Microfinance at a Glance Total MFIs reporting data 1,900 Gross loan portfolio USD 65.2 billion Deposits USD 26.9 billion Number of borrowers 92.4 million Average loan balance per borrower USD 522.4 Of the world’s 2.5 billion poor (those who live on less than $2 a day), only 10 percent are able to use formal financial services 1 No Good Deed Goes Unpunished The Micro Credit Crisis in India T he crisis exploded in the Indian State of Andhra Pradesh in early October 2010 after tragic casualties from suicides of micro credit users, hit the epicenter of microfinance in India and has fueled allegations on microfinance across the country, and globally. As events continue to unfold in Andhra Pradesh, there were important questions raised about the evolution of microfinance markets more broadly. Does micro credit lead to suicides? Is this the end of micro credit era? Does Microfinance Institutions (MFI) s abuse the poor by exorbitant interest rates? How fair is it to link these catastrophic suicide incidents to micro credit which has globally 92.4 million clients and hamper the right to access to finance of 2.5 billion poor globally? The Background India has a population of 1.2 billion, with less than one-quarter of adults having access to basic formal financial services. Following independence in 1947, much of India’s financial sector was nationalized. Part of the rationale was to ensure access to finance to a much larger number of Indians. In the 1980s social entrepreneurs created the self-help group (SHG)–bank linkage program, whereby commercial banks were encouraged to lend funds to groups of 10 to 20 women. The SHG movement received considerable national policy support led by the National Bank for Agricultural and Rural Development (NABARD). Today there are 4.5 million SHGs receiving credit nationwide, with 58 million members. Microfinance Ascending By the 1990s economic reforms in India opened up space for the private sector to play a larger role in the banking system. Amid these reforms a new breed of private microfinance provider emerged: microfinance institutions (MFIs). As of March 2010, ~27 million borrower accounts served by Indian MFIs, Indian microfinance representing a significant sub-sector of the financial system. It exceeds the number of borrower accounts served by the Regional Rural Banks by as much as 50% and represents 40% of the total number of micro-borrower accounts (of value less than Rs25,000, $555) in the entire Indian financial system. No. 67 1MIX Market ™ is a global, web-based, microfinance information platform. It provides information to sector actors and the public at large on microfinance institutions (MFIs) worldwide.
The Boiler Room of Microfinance: Andhra Pradesh Andhra Pradesh in southeast India is the fifth most populous of India’s 28 states, with 75 million inhabitants. Andhra Pradesh has also undertaken a series of large-scale projects to fight poverty, the most prominent being the Society to Eliminate Rural Poverty (SERP). SERP is a service delivery program under the Rural Development arm of the state government that offers far reaching livelihood promotion programs, including employment generation, vocational training, and access to savings and credit through SHGs. SHGs have a long and important history in Andhra Pradesh and have deeper penetration there than in any other state, with a total of 1.47 million SHGs reaching 17.1 million clients. In the late 1990s some of India’sfirst MFIs got their start in Andhra Pradesh. Today, five of India’s largest NBFC MFIs areheadquartered in Andhra Pradesh making it the epicenter of the microfinance industry inIndia. Over the last five years MFIs in Andhra Pradesh were among the first to attractsignificant investment from specialized MIVs as well as mainstream private equity players.These capital injections have provided the equity capital for growth but they have also createdstrong incentives for continued levels of high growth and profitability to drive highervaluations. All of this has fostered a perception of MFIs as being primarily profit-orientedorganizations. While most MFIs have acted responsibly, a few have generated unusually highreturns on assets, compensated executives lavishly, and remained nontransparent in waysthat only furthered a negative stereotype of MFIs.The Deadly CompetitionThe Rivalry between State –Backed SHG Programme and Private MFIs.The combined presence of the large and well-funded state-backed SHG program and five ofIndia’s largest and fastest growing MFIs has resulted in a rapid proliferation of credit acrossAndhra Pradesh and wide use of multiple loans by borrowers. In Andhra Pradesh, the averagedebt outstanding per household is Rs. 65,000 as compared to a national average of Rs. 7,700of outstanding microfinance debt per poor household.Indeed, the poor often use microloans to pay off far more expensive loans from villagemoneylenders. This suggests that restricting people’s access to microcredit could have theperverse effect of driving more poor people into the arms of village loan-sharks, who stillprovide the bulk of rural credit in poor countries. (In rural AP, 82% of households have suchinformal loans, whereas only 11% have loans from MFIs.) That would be good news for thesemoneylenders, but is surely not the outcome that policymakers want.The Supposedly ‘’Resolution’’On October 14 the government AP issued an Ordinance requiring MFIs to immediately haltoperations, to register, and to await processing of their registrations by an obviouslyunfriendly government before resuming operations. The implications of such drasticinterventions by the government for the long term future of microfinance is difficult to predict.At best it will result in a decline in capital available for microfinance, thereby slowing down itsincreasingly significant effect on financial inclusion; at worst it could destroy microfinancealtogether, resulting in throwing low income families back into the not-so-benevolent arms ofmoneylenders. The rush to impose restrictions on MFIs also betrays a fundamentalmisunderstanding about how the poor use credit. Many politicians cite the existence of clients
with loans from several MFIs at once to argue that the poor are over-indebted. This ignoresthe fact that most microcredit loans are tiny, so that several are needed to meet the needs ofeven a small business. Indeed, the poor often use microloans to pay off far more expensiveloans from village moneylenders.As complex this may look all of those could be prevented by simply taking necessary measureto prevent overindebtedness of micro credit customers. Best way of which would be topromote establishment of a credit bureau and providing access of information to MFImanagers. Indeed an association of Indian MFIs is trying to set up a credit bureau whichwould allow them to track clients’ overall indebtedness and credit histories, thus guardingthem against lending a person more than she is able to handle. This would be helpedenormously if the government speeded up its efforts to give all Indians a universalidentification number. The Indian government should also allow MFIs to take deposits, whichthey are currently prevented from doing: this would make them less dependent on capitalmarkets for funding. All rather complicated things, unlikely to stir up populism. And all a lotmore useful for the poor than an interest-rate cap. Pressing them to reduce rates furtherwould jeopardise their ability to attract private capital, inhibiting their growth. Slower growthwould in turn hamper their ability to harness economies of scale in order to lower transactioncosts and cut rates of their own accord, as many—including the biggest for-profit MFIs—havedone in the past. Forcing down rates would also deter new entrants and reduce competition.India is a country which invests heavily into information technologies and furthermorereceives substantial funds on this particular area. Why have not the regulators taken thisparticular action to prevent this deadly depth track the answers lies in the conscience ofIndian policy makers.One apparent fact is the government in India is an unfair referee as being both a player and areferee which easily leads them to make micro credit as the scapegoat.References: CGAP , Economist Intelligence UnitBurcu Guvenek Araslı M.A.Senior Development Finance ExpertKelebek Sokak 24/8 G.O.P. 06700 Ankara/TurkeyGSM: +90 533 618 3183
Skype: burcu.arasliAcademic StaffMicrofinance InstructorMiddle East Technical University (METU)Faculty of Economic and Administrative SciencesDepartment of Business Administratione-mail: firstname.lastname@example.orgTel: + (90) 312 210-2005Fax: +(90) 312 210-7962http://www.feas.metu.edu.tr/