Microfinance: Trapped in the treadmill of 'poverty capital'

On both accounts, it is either Peter or Paul who stands to gain at the cost of the poor borrower.

Alongside proposing a blanket cap on interest rate, the Malegam panel set up by the Reserve Bank of India has proposed a series of measures aimed at reforming the industry that has grown on unrestricted high interest rates as well as on high operating margins. It has sent jitters across the Rs 20,000 crore microfinance industry, that is already facing a tough time in Andhra Pradesh on account of a state law that was enforced following widespread suicides by poor borrowers.

Micro-lending agencies argue that a ceiling of Rs 50,000 on the annual family income of the borrower and a Rs 25,000 ceiling for loans to a single borrower proposed by the panel will cause a drop in growth of this burgeoning industry by 10-22 per cent each year. Ironically, much of the mainstream debate on the panel’s recommendations centres on protecting the interests of the micro-lenders and less about the survival concerns of the poor borrowers.

In drawing its listing of recommendations, the panel has laid to rest the most egregious myth about microfinance that it is a panacea to dispel poverty. Had it been so, Bangladesh would have abolished poverty long ago. What perhaps microfinance does is to fill the gaps between temporary mismatch in cash flow faced by the poor. Should gap-filling micro-credit be permitted to choke the lives of its borrowers is the question worth considering.

From 2007 to 2010, during which microfinance industry had flourished has also been the period during which outstanding loans had accumulated with the borrowers. While the outstanding loan accounts serviced by the industry more than doubled to 26.7 million, the cumulative loan amount with the poor borrowers had multiplied six times to Rs 18,344 crore during the period. Had it not been grounded, the microfinance industry could have taken the poor on an unending debt-ride!

Could microfinance industry been any better than what it has been? Economists have argued that although microfinance has a promise on a small scale, history suggests that when scaled up, and especially when used as an instrument of government policy, it will create problems. By promising to reduce the scope and scale of the microfinance industry, the proposals by the Malegam panel would do what the economist consider best.

Since microfinance is an important frontier of capital accumulation, the industry will contest the Malegam panel’s recommendation on the ground that it carries a special halo because it helps the very poor. In doing so, it will hide the crucial fact that leading microfinance institutions are “nearly twice as profitable as the world’s leading commercial banks” and are consequently cushioned against economic crises.

Capital accumulation

Work of leading micro-lending institutions reveal that the pro-poor markets being created are new subprime frontiers of capital accumulation, making navigation in the ‘ocean of money’ a suicidal act. No wonder, the influx of private capital into the microfinance industry has diluted its poverty-alleviation focus in the face of increased pressure to generate profits. Curiously, therefore, the commodity that the microfinance industry is producing, trading and valuing is debt.

If the above arguments are any indication, the fundamental premise of microfinance seems flawed. It is erroneous to believe that soft loans at an interest rate of between 24 to 36 per cent can erase poverty, because business opportunities that can get return on capital investment in excess of 36 per cent literally don’t exist under rural situations.

Ironically, the road to hell for the poor in Andhra Pradesh was paved with such good intentions.

Should then a flawed economic model be perpetuated? Economist Thomas Dichter argues that poverty lending is bad social policy, a bad development strategy and a bad business. Yet, the Consultative Group to Assist the Poor, a donor forum based at the World Bank, has sought to construct a global microfinance industry (of which Indian MFIs are an integral part) integrated with financial markets, a seductive promise of economic opportunity and freedom.

No wonder, microfinance has emerged as a dubious construct of the financial markets. In simple terms, microfinance helps sustain demand for consumer wares in the face of falling income share by the poor. Easy credit provides both effective demand for goods and, through interest payments, an additional source of income to capital. That the poor will be trapped in this treadmill of ‘poverty capital’ has been part of the microfinance design.

The Malegam panel has sought to correct the distorted picture of microfinance in the country. The panel is not writing off microfinance as yet but is surely trying to cast a protective net around the poor. Embedded in its proposal is the notion that microfinance as a free-market strategy cannot be allowed to harness the vulnerabilities of the poor.

And a democratically elected government cannot allow the privileged few to make ‘capital’ out of its poor.