In one of my earlier article (NREGA and Implementation Blues), I had mentioned about the menace of microfinance in short and now, few months later MFIs are the sensational news in the media for all the wrong reasons!
As usual, this is not a surprising challenge to the Governments as it was spreading its wings gradually in various pockets of the country. Our Governments have never been proactive and as a standard practice, wait for mishaps/ disasters to reciprocate and act!! The super economists of our country (including the whiz ministers) should have foreseen the magnitude and potential of growth of these institutions and took enough care to ensure the safety mechanism by introducing an apex body under RBI in line with TRAI (Telecom Regulatory Authority of India) and IRDA (Insurance Regulatory and Development Authority).
However, before taking up a campaign against all the MFIs, we need to understand the actual socio economic conditions which make the business model of MFIs lucrative…!
- The lack luster attitude and inefficient approach of macro finance corporations (All banks and financial institutions).
- The alcoholism amongst the BPL families and the financial impact it makes on these families.
- Common man’s needs and the necessity of small credit for various requirements of life.
- Common man’s inaccessibility to the Macro finance Corporations (All Nationalised, Scheduled and Private Sector Banks), due to various restrictions and regulations which distances these reliable customers from savings and the benefits of it…!
- The grip of money lenders on these marginalized families.
Now, all these socio economic conditions make the right combination of manure for a Micro Finance Institution to establish and grow well!
I know this gentleman who is a chronic Bachelor from Harward University, who was inspired by the speech of Dr. Younis and went to Bangladesh to understand the Grameen Bank model and on his way back, he resigned his job at Harward to start an organization which intended to help women groups with small credits for establishing micro enterprises for sustainable development and self reliance!
It was even difficult for my friend to open an account in the local nationalized bank and he literally struggled to establish himself amongst his target beneficiaries. He also had to undergo lots of hardships to adapt the Grameen Bank System for Indian scenario…! However, in 2005 when I was invited for their 5th Year anniversary programme, I realized that this small organization had grown to achieve 20+ Crores turn over and about 1500 families were beneficiaries of the organization! This achievement was because of the hard work he had put in with lots of vision and nerves of steel!!
I remember he had a problem initially with some of the local politicians (from various parties), who used to send a list of names with recommendations to include them in the creditors list. I strongly believe that it was his nerves of steel, which resisted such interventions and made it mandatory to not to have any recommendations as an eligibility criteria for availing credits! Then there was a scathing attack by some of these self claimed local leaders and as a matter of fact, their point of contention was also similar to the recent one at Andhra Pradesh that the interest rate was very high and the beneficiaries are looted by this MFI..! There was some local bandh also organized by them!! However, what happened was that this entire women groups who were the beneficiaries (It was about 200 families at that point of time) had organized a support march and there ended the matter!! He brought out a transparent interest portfolio to make the public aware what is interest he’s paying to his investing banks and the cost involved in servicing the beneficiaries.
This organization’s growth was purely based on the following basic principles they follow…
1) The eligibility criteria are not compromised under any circumstances.
2) The first credit in a group is extended only after the group dynamics is established well among the group members.
3) The identification of the right micro enterprise and getting some of the best professionals as resource persons for the projects to impart training for the staff and then to the BG (Beneficiary Group) to make them capable of running it on its own.
4) Persistent analysis of each beneficiary group and to hand hold them till they become capable of handling their finances on their own.
5) Keep up the principle to micro monitor the BG for giving them directions and not to micro manage!
6) Refinancing options for the micro enterprises are given depending on the performance and to change course to adapt to a new variances in the enterprise and vision.
Apart from all these, the BG Members’ social financial health is monitored and intervened whenever necessary to correct and support to get going! This was possible because the decision making is centrally controlled and there were no intentions of profit making other than fulfilling the expenditures and salaries for everyone including the CEO and the honorarium for board members. However, whatever margins made go to the seed capital and roll back to the expansion schemes.
I had helped identifying the right micro enterprises for some institutions, who operates in the north east region of India with lots of sincerity and transparency and was invited to be on the board of some institutions from Srilanka and Hongkong as well.
Now, coming back to the current scenario, it is entirely different and most of the MFIs mushroomed are re-incarnation of old time money lending/ finance companies and tried to fit into shoes of NGOs and they lack the actual vision, purpose or sensitivity of the BGs and their needs. This, added with the unhealthy competition lured the BG Families into a debt trap, which was an obvious turnout of the mushrooming number of MFIs since late 90s, which lost the credentials and ethics gradually, thanks to governments’ lackluster attitude towards the oncoming menace! The end result being the issues what we are seeing now and it is going to continue until the government form a very strong apex body to control and audit norms of functioning for these Institutions.
There are few immediate steps to be taken by Governments to arrest this surge….
1) Curb the interest rate of the seed capital given to credible MFIs at par with the country’s PLRs and block any other funding patterns from inside or outside the country.
2) Fix maximum interest rate tariff (MIRT) for lending by MFIs.
3) Conduct strict audits with the help of third party firms and take stringent decisions on MFIs.
4) Create a pattern of self appraisal for each MFIs with feedback from their respective BG’s perspective.
5) Create performance awards and acknowledgements with social audits.
6) Create a body to enquire into any unethical practices by these institutions.
To conclude, if the government does not act fast on this, there will be more disasters waiting in the growth curve ahead!