8/8/2019 What is Wrong With Indian Micro-Finance

1/3

The industry hailed itself as the saviour of the poor.But it is now stuck in its own web. An insider's per-spective on how it got itself into this messGrowth at a Scorching PaceFrom people carrying a sling bag on theirshoulders and dressed in a khadi kurta,the microfinance industry has moved up-market either to suits or FabIndia kurtas.A netbook has replaced the sling bag. Inabout a decade, microfinance has moved

from helping the poor to access financeto an interesting business at the bottomof the pyramid. This paradigm shift hap-pened with the entry of funding, initiallyfrom Silicon Valley, and then from thepeople who funded and fuelled the growthof SiliconValley.What is WrongWith IndianMicrofinance

by M.S. Sriram

. . .

Somebody from Silicon Valleywouldtypically be an entrepreneur who startedsmall, scaled up fast, used the asymme-tries in the market and logically and le-gallybecame rich. Many were first genera-tion entrepreneurs and did not forgettheirroots. Itwas logicalfor them to investtheirsurpluses into the business ofdoing good.

However, their ownsuccessand growthexperience dictated that while they dogood, they should also dowell.Doingwelltranslated into good business plans, tar-gets and also growing at a scorching pace.

'e: ;z!c~L- _

FORBES INDIA May 21, 2010

8/8/2019 What is Wrong With Indian Micro-Finance

2/3

All was well for us, within the indus-try, when the base was small. There wereseveral 100 percents in the microfinancesector. The growth rate was in excess of100percent, recoverywas 100percent andthe sustainability indices quickly crossed100percent. Voila,we had found a magicmantra where the poor could be served,we could look good and put "eradicationof poverty" as our mission statement andof course, lead a comfortable life. The al-ternative sources that were funding thepoor made us look likemessiahs.

The problem was that we were deal-ing with people and not processes andsystems. This involved group formationand dealing with behavioural patterns ofpeople. But we got addicted to the headygrowth target. And when we chase targetswithout logic, we cut corners. We becamecut-throat in competition and we lost asense of balance. There are enough signalsfor us to push the pause button.Multiple LendingIs there a bubble being created? Are mostmicrofinance institutions chasing thesame customer? Are we pushing the cus-tomer - the poor woman - into a debttrap? Would this lead to suicides?Wehaveto realise that these are not issues of today,but issues ofyore.

When an MFI lends to a family thatis indebted to a moneylender, there is al-ready multiple lending. In 2005 when Iwas doing fieldwork, one of the microfi-nance heads told me, "We have made ourprocesses simplez If the potential borrow-er has already passed a group recognitiontest of a competitor, she is eligible for aloan from us".It could be interpreted asle-veraging on the social capital built by oth-ers, or as multiple lending - the choiceis yours.

The question is not whether there ismultiple lending. The question is whetherthe lender knows the absorption and re-payment capacity of the borrower. It isimpossible to know this if we are doing agroup meeting in 20minutes and movingon. It is impossible to address this whenwe have standardised products and offera higher loan each cycle. Our credit offi-cers are trained to be robots following aprocess mechanically and are prohibitedto think. Therefore multiple lending is aproblem of the MFIs. We clearly do notknow our customers enough, and do nothavethe time to know them.

There havebeen moves to have a creditbureau to address this problem. Is this nota joke? What will a centralised databasecovering Ganjam (Orissa) and Ernakulam(Kerala), Chennai (TamilNadu) and Lud-hiana (Punjab) tell me better than whatmy credit officer can tell? Every organisa-tion operating in the area knows the other.

Wehave asked our credit officersto chasetargets. If onlywe ask our credit officerstotreat this money as their own and see if itis worth lending to the client; if only weallow our credit officersto think.Reading the Signals WrongThere was a crisis in Krishna (AndhraPradesh). We read it as a jealous govern-ment programme trying to get back at us.This was a crackpot zealous set of peoplewho just wanted to shut us up because wewere immensely successful. Then therewas Nizamabad (Andhra Pradesh). Wesaid that this is communalisation. Howcould this happen to a secular businesslike lending to the poor. Then Kolar (Kar-nataka), and Idukki (Kerala).

This is not a localised response. Peopleofdifferent orientation and differentback-grounds are getting upset with our busi-ness. We can have a micro argument foreach one of these and be satisfied with "Iam the best and nobody understands me"syndrome. Where are we going wrong? Isthere something in what is happening?It is impossible to knowthe payment capacity ofa client if we are doing agroup meeting in 20minutes and moving on

In Krishna, we suddenly decided thatwe could afford to reduce interest ratesand continue with life as usual. Does thatmean that we were charging more? Howdowetread the fineline between trying toseek "what the market can pay" price andnot appear greedy?

