The Malegam committee that was constituted to look into the state of microcredit in India presented its report a few days back. The report has been greeted with cautious optimism by several experts including N Srinivasan and Ramesh Arunachalam (Note: One USD is equal to Indian Rs. 45. One lakh is 100,000 and one crore is 10 million). The regulator, the Reserve Bank of India (RBI) has now requested comments from the general public and the RBI will finalize its guidelines in March-April 2011.
Meanwhile, the repayments in the state of Andhra Pradesh are still severely affected. Following the Malegam committee report, banks have started restructuring the loans for microfinance organizations (MFIs) that have made a lot of loans in Andhra Pradesh (i.e. MFIs get more time to repay the bank). In the rest of the country repayments continue to be high in the order of 99%. Loans are also being paid back to our MFI partner, Ajiwika, as per usual levels and we do not foresee any problems. Bank lending to MFIs has slowed down considerably and it seems that banks will start lending in a serious manner only after April 2011 when they have greater clarity on the nature of regulations.
These events are profound with a couple of important take-home messages:
- Supporting MFIs with the right social DNA is very important: This crisis highlights the fact that a few MFIs lost the way and started profiteering from the poor rather than helping them. In India alone there are perhaps more than 100 MFIs that are very committed to supporting the poor and are not indulging in any profiteering. However many of them do not get the needed support. Thus we clearly recognize that we need to support these socially oriented organizations and we will continue to support such socially oriented organizations. Conversely we also need to consciously avoid organizations that could potentially one day start profiteering. In this regard, an MFI in Kenya had got a bank loan approval based on a 50% guarantee from UnitedProsperity. On further due diligence we found that the MFI’s effective interest rate was high and the pricing to its borrowers was non-transparent. We therefore decided to not support this MFI.
- Beyond microfinance, focus on livelihoods is essential: A typical MFI would provide credit and in some cases provide other financial services. The clients would in most cases be engaged in different businesses, and beyond assessing the capacity of the borrower to repay the loan, the MFI does not directly help the borrower with her business. Thus if a client of an MFI finds that she cannot get the raw material for her business on time or if the costs go up suddenly or if the market for the product is affected then the client could get severely affected. In some cases these clients may borrow from multiple MFIs or money lenders to tide over what would seem to be a short term crisis and then eventually get enmeshed in a debt trap. An organization that is involved in livelihoods will do much more such as getting together clients who perform a similar business together in a co-operative or a producer company. The organization may pool the raw material requirements of its clients and buy the raw material in bulk from wholesalers or manufacturers cutting out the middlemen. The organization may provide training to its clients in their business. The organization may also aggregate their produce and sell it to end customers cutting out the middlemen. Thus, well run livelihood initiatives reduce input costs, get better prices for their products, reduce risks, allow clients to slowly graduate to larger loans without getting enmeshed in a debt trap, generate higher income and help clients get better control of their businesses and lives.
In my next post I will be writing about a new livelihood initiative that we are working on. And thank you very much for your patience and understanding over the last few months when we have had no loans online.