Microfinance: A likely Rescue for the Wrong Reasons

The Microfinance industry is likely to be saved from its death spiral thanks to the misconceptions that seem to exist amongst the highest level of policymakers in the Reserve Bank of India. Dr.Subir Gokran, Deputy Governor of Reserve Bank of India has categorically stated that dismissed reports that the microfinance sector is on the verge of collapse. Instead he believes that the microfinance sector is important component that is essential for financial inclusion that delivers credit to the "last mile" - something that the formal financial sector is not able to (Business Standard, Section II, 8 December 2010). It is prudent that we understand that the MFIs are but one of the those players (formal or non-formal) which provide credit to the last mile consumers (those at the 'bottom of the pyramid'). Ironically, if the RBI and other policy makers donot want to regulate the interest rates that the MFIs lend it to, why should they be worried about the role and influence of the informal private moneylenders. By that logic, regulating money lenders seems to be more of a moral issue rather than an economic one. Usurious lending rates charged by any institution/individual probably deserve to be treated alike, even if they are not registered or officially subsidised.

While it needs to be seen as to what issues the YH Malegam Committee would address, it is almost certain that the MFI sector will be given a new lease of life, though with more regulations that will invariably dilute the excellent provisions of the Andhra Pradesh Ordinance. The MFIs on the other hand will invariably go back to their 'business as usual' attitude once the recent crisis moves out of the front pages after a few months. Unless the business model is drastically changed, the crisis will re-occur, only with greater intensity after a period of time. After all, the MFIs have no intention of changing their culture of business or business model - not especially after it has become a multi-billion dollar extremely profitable business that now draws the support of global capital. Interestingly, there have been almost unsavoury incidents involving the MFIs run on a non-profit basis (at least as yet, unless they decide to borrow from their more usurious peers).

This support from policy makers is in addition to the shrill support that the microfinance industry has received from the financial sector. The financial sector, due to its empathy for a component group, confuses the praise showered on the microfinance sector due to the lack of information about its business practices for the strength of a business model. The for-profit MFIs may have drawn accolades due to lack of awareness of their day-to-day practices. One prominent observer in the financial markets was clearly unhappy when he wrote: 'when SKS went public and succeeded, it was interpreted as the market vindication of the business model. Suddenly today it has become a dirty word' ("Why MFIs deserve priority", The Financial Express, 23 November 2010, p.8). He tends to think that over-reaction is due to emotional reasons. The business world has to understand that the transparency and best practices need to go beyond a superficial reiteration of preferred management cliches.

It is probably time that the MFI sector and their advocates rework their business model that would abjure use of criminal tactics that may have played a role in abetting suicides, albeit indirectly. Unless they have a model that would enable some form of arbitration or rescheduling of loans (which most of the NBFCs as well as any other formal institution or even informal players accept with certain penal provisions) the MFI sector may have reached its logical limitations.