The reason why we should not appeargreedy is not because we should not makemoney and lead a comfortable life, butbecause we have positioned ourselves asinstitutions that work exclusivelywith thepoor and towards the eradication of pov-erty and empowerment ofwomen. If thatis the positioning, we should not be seenas seeking excessivereturns from the poorto lead a lavish lifestyle.

The signals in Krishna, Nizamabad,May 21.2010, FORBES INDIA

8/8/2019 What is Wrong With Indian Micro-Finance

3/3

II

Closer Look Credit officers must be encouraged to take the time to understand their clientsKolar and Idukki are about the mismatchbetween the lofty objectives, our targetclients on one hand, and the amount ofreturns and overnight wealth we are get-ting on the other. These are larger signals.We need a macro response and not anisolated, insulated response. We shouldbe seen as "responsible" lenders and beseen more aligned to the larger publicsector banks rather than be called white-collared moneylenders.Good Boys in Bed with BadThe microfinance sector in general hasa false sense of solidarity. The good boysconstantly stand up for the bad boys incase of a crisis. This is a peculiar syn-drome. If there is bad name for microfi-nance on account of a bad egg, it affectsus. Therefore if there isan organisation wedo not like, we still support them becauseit might affectus.

So the good boys think they need toprotect the "sector': The good boys thinkthat they are using the bad boys to buildthe numbers and show how big and influ-ential they are, and the bad boys are shoot-ing under the coverofgood boys. Itis timethat some of the leaders of microfinancestood up and called a spade a spade. Weare afraid to raise questions about "sue-

cessful" and "powerful" people becauseit might affect us. While that is a goodshort-term view,it is going to hit us badlyin the long run. We hope that if we forman industry association and evolvea codeof conduct, the entire problem would besolved. It isjust a matter of getting togeth-er, putting our heads together and makingpledges about being transparent, non-exploitative and treating the poor clientwith dignity.

Unfortunately we do not say this be-fore we admit somebody to the associa-tion. Why can we not say that unless weare already adhering to the code there isno admission to this club? But no, we livein eternal hope that we will reform ourmal-adjusted juvenile delinquents.

Wekeep their company when wemeetthe regulator, we ask and even plead withthe bad boys to be with us when we meetthe ministry. We want to show that weareunited. United for what?1 5 there Hope of a Correction?The poor are smart, sometimes smarterthan the people who are lending to them.They have learnt the art of juggling theimpossible, struggling for everyday lifeand therefore they know every trick in thetrade that has been used and not used. If

we think weare taking them for a ride, letus pause and think. If the MFI gives thesense to the borrower that it is unscrupu-lous, the borrower will take the MFI for aride sooner or later!The day they reach atipping point where they think enough isenough, they will default. Neither coer-cion nor any group mechanism willwork.It will not work because we would havealready put them into a debt trap and thisis the only response they have. Since theyhave no exposure with us and we have allthe exposure with them, it is us who willcollapse, not them.

There are talks of self regulation andpassing a bill. Selfregulation is an oxymo-ron. I should show responsible behaviourand I have regulated myself. Period. I donot need a peer group to regulate myal-ready good behaviour.

Therefore it is a question of intent. IfI want to be responsible, then no lawwillprevent me from being good.Regulationis

T he m icro fin an ce secto rin general has a false -and unnecessary - senseo f so lida rity

needed to dealwiththe deviant behaviour.Therefore regulation is not preventive, itis only a framework to deal with an eventafter it happens. The industry has to autocorrect. I do not think there is any otherway.MFIs may have a cascading collapsein placeswhere the competition is unscru-pulous and intense. I think weshould notlament if an MFI collapses.

Nothing can grow at the rate at whichMFIs are growing, particularly in the fi-nancial world. It isalla question of whoisthe sucker who exits first when the goingis good.

Th e au thor has worked fO T, or s er ve d o n,th e b oa rds o f d iffe re nt m ic rofinanc e in sti-

tutions . He r ema in s a d ir ector at Sang-ha mitra R ura l Fina ncia l S ervice, an MFI .H e w as a pro fes sor at the In dia n Institute

o f Management, Ahm eda ba d and iscurrently a n in de pe nd en t p rofessional

ba sed in B an ga lore

FORBES INDIA May 21,2010