Microfinance maladies

For the last few weeks, Microfinance Institutions have been a very worried lot. Whereas the Draft Bill seeking regulation of Microfinance Sector as a whole has been awaiting approval, the Andhra Pradesh government quite expeditiously passed an ordinance last week clipping the wings of Microfinance Institutions and their free run on the monies of the poor.

yada yada hi dharmasya
glanir bhavati bharata
abhyutthanam adharmasya
tadatmanam srjamy aham
(http://www.asitis.com/4/7.html)

While this might be quite inappropriate considering that I am referring to the government taking action, it still holds good that you cannot ignore this malaise forever. If the MFIs have not learnt their lesson from the 2006 fiasco  (http://bit.ly/dEOGMG), then they deserve what they are getting now. These organizations have had sufficient warning and time to mend their ways and become organized. However, from the recent debacle it is quite clear that they actually got complacent and dropped their guard once the storm had blown away. While some very genuine companies have also been impacted by the recent legislation, it is quite clear that as a fraternity, they have failed to create sufficient self-regulation to substantiate their bona fides.


Regulation cannot be selectively applied. Unfortunately, it is the Lowest Common Denominator principle that will be applied, and therefore impact evens those with good intentions. Equitas, (http://www.equitas.in/Transparency.html) for example, is one such company that claims to print its all-inclusive interest rate on every member's passbook. I am sure there are other MFIs, especially the larger ones, that have similar fair practices embedded as part of their operational practice. As has been the claim by most of these players, it is probably a few "fly-by-night operators" who have seen this as an opportunity to make a quick buck that have caused everyone to be painted with the same brush.

What has surprised me though, is the extreme reaction that we have been reading in the press in response to the legislation. When one is used to a free run of the place, any kind of regulation is likely to seem quite draconian. And this ordinance has been no exception. What is surprising though is the way the markets and the entire industry have reacted to this. One would imagine that Andhra Pradesh is the only state with a significant number of people who are below the poverty line, or otherwise disadvantaged, and therefore in need of financial assistance. On the other hand, if one were to take a more cynical view, the poor of this region have been the most gullible, waiting-to-be-exploited populace in the country, and for those in the business of exploiting them, it has come as a rude shock to see their wings being clipped. And it may well seem the case, going by NABARD's State of the Sector Report – 2009-10.

One of the short-comings clearly pointed out by the ACCESS State of the Sector Report 2009 has been the unequal growth of microfinance with the southern part of the country being an extremely good marketplace while the rest of the country is relatively under-served. I will probably comment more about this, in another post later. Coming back to the present malaise, this clearly reflects a case for

A) Implementing mechanisms for measuring and reporting Social Performance
B) Implementing effective process and systems to reduce costs and increase productivity of personnel deployed

Here again, while some of the larger MFIs have implemented automation with varying degrees of success, integrating this into the overall business operations for Business Intelligence and Social Performance Management has been something that has been quite low key in these implementations. In the absence of reliable and auditable data based on which regulation and compliance can be monitored, these MFIs are left to the perceived whims of the regulators who will perforce adopt a path that will seem draconian and make it appear quite unviable for the industry as a whole to operate. The sooner these organizations realize this and put mechanisms in place to address this issue, the better. Otherwise, one of the tools that was once touted as the panacea for what ails the unbanked will slip into oblivion. The unbanked and under-banked shall be left to the mercy of the government-run Cooperative Banks, Rural Banks and other credit societies. And those who cannot get credit from there, will go back to the unfriendly-neighborhood moneylenders. The wheel would have turned full circle.

We do hope that the dawn of the new decade will also see some concrete action from the Government, one especially, being passing of a much-delayed Microfinance Bill. We will also likely witness a shake-out and eventual consolidation of the MF sector, which we hope will augur well for all – especially those that were intended to be served in the first place.

Best wishes for a peaceful and prosperous 2011 to one and all.

"Sarve Bhavantu Sukinah"
Let there be happiness with everyone and everywhere.

ICOMF10 – International Conference on Microfinance, Pondicherry, 2010

This year the Third International Conference on Microfinance organized by Pondicherry University was held from the 22nd to 24th January, 2010.  The conference was well attended with several delegates and participants from all over the country landing up in this lovely little coastal town for the three-day jamboree.  The highlight of the event though, was the innovative approach of integrating self-help groups and small local microfinance institutions into the mainstream conference. Not only were site visits organized to enable participants to observe first-hand the activities of the local microfinance institutions, but more importantly, the third day was almost entirely devoted to very close interaction with the local self-help groups and microfinance institutions.  This session was primarily intended to provide academicians with a ringside view of the world of microfinance and give an opportunity to the Self-Help Groups (SHG) to voice their views and opinions on their real issues.



In a sense, the concept of an integrated approach seemed to be the theme around which the entire conference seems to have organized itself.  In fact, during the inaugural session one of the keynote speakers came up with the A+B+C+D+E (Academician + Bureaucrat + Credit Agency + Development Agency + Entrepreneur) formula for successful microfinance;  and quite coincidentally, it was this combination of these five important players throughout the conference that lend the entire proceedings its charm.  This was also quite evident in the academic discussions (paper presentations), panel discussions inter alia on capacity building, skill development, innovation, technology and self-help groups; the icing on the cake was the site visits and the presentations by SHGs and local microfinance institutions.



One recurrent theme that evidenced itself, albeit in different forms, was the need for an integrated approach to dealing with the core objective of financial inclusion and poverty alleviation.  Whether it was with skill development, capacity building, or the status of the SHG-Bank-Linkage program, it occurred to me that Microfinance had reached the next level of maturity, where it was now essential to go beyond the usual rhetoric of recovery rates and outreach, and look at the more fundamental issue of financial inclusion from a perspective of poverty alleviation.



The integrated approach to inclusive growth is a theme I would like to explore. I welcome feedback / inputs from readers on this subject; I hope to be writing a little more about this as my experience with the subject grows.