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Saturday, October 23, 2010

Microfinance crisis - Failure to learn?

By Ramakrishna
Reproduced as it is from Public Domain

To: MicrofinancePractice@yahoogroups.com
From: rkrishnay@yahoo.com
Subject: [MFP] Microfinance crisis - Failure to learn?

Dear All,

The discussions have been happening around crisis management rather than discussing about the core issues honestly. We all know the core issues but the entire MF industry shied away to discuss these issues during the normal times and State Government became possessive about its initiative of SHG movement without proactively engage MFIs and banking industry in formulating the strategies for financial inclusion. Is Micro Finance Industry learning from the past? I am not very sure
as the present crisis is not the beginning and end of it. 

Still the second crisis (first crisis is limited to Guntur district and involved one MFI) in micro finance industry emanated from Krishna district and spread across coastal districts like wildfire during 2006-07 and finally led into hacking one of the MFI staff into death not faded away from our minds. Reasons for that crisis also same – multiple loans from different MFIs to single households, inappropriate targeting, unhealthy competition among MFIs which led to street fights in the field, no transparency in transactions particularly interest rates etc. Still scenario is same and MFIs must honestly introspect and act upon the following issued which otherwise might led different crisis;

1.      MF Industry growth is phenomenal in terms of number of MFIs, borrowers, size of the portfolio. At the same time, not much innovation in terms of loan products to meet the diverse needs of the clients. Rigid loan products with weekly payments are not suitable to 80% of the rural borrowers except for traders, petty businesses and dairy. Few of the clients from top bottom only could reap the benefits by following the loan for savings approach. Remaining borrowers predominantly engaged in agri and allied activities, finally ended up in availing multiple loans from wherever they can. Finally when they are unable to cope up with the pressure of weekly repayments to the multiple MFIs, crisis like this blow up. MFIs by and large except few like BASIX not innovated customized loan products.

2.      As mentioned earlier, size of portfolio increased manifold, but methodology for targeting the right clients to meet appropriate credit needs not evolved over a period of time proportionate to the size of portfolio. Hence, field staff are forced disburse left, right and centre and many times in competition with other multiple MFIs in the area. This led to inappropriate targeting and multiple lending. Situation in Coastal Andhra is worse. According to the regional coordinators of some MFIs, some of the households are managing 8-10 different loans including bank linkage and size of the loan is in between 200,000 to 250,000.

3.      Now majority of the MFIs effective interest rates are in between 32-40% including  charges levied on compulsory insurance etc. All the MFIs need to introspect about the borrower’s ability to generate 30-40% returns on investment from their livelihood activity. MFIs disbursing the credit without weighing the opportunities available to the clients that too beyond the capacity. MFIs need to gauge the clients absorption capacity and their ability to manage the portfolio. According to Sa-dhan, 28% of the total MF portfolio in the country concentrated in AP.

4.      Biggest MFIs who accounts for major share in the portfolio and number of borrowers are busy in growing rapidly leaving the responsibility of engaging in public policy (except Basix and few others from CBMFIs) and communications to consulting/resource organizations and few individuals. Thats why still MF industry is unknown territory to press, politicians, public representatives and civil servants alike. No steps were taken up even on small scale to engage in action research/piloting/collaborations between largest Self Help Group based programs of Government and MFIs from either side.

At the same time, Government is equally responsible for the current situation by not formalizing the regulatory framework for the MF industry and by overestimating the SHG movement to cater the credit needs of the poor. Equal amount of problems are plaguing the SHG-bank linkage programs (no protection for member savings, hence members are cleverly adjusting their savings towards loan repayments while books of accounts showing huge savings accumulation, corruption, high opportunity costs interms of time to avail bank linkage, rigid repayment terms and conditions (EMIs) to easily operate etc).

Present crisis will revolve in the coming days with court interventions due to the flaws in the hurriedly drafted ordinance. But, unless the core issues discussed and solutions found, micro finance bubble can  easily burst as it is the only industry build on to service millions of people scattered across the country and it is very difficult to manage the repayment culture which dependent on the values and power relations of both lender and borrower. I dont think MF industry never ever gain power over its clients.

Thank you for your patience and warm regards,

Rama Krishna.

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