Ramesh S Arunachalam
Rural Finance Practitioner
Please recall that two days ago, I started this three-part article where I said I would try to highlight the impact of the current crisis on micro-finance in India and the 1st part was posted on 19th November 2010. The second part relates to the viewpoints of clients and is being posted now. The last part deals with issues of getting the incentives right and will be posted tomorrow…Read on and comments are most welcome…
The current state of micro-finance in India therefore, offers challenges as well as opportunities going forward. If things continue as they are, here is what I anticipate could (will) happen for clients:
10. I am making a huge assumption that banks (or governments for that matter or other types of financial intermediaries) may not be forthcoming in lending directly to low income clients – I hope I am proved wrong in making this assumption and I am sure that many clients will endorse what I am saying…
PS: By pointing out the difficulties that clients could face, I am in neither justifying lesser (or no) regulation for MFIs nor am I rationalising their reckless growth and greed (as Mr Vijay Mahajan correctly said in interviews in November 2010). This should serve to clarify my position
1. Clients will have increasingly limited options and may not be able to easily access credit for various purposes
2. Specifically, an MFI led micro-finance industry - which is on the back foot and fending off strong criticism about multiple lending and coercive collection practices - is not likely to be a easy and quick provider of credit (as in the past). Thus, low income people, many of whom have vulnerable and fragile livelihoods, may find it increasingly difficult to access money from the micro-finance industry.
3. While the SHG model and the banking correspondent are indeed options and can certainly be scaled up further, they may not be able to grow as fast in the short term as the MFI model. They also may require higher maintenance (especially, for the SHG model) and this could manifest itself as increased (overall) costs in delivery. The outsourcing guidelines are rather stringent and therefore, there could be problems with the correspondent-banking model as well, in terms of scaling this up.
4. Thus, clients may be able to access loans only from a few large MFIs and once they start borrowing from these large MFIs it could become difficult for them to switch and borrow from either a banking correspondent and/or (by forming/joining) an SHG. This is especially, applicable in places where the SHG Bank Linkage program is not as well developed as in Andhra Pradesh and/or some other states
5. The clients who get tied into a large MFI could be forced to keep up with group pressure in increasing the loan size. As a result, clients who may want a more gradual growth in loan size will have no option but to succumb to peer pressure and borrow (increasingly larger amounts) from the large MFIs as there will be limited financing options. This could result in many clients getting over indebted in the medium/long run.
6. If for some reason, due to family or other emergencies, clients urgently need money, they will have very limited options to get finance. Because of restrictions on multiple lending which are likely to be enforced in the future, clients may have to borrow (more) from moneylenders and informal financiers. Thus, without question, borrowing from moneylenders will increase if clients have limited choices amongst MFIs and the crisis results in the (inadvertent) favouring of large MFIs
7. If there is a rush amongst large MFIs to grow very fast in non-AP areas, then there could be cases of over indebtedness in these places as well amongst the clients and an AP like situation cannot be ruled in other states
8. For clients in AP, who have not paid back their past loans, getting loans from even large MFIs is likely to be difficult as their past (default) experience may result in their being excluded by the MFIs. This may push them solely to the informal financiers and/or banks/government programs (if they are willing and able to lend). Alternatively, at least, MFIs would become very discerning in granting loans to such defaulters in AP. Thus, while the defaulters (in the crisis) are surely not likely to get further loans in AP from the MFIs, it is the clients who have paid back properly and waiting for the next loan, who could get affected. Again, with little or no option, they would be pushed back (almost) to the door of the money lenders
9. All said and done, from a clients’ perspective, the crisis, would result in rendering them more vulnerable. Thus, they would have very little options to combat family level emergencies and life cycle setbacks/events. Coping mechanisms will get to become more dependent on the moneylender, especially if the crisis results in the smaller MFIs becoming non-operational
2. Specifically, an MFI led micro-finance industry - which is on the back foot and fending off strong criticism about multiple lending and coercive collection practices - is not likely to be a easy and quick provider of credit (as in the past). Thus, low income people, many of whom have vulnerable and fragile livelihoods, may find it increasingly difficult to access money from the micro-finance industry.
3. While the SHG model and the banking correspondent are indeed options and can certainly be scaled up further, they may not be able to grow as fast in the short term as the MFI model. They also may require higher maintenance (especially, for the SHG model) and this could manifest itself as increased (overall) costs in delivery. The outsourcing guidelines are rather stringent and therefore, there could be problems with the correspondent-banking model as well, in terms of scaling this up.
4. Thus, clients may be able to access loans only from a few large MFIs and once they start borrowing from these large MFIs it could become difficult for them to switch and borrow from either a banking correspondent and/or (by forming/joining) an SHG. This is especially, applicable in places where the SHG Bank Linkage program is not as well developed as in Andhra Pradesh and/or some other states
5. The clients who get tied into a large MFI could be forced to keep up with group pressure in increasing the loan size. As a result, clients who may want a more gradual growth in loan size will have no option but to succumb to peer pressure and borrow (increasingly larger amounts) from the large MFIs as there will be limited financing options. This could result in many clients getting over indebted in the medium/long run.
6. If for some reason, due to family or other emergencies, clients urgently need money, they will have very limited options to get finance. Because of restrictions on multiple lending which are likely to be enforced in the future, clients may have to borrow (more) from moneylenders and informal financiers. Thus, without question, borrowing from moneylenders will increase if clients have limited choices amongst MFIs and the crisis results in the (inadvertent) favouring of large MFIs
7. If there is a rush amongst large MFIs to grow very fast in non-AP areas, then there could be cases of over indebtedness in these places as well amongst the clients and an AP like situation cannot be ruled in other states
8. For clients in AP, who have not paid back their past loans, getting loans from even large MFIs is likely to be difficult as their past (default) experience may result in their being excluded by the MFIs. This may push them solely to the informal financiers and/or banks/government programs (if they are willing and able to lend). Alternatively, at least, MFIs would become very discerning in granting loans to such defaulters in AP. Thus, while the defaulters (in the crisis) are surely not likely to get further loans in AP from the MFIs, it is the clients who have paid back properly and waiting for the next loan, who could get affected. Again, with little or no option, they would be pushed back (almost) to the door of the money lenders
9. All said and done, from a clients’ perspective, the crisis, would result in rendering them more vulnerable. Thus, they would have very little options to combat family level emergencies and life cycle setbacks/events. Coping mechanisms will get to become more dependent on the moneylender, especially if the crisis results in the smaller MFIs becoming non-operational
PS: By pointing out the difficulties that clients could face, I am in neither justifying lesser (or no) regulation for MFIs nor am I rationalising their reckless growth and greed (as Mr Vijay Mahajan correctly said in interviews in November 2010). This should serve to clarify my position
SKS Micro-finance has become a Proxy, Hammer it, Hammer the Whole Industry
ReplyDeleteThere was full drama too at the counter, the day after the share hit the 20% downward circuit breaker, reacting to SKS comments that its collections have come in lower than normal, post the Andhra Pradesh government ordinance. Presumably, to allay investor's fear after the crash, the CEO-Chairperson of SKS, Vikram Akula and his CFO, Dilli Raj, on opening bell gave an one-hour studio interview with CNBC-TV 18, the country's premier financial news channel. During the course of the interview, the SKS share soared to trigger the upper 10% circuit breaker, giving rise to speculation that this was a turnabout in the script's downturn momentum.
Yet, this elation proved a momentary bubble.
Read More: http://devconsultgroup.blogspot.com/2010/11/sks-micro-finance-has-become-proxy.html