Micro-financing: Nov 4, 2006: ET,Mumbai: MFIs in Andhra should cooperate with the state mobilization

Microfinance,Yunus and Andhra

The MFIs in Andhra should cooperate with the state’s social mobilisation
programme, which has worked for over a decade to bring the poorest rural
women into SHGs, say Sachin Rao, Vijay Kumar and Jairam Ramesh

MANY tributes have been paid to Mohammed Yunus for his richly-deserved
Nobel Peace Prize. But the most curious of these is the editorial in ET (Oct
16) that says that the award is “a slap in the face of petty bureaucrats and
wimpish politicians of Andhra Pradesh who have been trying to choke
microfinance institutions in the state”. This is, to put it mildly, both
unfair and untrue. Andhra’s MFIs are not the representative of the shining
ideals of Yunus. They have been widely castigated in independent press and
government reports for practices that would make the reviled moneylenders
blush.

Among their documented transgressions have been coercive collection
practices, hidden charges that make interest rates significantly higher than
the advertised, and downright theft of collected savings. Such behaviour,
which at the very least is unprofessional and unethical, transcends into the
inhumane among the poorest and most disempowered of society.

The two commonly attributed reasons for the current crisis are the
exploitative practices among some MFIs and the supposed competitive tension
resulting from the government and MFIs seeking to serve the same customers.
A spectrum of options from industry self-regulation to legislated
interest-rate caps has been proposed. Two assumptions underpin this
discussion. The first is that Andhra’s poor are incapable of managing their
own selfinterest.

The second is that the Andhra government’s social mobilisation work is intended to providing micro-credit to the poor much as MFIs do. These assumptions betray an underestimation of the goals and achievements of the social mobilisation effort. This is resulting in flawed
diagnoses of the problem and a misconception that the government is seeking
to “regulate the industry to death” so that it may have the business for itself. More damagingly, it is limiting the creativity of stakeholders in visualising the next generation of microfinance models that have the potential to create far larger levels of credit disbursement, better product designs and lower interest rates.

The Andhra government’s social mobilisation programme, known as Indira
Kranthi Patham (IKP) has worked for over a decade to bring the poorest women
from rural communities into self-help groups (SHGs). Each SHG bring 10-15
members into a tight-knit unit able and willing to work in the interest of
the group. In addition to forming SHGs, IKP has federated them at the
village, mandal and, in several districts, the zilla level. The eventual
vision is to federate this organisation at the state level. This gigantic
effort has already brought over eight million women, or 80% of Andhra’s
poorest of the poor, into SHGs. There are now over six lakh SHGs, over
28,000 village units and 910 mandal samakhyas, all registered under the
Mutually Aided Cooperative Societies (MACS) Act, 1995. Andhra alone accounts
for more than a third of all SHGs in India.

A strong foundation for commerce in rural India requires a combination
of physical, institutional and social infrastructure. Alongside roads,
electricity and rule of law, we need a customer base capable of meeting the
market as an equal and enforcing its right to be served with dignity and
quality. IKP is creating this vital component of social infrastructure. The
IKP member is an empowered customer who has shed her temerity. As part of
her village, mandal or zilla federation, she is capable of buying, as part
of a group of tens, thousands, and lakhs. Such an aggregation also has
significant capabilities in managing operations, capital and risk.

THE groups can identify, deliver to and collect from eight million
members/ customers at speeds and efficiency that corporate India needs. Last
year, the SHG network procured Rs 177 crore worth of maize and disbursed Rs
240 crore of oldage pensions. These accomplishments have led scholars like C
K Prahalad to study their activities. The ‘core competence’ of IKP is thus
not the provision of finance, it is the creation of a communitymanaged
channel that brings previously excluded customers into global markets.
Rather than viewing each other with suspicion, IKP and MFIs must develop
models by which MFIs can leverage IKPs capabilities to reach eight million
customers. The approach to cooperation must be based upon the separation of
social organisation, to be performed by IKP and capital mobilisation and
disbursement, to be performed by MFIs.

The process of group formation, monitoring and strengthening is built
into the institutional capabilities of IKP. The scale created by the
consolidated customer base would allow a variety of MFI costs to be
amortised over a large base of customers. The competitive bidding process
will create the incentives required for MFIs to act upon the opportunities
to drive down cost and innovate products and pass the savings on to
customers.

In such an arrangement, the regulation of the industry will be driven by
the market and community rather than by legislation. Credit will still be
the liability of the SHGs, but the purchasing will be aggregated at a point
of scale much higher than the group. The community organisation will
negotiate on behalf of the purchaser, act as an enforcer of contractual
standards of operation and act as an arbitrator of disputes. Thus the MFI
customer is no longer a helpless destitute, but a community organised and
capable of acting in its best interest. Another natural regulator of the
service process is the competition to provide credit services. The ongoing
competitive bidding for the bulk credit requirement of the community is its
own check to ensure that MFIs never take the customer for granted.

This transformation represents a natural evolution of the industry that
rationalises its organisation and incentives to produce compelling economic
and social outcomes. The separation of the social organisation from the
financial aspects of the industry allows both IKP and MFIs to focus on what
they do best. The result should be IKP constantly improving to create more
equitable, inclusive and efficient delivery of services to the community and
the MFIs continuously innovating to create better and cheaper products to
earn the customers business.

(Rao is an independent scholar, working with C K Prahalad. Kumar is a
petty bureaucrat in Andhra Pradesh and Ramesh a

wimpish politician representing AP)

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