By Moin Qazi
Microfinance, an approach to financial inclusion, based on providing small loans and other financial services to poor people and primarily women, has generated considerable enthusiasm, not only in the development community but also at political levels In the last decade and a half. Microfinance Institutions (MFIs) in India have struggled to gain legitimacy as credible institutions despite demonstrating the ability to deliver financial services to unbanked low-income households sustainably. Serious doubts on their modus operandi, high interest rates, governance, client treatment and transparency have continued to bedevil the sector.
Why microfinance is declining as a sector
Microfinance has lately been facing trouble because of what observers apparently feel is the dilution in the purity of its mission. When it started, microfinance was a financial tool being used for social good. Now it has increasingly become a social tool used as a way to generate money, which is why it has lost a lot of its original sheen. This is one reason why microfinance often runs into heavy weather and hits periodic roadblocks and default crisis. A number of rigorous field studies have shown that even when lending programmes successfully reach borrowers, there is only a limited increase in entrepreneurial activityand no measurable decrease in poverty rates.
There is little doubt that the founders of these organisations were genuinely seeking to help poor and low-income people improve their economic and social prospects. Over time, however, organisational goals (growing bigger, winning international awards, having higher levels of profitability and closer links with mainstream finance) led them to abandon their original mission. The social focus was displaced by financial focus. The sectors biggest shock came seven years ago in Indias southern state of Andhra Pradesh: after a spate of suicides by highly indebted borrowers there, local authorities banned any collection on private microloans. Around $1.2 billion in debts was eventually written off, leaving behind ruined institutions and dismayed investors.
The sectors biggest shock came seven years ago in Indias southern state of Andhra Pradesh: after a spate of suicides by highly indebted borrowers there, local authorities banned any collection on private microloans. Around $1.2 billion in debts was eventually written off, leaving behind ruined institutions and dismayed investors.
The current state of MFIs in India: Politicisation
The industry has seen a dramatic turnaround and a number of measures have led to a creation of an ecosystem for responsible lending. The size of the microfinance industry stands at Rs 106,823 crore. India has some 223 Microfinance Institutions (MFIs), including societies and NGO-run entities.
Universal experience has consistently shown that whenever microfinance suffers a crisis particularly on the client front, the politicians stoke it, sometimes leading to large conflagrations. In India, it has much to do with its socialist history and popular politics. The ‘poor’ are a constituency politicians see as a very sensitive turf. Anything which leads to greater empowerment of the poor makes them insecure. Demonetisation was a big jolt for the poor whose financial lives were heavily rattled, leaving MFIs lurching with poor recoveries. To add to the woes of the collecting agents, politicians poured the explosive political gasoline, inciting borrowers with loan boycott exhortations. The politicians were under an illusion that they scored a political victory over the microfinance industry in Andhra/Telangana in the 2010 crisis but they were wrong. The worst sufferers of the crisis had been the low-income households. With the veritable exit of MFIs from the region, availability of microfinance has dramatically reduced and money-lenders are thriving again and are having a wonderful time.
The politicians were under an illusion that they scored a political victory over the microfinance industry in Andhra/Telangana in the 2010 crisis but they were wrong. The worst sufferers of the crisis had been the low-income households. With the veritable exit of MFIs from the region, availability of microfinance has dramatically reduced and money-lenders are thriving again and are having a wonderful time.
Reformative measures
The first step to ensure both safe and sustainable microfinance is better regulation. MFIs come in many forms mainstream banks, specially licensed banks, non-financial companies, finance and leasing companies, non-governmental organisations, cooperatives and trustsand follow a variety of business models. All of these intermediaries must be recognised and regulated according to the needs of the economies in which they operate.
Clients who are facing default may very well be in the most precarious financial position of their lives and they need empathetic guidance in climbing out of the trap. It is not just financial stress, but mental stress they have to cope with. The elements of a humane approach are known to us all: do not shame or intimidate defaulters but instead, speak to them gently in privacy and with respect; do not deprive them of their basic survival needs or tools of work, be flexible and accommodative and assist them to rehabilitate themselves over time.
Rebooting microfinance
Microfinance needs a relook and has to undergo a soul-searching. When it comes to microfinance it is very important to think outside of the borrowing box. It will have to move beyond its traditional roots.The hard truism is that microfinance has been saddled with misplaced expectations and we have lost a sense of its more modest, even though critical, potential. It is actually a tool in a broader development toolbox but in certain conditions, it happens to be the most powerful tool. It will make the poor a little more resilient but it is not the answer on its own. It has all to do with how we are using it and how we are defining the outcomes.
In conclusion
The practical question is not whether microfinance should continue, but how it can play to its strengths without damaging its social conscience. Before pundits and politicians reduce the questions and solutions posed by the occasional crisis down to sound bites and slogans, we must realise just how positive the effects of microfinance can be, for both financial inclusion and livelihood promotion, if handled correctly. Microfinance needs to shape a more responsible capitalism. It is certainly not an easy choice by any means but a right choice for wise investors and society alike. Similarly, politicians should be wary of the bad consequences of their narrow populism. We have the means of taming wrong tendencies laws for punishing them, norms for shaming them, and cure for healing them. Let us not, in our imperfect understanding or prejudice, throw the baby out with the bathwater.
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