What is Wrong With Indian Microfinance
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Image: Abhijeet Kini
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Growth at a Scorching Pace
From people carrying a sling bag on their shoulders and dressed in a khadi kurta, the microfinance industry has moved upmarket either to suits or FabIndia kurtas. A netbook has replaced the sling bag. In about a decade, microfinance has moved from helping the poor to access finance to an interesting business at the bottom of the pyramid. This paradigm shift happened with the entry of funding, initially from Silicon Valley, and then from the people who funded and fuelled the growth of Silicon Valley.
Somebody from Silicon Valley would typically be an entrepreneur who started small, scaled up fast, used the asymmetries in the market and logically and legally became rich. Many were first generation entrepreneurs and did not forget their roots. It was logical for them to invest their surpluses into the business of doing good.
However, their own success and growth experience dictated that while they do good, they should also do well. Doing well translated into good business plans, targets and also growing at a scorching pace.
All was well for us, within the industry, when the base was small. There were several 100 percents in the microfinance sector. The growth rate was in excess of 100 percent, recovery was 100 percent and the sustainability indices quickly crossed 100 percent. Voila, we had found a magic mantra where the poor could be served, we could look good and put “eradication of poverty” as our mission statement and of course, lead a comfortable life. The alternative sources that were funding the poor made us look like messiahs.
The problem was that we were dealing with people and not processes and systems. This involved group formation and dealing with behavioural patterns of people. But we got addicted to the heady growth target. And when we chase targets without logic, we cut corners. We became cut-throat in competition and we lost a sense of balance. There are enough signals for us to push the pause button.
Multiple Lending
Is there a bubble being created? Are most microfinance institutions chasing the same customer? Are we pushing the customer — the poor woman — into a debt trap? Would this lead to suicides? We have to realise that these are not issues of today, but issues of yore.
When an MFI lends to a family that is indebted to a moneylender, there is already multiple lending. In 2005 when I was doing fieldwork, one of the microfinance heads told me, “We have made our processes simpler: If the potential borrower has already passed a group recognition test of a competitor, she is eligible for a loan from us”. It could be interpreted as leveraging on the social capital built by others, or as multiple lending — the choice is yours.
The question is not whether there is multiple lending. The question is whether the lender knows the absorption and repayment capacity of the borrower. It is impossible to know this if we are doing a group meeting in 20 minutes and moving on. It is impossible to address this when we have standardised products and offer a higher loan each cycle. Our credit officers are trained to be robots following a process mechanically and are prohibited to think. Therefore multiple lending is a problem of the MFIs. We clearly do not know our customers enough, and do not have the time to know them.
There have been moves to have a credit bureau to address this problem. Is this not a joke? What will a centralised database covering Ganjam (Orissa) and Ernakulam (Kerala), Chennai (Tamil Nadu) and Ludhiana (Punjab) tell me better than what my credit officer can tell? Every organisation operating in the area knows the other. We have asked our credit officers to chase targets. If only we ask our credit officers to treat this money as their own and see if it is worth lending to the client; if only we allow our credit officers to think.
There was a crisis in Krishna (Andhra Pradesh). We read it as a jealous government programme trying to get back at us. This was a crackpot zealous set of people who just wanted to shut us up because we were immensely successful. Then there was Nizamabad (Andhra Pradesh). We said that this is communalisation. How could this happen to a secular business like lending to the poor. Then Kolar (Karnataka), and Idukki (Kerala).
This is not a localised response. People of different orientation and different backgrounds are getting upset with our business. We can have a micro argument for each one of these and be satisfied with “I am the best and nobody understands me” syndrome. Where are we going wrong? Is there something in what is happening?
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