ET ARTICLES
Five myths about microfinance
Posted on November 11, 2010 | Author: T T Ram Mohan | View 679 | Comment : 5
To say that MFIs are crucial to financial inclusion is to give respectability to what is increasingly a profit-driven activity. MFIs are no different from private banks in India marketing consumer loans or US banks marketing subprime loans. MFIs substituted moneylenders only in a way that many moneylenders found it expedient to set up MFIs themselves.
The microfinance bubble has burst. The AP government ordinance, the AP opposition’s campaign asking borrowers not to repay and the sheer public hostility towards MFIs — all these have put the brakes on MFI activities for now.
We need to rethink the role of MFIs in the rural economy.
In order to do so, we must first grasp some of the myths on which the MFI sector has rested thus far.
MFIs are crucial to financial inclusion: The big impetus to financial inclusion came way back in 1969 following the nationalisation of banks.
Secondly, financial inclusion is not just about giving small-ticket loans.
It is also about taking deposits and providing basic banking services.
MFIs are hardly the pioneers in microfinance.
The early initiative came from the self-help group (SHG) movement started by the government of India in 1992 under the auspices of Nabarad and with the involvement of banks.
This is the biggest outreach programme of its kind in the world.
It covers 86 million poor households and has extended credit of . 23, 000 crore.
MFIs cover 30 million customers and have lent over . 30,000 crore.
Under the SHG scheme, credit is linked to savings (unlike MFI credit).
There is focus on capacity-building among borrowers.
The rate of interest is 8-10% with monthly repayment.
The suggestion that MFIs are crucial to financial inclusion is only part of an attempt to give respectability to what is increasingly a profit-driven activity.
MFIs have reached out to those ignored by banks: The contention is that MFIs complement the efforts of banks by reaching out to those ignored by banks.
This too is not true. AP has an average credit/deposit ratio of over 105% and a ratio of over 80% in half the districts.
(The national average is 63%). AP does not lack credit.
MFIs would have been made a real contribution had they fanned out to states where the credit/deposit ratios are low.
Instead, they have focused on AP. They have done so because AP houses nearly a quarter of the SHGs.
MFIs chose the easy route of tapping into established SHGs for making loans.
This was viable in the early stages but, over time, it has led to the problem of multiple lending and excessive debt burdens.
It is no different from private banks in India marketing consumer loans or US banks marketing subprime loans.
MFIs are an important mechanism for alleviating rural poverty: Credit is only one of several instruments needed for fighting poverty.
Secondly, credit can help alleviate poverty if it goes into income-generation schemes.
MFI credit, for the most part, is for consumption.
Thirdly, returns to agriculture are so low that it is inconceivable that it can service interest rates of 24% and above that MFIs charge.
Since agriculture is the key to rural poverty, it is ridiculous to suggest that MFI credit can help alleviate poverty.
MFIs have substituted moneylenders who used to charge even higher interest rates: The comparison with moneylenders is flawed.
Moneylenders don’t go out and market their loans as MFIs do.
Besides, moneylenders make loans strictly against collateral and this is a built-in check on lending.
Secondly, MFI interest rates in AP are said to be have been in the range of 24-60%.
At the upper end, the rates are no different from those of moneylenders.
Yes, MFIs did substitute moneylenders in a way because many moneylenders found it expedient to set up MFIs themselves — they could then have easy access to bank funds!
High operational costs means that smallticket loans cannot cost less than 24%: If this is true, how is lending to SHGs viable?
The high lending rates of many MFIs translate into fat salaries for executives and abnormal returns.
(Some have return on assets of 5%; a bank is lucky if it makes 1%).
Public sector banks (PSBs) have long had branches in the rural areas.
Small loans will be one element in their portfolio which will include low-cost deposits and other products.
With branch costs fully written off, it is hard to see why microfinance provided by PSBs needs to be priced at 24%.
If indeed the operational costs turn out to be steep in some areas, then the bank correspondent and other models need to be developed.
PSBs have not put their best foot forward in respect of microfinance because they lack the incentives to do so.
Most are listed now and have had to focus on earnings growth, which is easily provided by corporate and retail credit.
The regulatory cap on interest on small loans was a dampener. (The cap is now gone).
Lending to MFIs qualified as priority sector credit, so PSBs could not be troubled to build their own portfolios.
Many people think the recent problems with MFIs were the result of some excesses.
With a little tweaking here and there, MFIs can be in the forefront of financial inclusion.
They are wrong. The entire MFI model needs revisiting.
At least PSBs are much better placed to pursue financial inclusion on their own.
The AP ordinance and its fallout ensure that the go-go days for MFIs are over. And that is all to the good.
Post Comment
Comment
Comments (5)
- What about the states where there have been nil state sponsored SHG schemes? e.g. Tamilnadu (Equitas is working there). Such states in my opinion, need MFI. Which is why, the state governments are working in conjunction with MFIs regarding new ordinances/laws. In AP, the intent of the government seems to be to harm (a strong word but maybe needed) the MFIs. In other states such as TN, the govt. mindset is more constructive as the need being fulfilled is genuine. Also, MFIs such as Equitas are already self regulating themselves.
Posted by Anirudh Singh | 23 Nov, 2010
- Though the MFIs tells they are serving the poor, yet the micro finance services especially credits is not accessible to last one of the society. In metro cities the families earn more than ` 4 laks in a year are considered as client of various MFIs. Now Micro Finance is only a tool to receive loan from institutions easily and avail subsidy.
Posted by Satyendra Nath Pandey | 15 Nov, 2010
- Looking at the salary and perks of microfince companies, one cannot say they are serving the best interests of the poor. It is obvious that these companies can sustain thier luxurious compensation model, these companies have to exploit the hapless poor.
Posted by George Varuggheese,President at Godimages Good Governance Society|11 Nov, 2010
-
while i appreciate the news i only bring a small note placed before you.
The city Hoardings are giving clear message to prospective clients that Home loans are available at 8.75% where as your message says one micro finance company is kind enough to reduce the interest rate to 24% after so much of agitation.
A Small entrepreneur who is having hand to mouth living are asked to pay 24 % where as
...See More
Posted by Satya Narayana Palukuru,Advocates & Mediators at Advocate , Hyderabad|11 Nov, 2010
- build up your knowledge on MFI before making such comments. you need to work in a MFI for a year. that wht i can say after reading your comments...... good day.
Posted by arrogantgal | 11 Nov, 2010
|
It's true, India has emerged
President Barack Obama's visit has broken the glass ceiling by broadening India's strategic relevanc..
Amit Mitra
Read full story 
|
Kate Pickett
We are social epidemiologists; people who usually spend their time trying to understand how social f..
Vithal C Nadkarni
God's own country finds your columnist searching for antique animal figures of boars, buffaloes and ..
About Us | Terms & Conditions | Contact Us
Copyright © PeerPower.com 2010. All rights reserved.
powered by 