Microfinance Business Model and the 'Politics of the Governed'

The Microfinance sector seems to be attempting every method in order to generate support and sympathy, but obviously to little positive impact. The sector, as always, has the support of the policy makers at the Central levels and the financial services industry, and the scattered but qualified support from senior officials from the Reserve Bank of India (RBI). The MFIs seem to have convinced the policy makers at the central level that they are actually working for the poor, ironically even after evidence that keeps emerging on a day-to-day basis indicating that the current MFI business model is more or less redundant.

The MFIs seem to be on a spree to blame everybody else, expect those whom they should be blaming: themselves. The fact that most of the large players use violent methods is something that the senior managements are very well aware, considering that the finance business involves micromanagement of their day-to-day operations. Denying wrong doing by the industry has been a common strategy. However, a more interesting and coordinated strategy seems to have been conjured up by the microfinance industry. Bankers are always interested in recollecting their loans, so it is in the interest of the MFI to create a fear in the minds of the bankers about the safety of the money they have lent. This is the latest strategy that the MFIs are trying to implement. On the sidelines of a Bankers Conference (Bancon 2010), Vijay Mahajan, the president of M-Fin Network and Chairman of the one of the largest MFI, Basix, is reported to have claimed that unless the banks release fresh credit to the MFI sector, "There will be no microfinance in 2011... Come first January, we are dead, absolutely... it will be finished” (The Times of India, Hyderabad Edition, 4 December 2010, p.15). This is because Andhra Pradesh accounts for about 35 of business generated. Mahajan also stated that 90% of the borrowers in Andhra Pradesh have not been paying their installments for more than a month and "it is only a matter of time before the news spreads to other parts of the country".

There are two important points that need to be understood: The fact that the MFI sector is almost certain that they expect an increase in defaults in other parts of the country clearly means that they understand very well the peculiar nature of the finance business namely: once the borrowers realise that the lender has no tools at their disposal to collect the loans even those borrowers who have the means and resources will not repay their loans. Importantly, it is indeed curious that while the MFIs claim that they have replaced the moneylenders and are often the only sources of credit, then why would the borrowers be amenable to default. If the arguments of the MFIs are true, then the borrowers would repay the loans as they would not want to lose their only source of credit. It is clear that the MFIs are but only one of the many sources of credit to the poor and their borrowers have no compunction in defaulting on a MFI loan for the simple reason that they are no better than private moneylenders. Interestingly, Vijay Mahajan claims that barring two or three MFIs, the average median return on assets for MFIs is 2.8%. This seems to be an extension of the logic laid down by the RBI that four or five MFIs constitute about 80 percent of the sector.

The other rather weak argument that the MFIs have been propounding is that the problems plaguing the MFI sector have been exacerbated by the opposition parties. There is an increased tendency to blame the political class for a whole gamut of problems. This is the latest such example. Vijay Mahajan is also reported to have slammed the President of the Telugu Desam Party in Andhra Pradesh, N.Chandra Babu Naidu for fishing in troubled in waters. This is reported to have exacerbated the problems of the MFI sector. MFIs seem to have forgotten the basic fact that political parties of all kinds, not just the opposition parties, but even the ruling parties, especially at the ward/village or small town level will not allow themselves to be mute spectators as after all the poor are some the most important voters. They always turnout in large numbers to vote in elections, unlike the middle classes or the rich. This logic of the 'politics of the governed' has been missed by the MFI, unfortunately they missed this ground reality even when the erstwhile minister for Rural Development in Andhra Pradesh, Mr.Vatti Vasanta Kumar was one of the first to condemn the excesses of the MFIs. As long as the MFIs ignore the ground realities, they will continue to get into trouble. This is the second time that they are facing problems: the first in 2005-06 and now on a larger scale. This is unlikely to change as long as the MFIs accept that their business model is already redundant. They have to understand that due to a various reasons the poor are also extremely well informed and have become well versed in using the institutions of the State and its various departments to serve their purpose and to wring out various concessions.