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Microfinance could crush target groups

Saye Sekhar | January 23, 2012 | 2 Comments

Microfinance as a concept hit a roadblock in India. When someone offers cash sans any security or questions, it is difficult to resist the lure of lucre. The indigent tend to avail themselves of the crumbs even if it costs little dearer. This typical human weakness seemed to be a cash cow for some institutions.

At the outset, capitalising on this enticing opportunity appeared plausible for Microfinance institutions what with an overwhelming response from the subjects, who took a little longer than usual to realise the intricacies.

When they deciphered the dogma, the street-corner moneylender, who was always seen as a villain de peace, shone in contrast.

Thus, microfinance is a failure for sure in India, as there is no revenue model for the unsecured loans. There is no way the microfinance institutions can be put back on track, unless they take the route of a non-banking financial institution (NBFC).

The transformation of a micro-lender from being a not-for-profit institution in the form of a non-governmental organisation to an NBFC to a local area bank offering savings and other banking services akin to Prof. Muhammad Yunus’s Grameen Bank model in Bangaldesh is not easy in India, thanks to the regulatory environment.

Let us demystify the complicated sector only to understand why the ‘for-profit’ model of microfinance too failed in India. Grameen and other microfinance models have the participation of borrowers.

To put in a nutshell, we may liken the same to cooperative model where lenders and borrowers are equity-holders who surely would not dent the institutional interests, at any cost.

When some microfinance institutions (MFIs) took up micro-lending activity, they were pretty sure that the borrower is investing the loan amount in an income-generating activity. Share and BASIX are live example of the same.

When it comes to a few other for-profit MFIs, the story is completely different. I know of a few families which borrowed a sum of Rs.5,000 to Rs.12,000 to celebrate a family function or go on a pilgrimage. They were obliged to repay a sum of Rs.250 a week and the interest rate ran into a whopping 36 per cent to 48 per cent. This could happen to your trusted maid or driver too.

In case any borrower of this kind fails to repay an instalment, he/she — usually, it is the woman of the family, as loans are given mostly to women groups — incurs the wrath of the lending company, which entrusts the task of collection to goons who would arm-twist them.

The MFI neither verifies the repayment capacity of the borrower, nor does it make any need-analysis before offering the loan. If the borrowed amount is used for establishing a small motor mechanic shop or a tailoring unit or anything of that ilk, it generates some income and the part of the proceeds can be earmarked to service the debt. But the economics of a poor family crumble, when the loan from MFI is like a hand-loan it is used to raising on and off.

With a view to subjecting the defaulters to ‘peer pressure’, the group model was chosen as a weapon for surreptitious coercion by MFIs. However, the ‘domino’ effect, wherein all members of the entire group gang up and refuse to repay, turned out to be a dampener to the microfinance.

Andhra Pradesh Government’s laggard Act that infused politically-motivated restriction on the MFIs drilled a hole in the books of the MFIs. But the recommendations of Malegam committee at the behest of the Reserve Bank of India broadly provided the framework for a healthy functioning of the industry. Yet, the ‘for-profit’ MFIs apparently reached a cul de sac. They can neither walk back nor can they surge ahead.