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FEATURES/Real Issue | Apr 5, 2010 | 15842 views

The Indian Microfinance Impasse

A small pocket in South India has made the microfinance industry sit up and review its heady growth and practices
The Indian Microfinance Impasse
Image: Gireesh G V for Forbes India
DEAD END: Shut out from taking MFI loans, beedi worker Shama is back to borrowing from money lenders

M

ohamed Saifulla smiles as he pulls out a thick folder in the pale green office of the Anjuman-E Islamia of Kolar. He may well smile. Saifulla and the Anjuman committee are in a great part responsible for the Indian microfinance industry now finding itself with its back against the wall. The outgoing president of the Anjuman committee, made up of nominees from the town’s mosques, Saifulla has agreed to show us details of women borrowers who were harassed by microfinance institutions for repayments. Instead what he brings out ceremoniously from a plastic bag is a file with clips of blog accounts, comments and newspaper articles about how the committee brought microfinance repayments to a grinding halt in Kolar.

“Most of them agree with us,” he says, basking in his new celebrity status and pointing to articles that say the meteoric growth of microfinance could lead to problems. Saifulla knows he has caught India’s MFI industry by the scruff of its neck. Upon a directive from Anjuman in February 2009, Muslim women borrowers stopped repayments Kolar, Mysore, Ramanagaram, Tumkur and other neighbouring towns in Southern Karnataka amounting to a default of around Rs. 60 crore for microfinance institutions (MFIs), probably the biggest default in the Indian microfinance industry.

While MFI activity in India has grown exponentially, the top five MFIs have more than doubled their client bases and grown at more than 45 percent over the last couple of years, some areas like Kolar are facing saturation. But for an industry that prides itself on near 100 percent repayment rates and doubled its turnover last year, the Kolar standoff is bad news not just for the loss of the money but for the larger ills that plague the entire microfinance ecosystem.

Microfinance has changed social and economic equations even in conservative societies. Is it now being held hostage by interests that are threatened by this change? Or has the industry skipped processes in its eagerness to grow? Turns out it is a bit of both. What the microfinance industry is also pondering is how this can be prevented from happening again.

On the Ground
The growth of MFIs in Kolar has been a natural consequence of the socio-economic fabric of the place.
A poor, area with a considerable Muslim polulation, Kolar was known for housing India’s only gold mines, an hour away from the town. But when the mines closed, it came to depend on silk factories as did Ramanagaram, a rocky place known more as the location of the cult film Sholay. But with the decline of silk factories, most women just sit outside their houses endlessly rolling beedis that earn them no more than Rs. 60 or Rs. 70 a day.

Most who say they started small businesses, including pushcarts selling firewood or vegetables or opened repair shops, say they suffered losses because people had no means to buy. With no way to earn, the lure of the increasingly available MFIs loans became hard to resist but harder to return.
Jabeen (who uses a single name) is a defaulter like hundreds of others who have taken multiple loans from MFIs. Jabeen and three friends have gathered at her house to talk about their financial woes. Jabeen says she took loans worth Rs. 15,000 and Rs. 12,000 from Rores Micro Entrepreneur Development Trust and FFSL Microfinance for house repairs and to give her husband — an auto driver who wanted to start a small business. But that did not work out and eventually Jabeen had to take a loan from the money lender to make her weekly repayments. So, it was with some relief that she told MFI officers that she would not repay till the Anjuman allowed her to.

But a year later Jabeen and her friends agree that they need loans of at least Rs. 10,000 a year to pay school fees or celebrate festivals. “If the Anjuman asked us to stop paying can they give us even Rs. 100?” Jabeen demands even as an Anjuman member, who accompanied us to her house, glares at her. The choking of MFI loans has meant that they are now borrowing small amounts at high interest rates from moneylenders.

As we leave the house they call out to say they would like to work, earn and then take loans and repay but that there are no jobs for women to do here in Kolar. To give this desperate message out they change their minds about not allowing their names to be used for this article.

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Comments (3)
Siddarth Apr 7, 2010
The lure of meat brings the dogs. Microfinance once viewed as a market efficient way of providing the poor credit has now become a cover for the same hoodlums and anti social elements. It needs some broad regulation.
Devesh Sachdev Apr 6, 2010
Microfinance Companies need to sit back and ponder/decide on the overall positioning of their business whether it is commercial microfinance, responsible microfinance or social microfinance. The focus should shift back to relationship based business rather than transaction based.
Vasudevan P N Apr 6, 2010
The trend happening in micro finance space is what has happened in other lending sectors earlier. The small ticket personal loan (stpl) is a classic case in point. for over a decade citi corp and GE capital had successfully been lending small amounts (upto Rs. 50,000) to individuals as personal loans and it was very profitable. however in 2006, 7 new players viz icici, hdfc, hsbc, db, choladbs, indiabulls and fullerton entered and this led to significant amount of over funding of same clients and ultimately by 2008 all of them, including the first two successful pioneers downed shutters and wrote off huge amounts. the question is whether it can happen in micro finance.







The answer is clearly that if we, in micro finance do what others did in other sectors, there is no reason why our end result would be any different. However herein, lies the key difference. The entire micro finance industry is a fully united industry which has never been the case with other sectors and lenders. In the MFI space, there is a new body called MFIN which is created which has all NBFC MFIs as its members. MFIN has now rolled out a code of conduct which lays down that no client shall be funded by more than 3 MFIs at any point in time. Also the funding should be only within what the client would be able to service and under no circumstance it can exceed cumulatively for all 3 put together, Rs. 50,000. This is a landmark agreement on self-regulation amongst the MFIs not heard of in any other sector. A strict enforcement mechanism is also put in place and consistent default by members on this, can lead to their name being struck off the membership of MFIN. Parallelly MFIN is in discussion with lenders and investors to make membership of MFIN a must to have lending / investing relationship. This would ensure that the code is followed truly by all.







Also MFIN's code of conduct talks of transparency in communicating interest rates to clients and we have taken help of mfTransparency.org to help bring about ultimate transparency in the indian MFI sector. These initiatives are expected to fructify over the next few months/quarters.







Parallelly Alpha Micro-finance consultants p ltd has recd equity investment from all the NBFC MFIs and has in turn taken a 5% stake in one of the credit bureaus. Alpha is in discussion with the credit bureaus and the MFIs and is helping the MFIs take their data out and make it bureau complaint so that it can be uploaded to them. While it is early times, Alpha expects that in about 9 months most of the members' data would be on the bureau and we would have authentic data on overall client indebtedness. Also alpha will be working with UIDAI to help as an enroller to collect biometrics of its member clients and family members and help them get Unique number which will further help in the credit referencing process.



The amount of close coordination between the MFIs and their willingness to be self-regulated is something i have never seen either in the general NBFC industry nor in the banking industry (both of which i have worked earlier). While the criticism on heated growth of MFIs and poor client servicing is probably true in pockets, but one would have to come close to the sector to see the amazing level of serious intent of the sector to self--regulate. i am very confident that the MFI sector would be strengthened through such sector level initiatives and the sector would be able to sustainably take forward the national agenda of financial inclusion of the over 600 million excluded population, in a fair and ethical manner.
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