Shut the door
Mismanaged MFI sector
The free run of private microfinance institutions will soon be history as the govt is strengthening the self-help group model.
With bailout packages being viewed with utter disdain, it is unlikely that such plea from beleaguered microfinance (MFI) sector would evoke any different response. The microfinance sector is seemingly close to seeking a bailout should its dismal run with outstanding loans and shrinking capital base was to continue. Once an estimated Rs 30,000 crore industry, the MFI today has shrunk in size with offices being closed down and employees being retrenched.
Spate of suicides by micro-lenders during recent past had unleashed punitive action by the government to regulate loan recovery. Consequent to tightening of noose on loan recovery methods, loans repayment has dipped to an all time low of 10 per cent. As commercial banks are holding back fresh loans to MFIs, not only has customer outreach declined but growth of outstanding loans has slid from a high of 56 per cent to an alarmingly low of 13 per cent.
With a dwindling loan portfolio, it is tough for the MFIs to salvage the situation. Even insiders now admit that what was once seen as a magic bullet having the ability to pull the economically backward out of poverty is now under a shroud of deep controversy across the world. To gain empathy, it is however being argued that the death of the MFI industry will push the poor into the grip of moneylenders and may deal a blow to the government’s financial inclusion drive.
However, such arguments are unlikely to count as the present problems are mostly of the MFIs’ own making. Accumulated bad assets worth Rs 6,500 crore and a lurking capital inadequacy ratio (Rs15 capital for every Rs100 loaned) leave little options for the sector to resurrect itself. Unless the MFIs re-establish their relevance before a doubtful state, regain the confidence of suspecting banks and recapture the hesitant customer base the door will shut on them soon.
And, there are good reasons for the government to ignore the crises and focus instead on customer protection as the MFIs have not only been proven exploitative but have been cause for a spate of suicides by borrowers too. In a rush to show high growth and high profitability, the microfinance institutions not only jumped their brief but took the inadequacy of banking services and absence of collateral for the poor to access soft loans in rural areas for granted.
The manner in which the MFIs have exploited the absence of banks and banking services in rural areas smacks of criminal conspiracy as it not only trapped the poor into perpetual debt but helped the sector amass great wealth in the name of eradicating poverty too. In fact, some of the leading microfinance institutions became ‘twice as profitable as the world’s leading commercial banks’? And for rightful reasons, these are the institutions which now face the brunt.
New competition
The government is committed to turn things around now. The free run for the private microfinance institutions will soon be history as new competition is being injected in the sector by strengthening the self-help group model. Further, the government has drawn plans to cover the remaining 73,000 villages, out of a total of 600,000 villages, with banks or banking services by 2013 – at least some form of financial service for each population segment of 1,000 people.
Without doubt, the microfinance industry could not have been any better than what it had turned out to be as the economists had long cautioned that on a small scale microfinance holds promise but when scaled-up it becomes the case of ‘a fence eating the crop’. That is precisely what has happened. And, it is now for the leading MFIs viz., Spandana Sphoorty, Share Microfin, Asmitha Microfin and Vijay Mahajan-promoted Bhartiya Samruddhi Finance to face the flak!
Although it has been at the cost of several human lives, the realisation by the government that microfinance as a free-market strategy cannot be allowed to harness the vulnerabilities of the poor has been somewhat delayed. Yet, by planning to appoint business correspondents in all villages and backstop them with the network of banks, the democratically elected government has finally conceded that a few MFIs cannot be allowed to make ‘capital’ out of its poor.
There isn’t any doubt that credit is a necessity to fill the gaps between temporary mismatch in cash flow faced by the poor. But a government that extended Rs 60,000 crore debt-waiver scheme for poor farmers in the recent past can do it better than any profit-making microfinance institution to plug the ‘gaps’ in cash flows. Though ignored in the past, realisation has now dawned that micro-credit is a social obligation which the elected government must fulfill.
There is no dearth of evidence to suggest that profit-making microfinance sector has no place in a country that is taking inclusive growth to the doorsteps of its people. Be it through employment guarantee or upcoming food security provisions for the poor, the state has clearly demonstrated its intentions of providing safety nets for the poor. In such a scenario, it would be a paradox to support microfinance sector that has long been known to make lives of its borrowers ‘unsafe’.
The strengthening of self-help groups a ’la thrift-credit societies; extending banking services to all the villages; and creating Rs 500 crore special fund to assist self-help groups are all indication of a change wherein the microfinance institutions would be made to struggle for survival. The writing on the wall is clear.
