainstream circles, who have visited field operations of microfinance institutions (MFIs) now understand how a poor borrower can use a tiny loan to start a sustainable business, generate more income and over a period of time, come out of poverty. They also understand why this kind of painstaking work could not be done by traditional banks, and required a new set of dedicated institutions — the MFIs. Unfortunately, recent headlines have focused on some aberrations in microfinance that have then spread misconceptions about the industry as a whole. These misconceptions need to be corrected. For example, parts of southern Karnataka has been in the spotlight because some microfinance customers in districts last year defaulted on loans. While any defaults are troubling, it is important to keep this in perspective. About 25,000 borrowers in southern Karnataka were affected, out of 25 million in the microfinance industry across India — about 0.1% of the industry’s total portfolio. We are not downplaying the seriousness of what has happened and our industry must strive to curb similar events in the future. But contrary to what a recent spate of articles would have you believe, defaults are not rampant. As a whole, repayment rates across the microfinance industry are 98% and above. In December 2009, a new microfinance industry association called the Microfinance Institutions Network (MFIN) was formed by the top 35 MFIs, which are registered as NBFCs with the RBI. In March 2101, MFIN launched a self-regulatory code of conduct that underscores our commitment to good governance and customer protection. It emphasises transparent interest rates; limits a borrower’s loan through group lending to less than Rs 50,000 total from three microfinance institutions; and includes a whistle-blower policy on code of conduct violations, among other pledges. MFIN also has collected Rs 2 crore from its members and has invested this in a RBI-approved credit information bureau. By getting information on the prior borrowings of a customer, MFIs will be able to curb multiple borrowing which can result in over-indebtedness. MFIN’s code of conduct also provides that no coercive practices can be used to collect loan repayments. The media have reported some incidences of such practices but specific details are not mentioned. If anybody reports specific incidents of malpractice, MFIN will investigate the incident and if found materially correct, take punitive action against the concerned MFI, as provided in the code of conduct. We want to emphasise that the sector should be judged by its median and best and not by the black sheep that damage our cause and the cause of the people we wish to serve. Every industry has its bad apples and we are committed to expose and expel them. Another common issue raised is that the interest rates of MFIs are high, as these range between 18% to 30% per annum on a declining balance basis. How do we explain these rates? We must borrow funds from commercial banks to on-lend to our customers because Indian regulation restricts microfinance institutions from accepting savings deposits. Banks charge us 11% to 14% for funds. Next, our operational costs are high because loan officers have to travel to each village every week by motorbike to distribute loans and collect payments in person. Our operational costs range from 6% to 12% (depending on volume of loans and the remoteness/ density of the area served). This includes salaries for staff, field travel expenses, branch administrative expenses and head office costs such as maintaining IT systems, accounting, raising finance, risk management, audit and compliance. We incur another 1-2% for provisioning of overdue loans, as mandated by the Reserve Bank of India (RBI). This brings the total costs to 18% to 28%. At this rate we are able to cover our costs and earn a reasonable profit that is necessary to maintain the capital adequacy ratio of 12% mandated by the RBI. Without profitability, it will not be possible to expand our outreach or deliver other financial services such as life and health insurance and micro-housing loans. In addition, we must compare these rates to the alternative — the local money lenders and traders who charge anywhere from 36% to 120%. Over the years, MFIs have already lowered their interest rates when they achieved lower costs due to economies of scale. We have also urged the RBI to let microfinance institutions accept savings deposits at least from our borrowers, thereby reducing the cost of funds as well as allowing us to offer a much needed service to the customers. Technological breakthroughs, such as capturing field transactions via mobile phones direct into servers, will also reduce costs, and we could pass on the cost savings to customers by lowering interest rates. The poor deserve to participate in the opportunities that the overall growth of the country offers and microfinance is an essential step towards that. Stories about high interest rates, over-lending, defaults and coercive recoveries make sensational headlines. But independent studies by NCAER, CRISIL and others show that most MFIs are credible and committed to providing affordable financial services to India’s 150 million financially-excluded households. Anyone is welcome to visit and talk to any of 25 million MFI customers, to check if they are satisfied or not. The answer will be a resounding yes, because it is due to the goodwill and patronage of the poor that MFIs have been growing at 100% per annum, and without any government subsidies. (The author is the president of Microfinance Institutions Network) |