Ramesh S Arunachalam
Rural Finance Practitioner
I woke up today to hear three disturbing pieces of news[i] about the Indian micro-finance industry and Read on…
(1) I just heard from a close friend that an MFI client, who had taken (13) loans from 13 MFIs in Salem district in Tamilnadu, has filed an insolvency petition. She wants her loans written off and there are supposed many others like her in the offing;
(2) There is also wide spread discussion in Tamilnadu with regard to an MFI that is said to have sent legal notices to several thousand clients (another friend put the number of notices sent at close to 15,000), who have been unable to make payments (on their multiple loans) to this and other MFIs. Other MFIs are likely to follow suit; and
(3) I also heard that when MFIs go back to collect money from these several thousand clients who have been served a legal notice by the above MFI, the women are telling the other MFIs – “now that a legal notice has been issued by one MFI, we are not willing to pay any of you back. You will have to collect the money through the same legal route only”
A lot of these problems can be attributed to the growth and client acquisition strategies pursued by the MFIs during the last three years. Given the large-scale ramifications of the present situation, who is responsible for this situation and who needs to be held accountable?
There are several stakeholders including the following who need to answer for the mess created in India’s rural and urban low income economy
a) Large and fast growing MFIs who desired to have supernatural profits and artificial growth numbers to attract equity investments at a premium and create wealth for themselves and their investors,
b) Investors, who paid a premium and hence, perhaps pushed MFIs to grow recklessly and mindlessly, using the bait of further and larger equity investments to get MFIs to show better results and offer artificially high returns,
c) Banks, who had a great time in making supernatural profits from micro-finance, often piggyback riding on MFIs/Equity Investors. Without question, the banks ably led by SIDBI irresponsibly threw their (public deposit) money in the garb of financial inclusion, knowing fully well that greening and other strategies were being used to repay loans,
d) International Agencies like CGAP and others who have pushed the agenda of hardcore commercialization, without for once thinking whether inclusive access to finance was being implemented as envisaged and/or whether it made any real difference on the ground,
e) Policy makers who strongly pushed the vision of financial inclusion without realizing that this concept primarily translated into small consumption credit (and perhaps some small production credit) being channeled to the very same borrowers multiple times, and
f) Last but not the least, the so-called SROs (Self-Regulating Organisations like MFI associations), which have not been able to bring a semblance of order to the chaotic growth of the Indian micro-finance industry in the last few years.
As the Indian micro-finance mess continues to unfold, I would like to use this opportunity to (humbly) caution my Dear African and Latin American friends and request them to learn from India’s large scale micro-finance mess that promises to stay that way for a long, long time ahead. The credit culture in our ‘low income economy’ appears as good as dead. And make no mistake, irrespective of any regulation and/or bill that is going to be passed, the mess on the ground is very severe as I have always been saying and it is sure to take long to clean up – there are many many shared clients/JLGs with multiple loans and these clients have no real means of repaying the multiple loans that have been literally consumed over the years. I am sure that some stakeholders will continue to say that all is well but there are very clear signs emanating that things are going from bad to worse in many places in the Indian micro-finance sector and much of this is not necessarily in Andhra Pradesh (AP)
Without question, the low income economy in rural and urban India has been shredded in many places and the people are the real sufferers…as many of them are not seen as credit worthy even by their traditional financiers (informal money lenders)… so much for the inclusive finance agenda being pushed world wide. I really hope that CGAP and others including UNCDF or UNDP or USAID learn from the Indian micro-finance crisis - even as they are implementing and furthering the inclusive finance agenda globally elsewhere[ii] – and alter their approaches and strategies accordingly!
Have a Nice Day!