Ramesh S Arunachalam
Rural Finance Practitioner
I have been wondering about the causes of the burgeoning growth experienced by MFIs in India during the last few years and have had this nagging question, at the back of my mind, for almost 3 to 4 months:
ð What caused MFIs to grow at such rapid rates?
ð Specifically, what made them add a very significant proportion (often greater than 2/3rds) of their total end march 2009 client outreach, during the period April 2007 – March 2009?
Please see data in Tables below, which are self-explanatory. They have been compiled from http://www.mixmarket.org/
As seen from the above tables, the following aspects are clear:
· For the group of top 14 MFIs (ranked on the basis of number of clients added from April 2007 to March 2009 and other parameters), barring two institutions, for all the others, almost 75% (or more) of the total clients (added between April 2005 to March 2009) were done so during the period April 2007 to March 2009.
· For the two institutions that are exceptions, nearly 2/3rds (or 67%) of the clients added between April 2005 to March 2009, were done so during the fastest growth period – April 2007 to March 2009
· Further, for these top 14 MFIs, barring three institutions, all of them added a very significant proportion (>2/3rds or 66.67%) of their total end March 2009 client outreach during the 24 months from April 2007 to March 2009. That is phenomenal growth indeed by any standards
· This clearly establishes this period of April 2007 to March 2009 as the period of most rapid growth (ever perhaps) in Indian micro-finance.
Therefore, in many ways, these two financial years (April 2007 – March 2009) represent a watershed for Indian micro-finance and I believe that the seeds for the present Andhra Pradesh and Indian micro-finance crisis were actually sown then or thereabouts. That this period of phenomenal growth occurred just 1 to 1 1/2 years after the famous KRISHNA Crisis in Andhra Pradesh (2005/6) is indeed interesting and I think the remarks of Mr C S Reddy, CEO, APMAS (quoted from the CGAP Blog) put the various happenings in proper perspective:
“For almost six years, the MFIs have been asked to improve their practices on the ground. However, there is no improvement. After the 2005-06 crisis, the MFIs came up with the voluntary code of conduct. Its implementation is yet to begin. The SHGs and their federations suffered a great deal due to the exponential growth of the MFIs without any regard for the SHGs.
In 2005-06, MFIs made several commitments like reducing the interest rates, not indulging in multiple lending and that the recovery practices would not be coercive. None of those commitments were acted upon. They did not seem to learn any lessons from the previous experiences. MFIs have pushed a lot of credit resulting in many households in a debt trap.
MFIs have to demonstrate that they “walk the talk”. Those that seem to make comments in support of the MFI practices need to understand the practices on the ground. Responsible microfinance does not exist in practice” - Quoted from CGAP Blog, Crisis or Opportunity.
While it is now an accepted fact that MFIs grew at a scorching unbelievable pace and perhaps did not engage in RESPONSIBLE Micro-Finance as promised by themselves, without question, we need to understand the happenings better in terms of causality. Specifically, we need to better understand their motivation to grow at the rates they (eventually) did and also, on who actually gave them the resources to grow at this pace? There are several possible explanations, which could be explored and this has to be properly researched and understood by The RBI Board Sub-Committee – as only then can proper remedies, to cure the actual causes, be offered. Otherwise, the solutions provided may tackle just the symptom whereas the disease could still be spreading…
Accordingly, the four scenarios for analysis and hypothesis testing are listed below:
1. Scenario # 1: MFIs Grew So Rapidly Because They Wanted Greater Investment and Better Valuation and Were Keen to Tap Capital Markets: Did the MFIs grow because they wanted to attract more equity at higher than normal valuations and ultimately, tap the capital markets (IPO etc)? For the years in question (April 2007 to March 2009), what is the actual level of equity investment into Indian micro-finance and how does it compare with previous years, both in terms of the volume of the transactions (deals) as well as the valuations paid? Was this flow of equity dominated by certain types of investors? Were they national, international or both?
2. Scenario # 2: The Financial Inclusion Drive by Policy, Donors and International Agencies Resulted in MFIs Growing At A Scorching Pace: Did MFIs grow because of the (well intentioned) drive by policy and/or specialized donors/international agencies towards financial inclusion? What specific policy/vision pronouncements can be traced to the above/preceeding periods and what is the relative impact of these in accelerating the growth of micro-finance for the period in question? Were there special drives to enhance financial inclusion in the concerned periods and what is the relative impact of these in causing burgeoning MFI growth during the concerned periods?
3. Scenario # 3: Commercial Banks Pushed MFIs To Grow At A Burgeoning Rate So That They (The Banks) Could Achieve The Mandatory Priority Sector Lending Targets: Did the MFIs grow because the commercial banks, in turn, pushed them (the MFIs) so as to meet/satisfy priority sector lending norms and/or acquire a larger portfolio and get better returns from a captive pro-poor market? Which types of banks have increased their micro-finance portfolio during the concerned years and by how much? Is there a rationale underlying the pattern of increases across the various types of banks? Did policy push the commercial banks to cater more to micro-finance and what can be said about the impact of this on the ground, in terms of increased lending to MFIs, during the specified period?
4. Scenario # 4: Investors Who Paid a Huge Premium Sought Commensurate Returns ASAP And They Caused MFIs to Grow Very Rapidly: Or was it the investors - who had perhaps paid larger than normal valuations and were eager to get their commensurate returns, ASAP - who made the MFIs grow at a very rapid pace? What can be said about the various equity deals that took place in Indian micro-finance during April 2007 to March 2009? What were the respective valuations and how appropriate were these, in comparison to national and international standards? Who were the main categories of investors that came in? What can be said about their motivation, orientation and vision and its impact in terms of causing the burgeoning growth among MFIs during the concerned years?
Therefore, it becomes critical to analyse the above four scenarios and understand their (relative) causal impacts that (perhaps) drove the Indian micro-finance industry to such a desperate situation and deep crisis. The point of this exercise should not be to witch hunt or blame any stakeholder(s) – that phase is clearly long over and it is about time that we approach the whole crisis in a constructive, scientific and professional manner so that appropriate solutions are put forward (and necessary safeguards created) to prevent such crisis from recurring in future. I sincerely hope that the RBI Board Sub-Committee, looking into the micro-finance, calls for authoritative (emphasized as reliable/valid data) on the above and analyses the same before outlining its prescriptions for regulation of the Indian micro-finance industry…This is another step that will enable the RBI to take greater charge of the ‘orphaned’ Indian micro-finance industry that is desperately and urgently seeking a legitimate regulator…
 While the above are all serious possibilities, the lack of reliable and valid data prevents us from making a conclusive argument. For example, I have been struggling, despite my deep-rooted contacts in the Indian micro-finance industry to get reliable data on how bank lending to the micro-finance industry in India grew in the same period. Likewise, it has also been extremely difficult to get accurate information on the various equity deals that happened in Indian micro-finance during the last few years. I am close to finishing this and will post separately on the same, as and when credible data becomes fully available