The Indian Microfinance Lending Machine
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Image: Vikas Khot
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ijay Mahajan’s morning walks are interrupted by neighbours who question him about the recent controversy around MFIs. They want the man regarded as the father of microfinance in India to explain why there are so many suicides related to MFI lending. “I feel like my whole life’s work is turning to ashes. I’ve spent the last two weeks, just running to regulators and government officials, defending microfinance,” says the founder and chairman of BASIX, India’s first microfinance company, and president of the Microfinance Institutions Network (MFin).
He is not often given to words as strong as these. But then the microfinance sector hasn’t seen times like these. From one angle, these are the best of times. Microfinance is as hot as the tech sector was 10 years ago. Valuations are crazy. It’s poster child SKS Microfinance has just listed on the stock exchanges at a handsome premium. Investors want a piece of any half-decent microfinance outfit if ongoing capital-raising is any indication.
These are also the worst of times. Officials and the media in Andhra Pradesh, the largest MFI market in the country, have whipped up themselves into frenzy over a sudden spate of what might be MFI-related suicides amongst poor borrowers. Last week, Chief Minister K. Rosaiah warned MFIs against charging usurious interest rates and passed stringent rules governing their behavior. Add to this, a statement from the union finance ministry that a cap on MFI interest rates is being considered. The Reserve Bank of India has also formed a committee to examine if loans from banks to MFIs ought to remain classified as priority sector. “Forget all three, if even one of these policies comes through, it could be a huge setback for the MFI sector,” says Mahajan.
Alok Prasad, CEO of MFin, a group of 44 profit-oriented microfinance companies put it succinctly when he told Financial Times, “The operations of the microfinance institutions have come to a grinding halt. They cannot lend, and they cannot collect repayment. They are dead in the water.” There is every possibility that this will create chunks of bad loans and can cripple many microfinance companies.
The stock market isn’t taking to these developments kindly. Already SKS has fallen from the high perch that investors gave it at the time of listing. Adding to the external problems is the company’s own troubles, chiefly the mystery surrounding the unceremonious dismissal of its CEO, Suresh Gurumani. As a result, the several IPOs that were expected to follow SKS, including those of Spandana and SHARE Microfinance, have been delayed.
For many, the ouster actually signals the wider problem with the aggressive business model that SKS had chosen.
“We’re not a listed entity but we might go in for an IPO in 3-4 years time and this is a good learning lesson so we don’t have such kind of issues when we get into those spaces,” says Suresh Krishnan, MD, Grameen Koota, a Bangalore-based MFI.
Poster Boy to Problem Child
And to think that SKS, the model MFI until yesterday, would be the source of much of this embarrassment. Founded as a non-profit in 1998, SKS (Swayam Krushi Sangam) is the largest MFI in India and one of the first to show private capital could be used as a means to reach the poor. It reaches over 7.3 million women and has 2,226 branches in 100,000 villages in 19 states across the country. It has a 99 per cent on-time repayment rate, a disbursement record of over Rs. 16,000 crore and a net worth of Rs. 1,016 crore (in June) and is of one of the fastest growing MFIs in the world. Much of the growth came after it changed to a for-profit enterprise.
BusinessWeek named SKS as one of the top five emerging and influential companies in the world in 2009 and last year, rating agency CRISIL ranked SKS as first among the top 50 MFIs in India. Its IPO was over-subscribed 13 times. “The performance of the company is not only solid but spectacular,” says the company’s founder and chairman, Vikram Akula.
Despite all its success, many of its peers feel SKS’ aggressive growth has put them on a back foot. Its for-profit image is making regulators deeply uncomfortable. SKS is intriguingly eroding its own messianic image before the world. The controversial decision by its board to sack its CEO barely two months after the IPO has only added to its woes.
“Somewhere they have got lost and they need to revisit their soul,” says Ela Bhatt, founder of Self Employed Women’s Association (SEWA). Former employees agree. “It seems as though the dream Vikram started out with is rapidly turning into an illusion,” says Anna Somos Krishnan, a former SKS executive and now executive director of Planet Finance India, an international NGO for the development of microfinance.
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Join the Campaign and ban MFIs. If they want to profit from the blood of the poor, lets give them a taste of their own medicine. Vikram Akula of SKS Microfinance is our mascot
What'€™s wrong with Micro-finance Institutions? Practically everything as the case of SKS illustrates.
http://devconsultgroup.blogspot.com/2010/10/whats-wrong-with-micro-finance.html
I think:
1. Govt can take conclusive action to rectify the situation especially the MARKUP point which is too high there in India (as highlighted in the para). - However keeping in view the current price hikes/ inflation issues/ expenditures and many more, the interest rate could be revised but through the regulatory body and not by the stack holder;s will.
2. Stack holders should be harnessed at a level of profit only.
-- closing the MFI sector would creat a malignant financial problems to those who could not go to other commercial banks, however reforming the sector would be much more effective.
