Microfinance: Broken Promises & Unchanged Methods

A cursory glance into history of the Microfinance business reveals a string of broken promises accompanied by a string of unchanged business methods. Interestingly, most of the observers seem to have overlooked the nature of the violations and the promises by the Microfinance business in the aftermath of what is commonly referred to as the "Krishna Crisis of 2005-06". As we have pointed  in a number of our previous writings we have noted that the practices adopted by the business are nothing new. The only change has been the national and international attention that the present crisis has drawn. That could be largely a consequence of the fact that the business has grown exponentially since 2005-06. 

A cursory glance of the news stories in the popular press seems to indicate that the business model as well as their methods have not changed since the 'Krishna Crisis'. Neither has the role of the banks in the business, and it seems clear that the banks clearly know that the practices adopted by he MFIs despite claims of innocence. It is now clear that the bankers donot really care - at least as long as their loans are repaid by the MFIs. By September 2006, the MFI's operating in the  business had lent nearly Rs.1600 crores in five districts of Andhra Pradesh after borrowing this money from the banks (for onward lending). The image below from a the largest circulating Telugu Daily, Eenadu, reports that the MFIs had promised to reduce the interest rates to 15% after outcry over the methods adopted by the MFIs and the high interest rates that they charged (which at that time too was 24-35 percent). 

The article claims that the banks had provided a written undertaking to the government promising that they would reduce the interest rate to 15 percent. Interestingly, there were calls by various political parties and civil society groups that the Central Government should intervene and pass laws that would limit the interest rates that an MFI could charge. 

After the Supreme Court made it clear that violent methods were not to be used for collecting bank loans of any kind, one wondered for a time where all the agents of the private and foreign banks had all of a sudden disappeared. It was only in late 2010 that we got the answer. The MFI sector had taken them on board en masse. Or it could be that the same set of hoodlums operated for both the banks and the MFIs before the Supreme Court decision but have now gone full-time for the MFIs. Violent arm twisting is not a new development and it is not restricted to only a few of the MFIs. Press reports at the time clearly show that cases were booked against SKS, Spandana and other MFIs - all of which have been involved in the crisis this time too. The fact that they got off lightly last time gave them confidence that this time would be no different. The article reproduced below  (from Andhra Jyothy 27 September 2006, p.3) shows that MFIs tied up a lady who could not repay the loan and insulted her. Numerous articles pointed out that more than 20 women had committed suicide because they could not repay the loans and due to the pressures by MFIs.

It is clear that the government should consider promises by industry bodies about future good behaviour to be nothing more than a joke. They had promised similar things in the past. Ironically it is the same people - Vijay Mahajan of Basix. The news paper clipping from the Business Standard elaborate the "Model Code" that they claimed would be enforced (see Image Below: Click on the image to enlarge).

Based on our historical experience it is clear that the MFIs will make promises, which they clearly do not intend to keep. Ironic as it may seem, Mohd Yunus was from those days suggesting that we need a clear legal framework around which the MFIs can operates (See Image Below). This seems to have been ignored.

Hopefully, Y.H.Malegam Committee would look at the problems of the Microfinance sector in a historical perspective and would clearly draw a line, which hopefully will not be a line in the sand. They should also avoid thinking in terms of the problem loans that the banks will be left holding if something goes wrong with the MFIs. This will only increase. In 2006, Vijay Mahajan claimed that the banks would lose Rs.1000 crores, now it has reached Rs.30,000 crores. After all the description of a police officer in Vijayawada in 2006 that described the moneylenders as 'modern day shylocks' is after all not far from the ground reality. The only difference is that these are 'corporatised' moneylenders who decide to "unlock value" by listing of shares (and probably rigging their prices) in the stock exchanges.