Microfinance as it started in Bangladesh is a social business. i.e. The microfinance institution (MFI) is either a non-profit or is owned by its borrowers in case it is a for-profit institution (e.g. Grameen Bank). This ensured that most of these organizations in Bangladesh are single bottom-line, pro-poor organizations whose primary and only mission is helping the poor in a sustainable manner. While most MFIs are non-profits, there is an emerging trend of commercializing microfinance by establishing for-profit MFIs.
In India, a few MFIs have raised equity from socially minded investors and also commercially oriented venture capitalists and private equity firms.Some of these for-profit MFIs also had plans of going public and SKS Microfinance became the first MFI from India to go public in August 2010. This was not appreciated by Prof. Muhammad Yunus who said that this is not the right direction. For those interested in knowing more, the two debates at Clinton Global Initiative and at Asia Society offer a fascinating perspective.
The last few days have been pretty unprecedented for microfinance in the state of Andhra Pradesh in India.Here is a summary of what has happened and some of its potential implications:
In the state of Andhra Pradesh in India, which is the home of several for-profit MFIs, several borrowers were facing extreme stress from excessive debt due to excessive borrowing from multiple MFIs and also from local money-lenders. There were also some reported cases of suicides due to debt-stress.
Extreme debt-stress amongst borrowers forced the Andhra Pradesh state government to implement several measures to protect the interests of the borrowers. The Principal Secretary of rural development at Andhra Pradesh clearly stated certain aspects that are non-negotiable in the operations of MFIs:
“We are very clear that certain fundamentals are non-negotiable for example, there cannot be any coercive mechanism, second thing is that there cannot be any multiple lending and third thing is that there cannot be lending without due diligence. I think these are fundamentals, beyond that certainly we are prepared to discuss and then we are prepared to look at it with open mind as far as the modalities are concerned, we are with open mind and we can certainly look at any difficulties that are arising and then dissolve it.”
Since then, Vijay Mahajan, the CEO of Basix which is a large MFI in India, and one of the most respected microfinance leaders summarized the problem and stated that these events will serve as a course correction:
“So it was basically situation where the sector’s incentive structures had gone wrong and I think that corrective has happened. We will rebuild the sector along the right lines and I am sure we will contribute to financial inclusion in the country but all over the country not just Andhra Pradesh.”
Elisabeth Rhyne, Managing Director, Center for Financial Inclusion also writes on similar lines:
“The blame for this unfortunate situation falls most squarely on the MFIs that failed to restrain aggressive growth even as the market became increasingly saturated. Investors must also swallow a big spoonful of blame. Because they paid dearly for shares in the MFIs, they need fast growth to make their investments pay off.”
I believe that the path of course correction has just started and if correctly done with the help of regulators it will be of great benefit to the poor. But the next few months are likely to be turbulent in Andhra Pradesh. MFIs in Andhra Pradesh are not reporting their usual level of collections from borrowers and as a result the finances of the MFIs who are operating in Andhra Pradesh are likely to be strained.
Banks have also slowed down their lending to MFIs and several loans that were to be disbursed to MFIs located all over India have been put on hold over the last few weeks. Banks are slowly resuming lending, but their approach is likely to be cautious for several months to come.
Ajiwika, our microfinance partner works in the states of Jharkhand and Bihar. Unlike Andhra Pradesh, these two states have low levels of penetration of microfinance and Ajiwika is not having any difficulty collecting repayments from borrowers. However, we are waiting on our partner bank to disburse the loan to Ajiwika for profiles for which we have already raised the guarantee (See for profiles by Raised status on http://www.unitedprosperity.org/us/featured_loan_listings).
Although this situation happened in Andhra Pradesh, it is going to affect poor families all over India over the next few months. With banks becoming more cautious in lending to microfinance, it is going to slow down the availability of microcredit in regions like Jharkhand, Bihar, Kutch and others that have low levels of microcredit.
At a broader level, this raises a bigger question. Is the external investor driven profit-maximizing approach appropriate for solving complex problems such as poverty? Can it create unintended consequences especially for those who have so little, as we saw in the case of Andhra Pradesh?
A desire to help fellow humans is the primary motivation for United Prosperity and our loan guarantors. Social Businesses, that carry a single bottom-line of only helping the poor in a sustainable manner, as enunciated by Prof. Yunus, are certainly the need of the hour.