The remarkable aspect of the MFI crisis in AP is that, MFIs have clearly shown that they are not interested in changing their flawed business model. Instead, they have concentrated their energies on accusing the AP Government of high handedness. Ironically, we have a unique situation where the wrong doer has claimed that a belated attempted at regulation is actually wrong. MFIs seem to be more interested in blaming everybody, other than themselves, for their current predicament. To this day, MFIs do not like to admit that they have an unsustainable business model. An objective view of the issues in the crisis leads to the conclusion that either the MFIs suffer from either intellectual poverty or they were never interested in even nominally practising what they preached. Their business model seems to have been underscored by their belief that they business practices are essentially “harmless frauds” – something like pyramid schemes. Little wonder that SKS in the early days after Government action claimed that their battle was between those who were against free market.
A number of ridiculous arguments have been marshalled by MFIs in order to mobilise public opinion against the government attempts to regulate the sector. What is often missed by proponents of the MFI business is that this is probably the only segment of business in India that went unregulated for more than a decade. In a recent article, Industry claimed to have the following issues with the government action:
(a) The Troubles in AP were politically motivated(b) Regulation were excessive and implying that the problems from the industry side were only minor indiscretions.
(c) People were attacking the group based lending model.
(d) Customers, especially the poorer borrowers are suffering.
(e) The business was now more ‘responsible’ and it was promising good behaviour, thereby implying that the government should allow them to lapse back into their old behaviour.
The first three of the above claims require detailed analysis as the claims do not withstand objective scrutiny.
The MFI business has gone out of the way to point out that the crisis was politically motivated. Proof of that was the supposed statement by the opposition leader that people should stop repaying loans. What is important is that these pronouncements by the political parties started only after the government action, which was a consequence of suicides. It is imperative to note that the Microfinance business in AP was actively encouraged by the then CM (the present opposition leader).
The second claim is spurious at best. As this blog has pointed out in various instances, the regulations are long overdue – in fact, it is difficult to understand why the microfinance business was allowed to get away with activities. In 2005-06 nearly 30 people committed suicide and the MFIs promised good behaviour and a code of conduct, which was never implemented. Even to this day, MFIs do not follow the letter of the law - forget the spirit of the law. The MFIs continue to refute the claims that their business practices were illegal and unethical. They only talk of “alleged suicides” due to their practices. Ironically, a recent study commissioned by MFIN claims that nearly 45% of the reported suicides were due to MFI harassment. There is no doubt that the government should allow businesses to flourish, but a business cannot be allowed to flourish at the cost of the consumers and vice-versa.
The MFI business has gone out of the way to point out that the crisis was politically motivated. Proof of that was the supposed statement by the opposition leader that people should stop repaying loans. What is important is that these pronouncements by the political parties started only after the government action, which was a consequence of suicides. It is imperative to note that the Microfinance business in AP was actively encouraged by the then CM (the present opposition leader).
The second claim is spurious at best. As this blog has pointed out in various instances, the regulations are long overdue – in fact, it is difficult to understand why the microfinance business was allowed to get away with activities. In 2005-06 nearly 30 people committed suicide and the MFIs promised good behaviour and a code of conduct, which was never implemented. Even to this day, MFIs do not follow the letter of the law - forget the spirit of the law. The MFIs continue to refute the claims that their business practices were illegal and unethical. They only talk of “alleged suicides” due to their practices. Ironically, a recent study commissioned by MFIN claims that nearly 45% of the reported suicides were due to MFI harassment. There is no doubt that the government should allow businesses to flourish, but a business cannot be allowed to flourish at the cost of the consumers and vice-versa.
A third claim is that the people have been attacking the concept of Group lending. Microfinance business was encouraged with the fond hope that it would create and expand existing social capital amongst members. Unfortunately, instead of that happening, the groups became instruments of coercion and a source of friction in rural society. There is no need for a government to subside a business that is detrimental to everyday social relations. The MFIs themselves live in denial, when they claim that they have received no subsidies. They seem to forget that Priority sector benefit is itself a great benefit, especially in a country where capital is a scarce commodity and formal sources for the supply of capital are scarce. The problem with the group lending practiced by the MFIs was that their business thrived on the an inducement of an ever larger loans backed by peer pressure as a vital tool for loan recovery. But unfortunately the clientele of MFIs is such that they end up guaranteeing peer loans that exceed their incomes many times over – apart from their own loans. That is a potent combination as default by one borrower in a group automatically destroys the financial health of the other borrowers.
Promises of good behaviour need not be trusted for the simple reason that they are bound to remain just that: promises. None of the MFIs, barring SKS, have bothered to change their business model. Instead their response has been shocking: they claim that they will spread to other parts of India and not in Andhra Pradesh. Such claims mean that there is no chance that the MFIs will ever learn their lessons. SKS was forced to change its business model because investors lost nearly 75% of their investment. The other MFIs are not listed, hence they can continue with their business model which is essentially a corporatized version of moneylending.
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