Micro Finance in Macro Problems.
B. Yerram Raju*
Suddenly, the issue of Microfinance has occupied the centre stage of intense public discourse during the last few weeks. The State Government also acted proactively to bring about “Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Ordinance, 2010 on 15th October 2010. For a change, the media have taken up a deserving issue concerning the hapless rural women falling into debt trap of the Micro Finance Institutions (MFIs), which have mushroomed in the country in the garb of helping poor women to overcome misery and poverty. Some questions that beg for an answer at the moment are: Are the MFIs that bad as made out? Why did the suicides occur only in Andhra Pradesh and not anywhere else? Where are the roots to the entry of MFIs and are the corrections possible? Are equity and discipline incompatible in lending to the poor?
SELF-HELP GROUP (SHG)-BANK LINKAGE (SBL) PROGRAMME:
The SHG movement was started in early 1990s by Govt. of India with involvement of NABARD to provide empowerment to rural women. It took nearly five long years for the NABARD to create interest in the public sector banks, the RRBs and the Cooperative Banks to get interested in this linkage programme. 42.24 lakh SHGs were credit linked to the extent of Rs.22,670crores as on 31st March 2009 in the entire country by Nationalised Banks, RRBs and Cooperative Banks. Andhra Pradesh had a share of 23.6 percent in number of groups and 26.5 percent in credit under SBL. Society for Elimination of Rural Poverty (SERP) a State Government initiative with World Bank funding has been actively associated with SBL in Andhra Pradesh aiding the social, financial and political empowerment of Rural Women to a large extent as corroborated by various studies. Similar SHG-Bank Linkage programmes are also being implemented in other states like Tamil Nadu, Kerala and Karnataka. Under this SBLP, the savings-linked credit has been provided to SHGs around 8% to 10% interest rate with monthly repayment obligations. The recovery percentage is stated to be around 95%. The entire SBL financing has been carried out through thousands of bank branches located in the hinterland of the country. The Bank staff is actively involved in this programme.
Following RBI circular dated 18th February 2000 providing guidelines to financing of MFIs by commercial banks, there has been rapid increase of private MFIs in the country during this decade. Most of these MFIs are broadly in four categories.
1) NGO MFIs – Registered under Societies Registration Act 1860 and/or Indian Trust Act, 1880
2) COOPERATIVE MFIs – Registered under State Cooperatives Act or Mutually Aided Cooperatives Act (MACS) or Multi-State Cooperatives Act, 2002.
3) NON-BANKING FINANCIAL COMPANIES(NBFC) MFIs- Registered under Section 25 of Companies Act, 1956 (Not for Profit)
4) NBFC –MFIs – Registered under Companies Act, 1956 and Registered with SEBI where they went in for public issue and/or with RBI.
In order to encourage the MFI movement, the RBI desired that they go under self-regulation mode and the RBI expressed categorical “NO” to MFI regulation. On the top of it, the Central Bank categorized all corporate loans granted to MFIs as part of priority sector lending and the public sector banks found a bonanza in such categorization as they can claim credit under somebody else’s shoulder without having to incur the huge cost of reaching the poor and realizing such loans again at a huge cost. Suddenly they found a de-risking their otherwise high-risk portfolio. Bulk loaning to MFIs moved at 8-12 percent for online lending to the poverty groups.
Even most of the private sector banks that were unable to fulfill their Priority Sector obligations due to their lack of presence in Semi-Urban and Rural Centers or lack of initiative in financing SME or other Priority segments, have found an easier option of providing bulk loans to MFIs. This paved the way for large scale flow of depositors’ funds to MFIs for their onlending activities. There are 44 RBI recognized MFIs in the country according to Microfinance Institutions Network. Some well meaningful entities have put the training of the poor in viable economic homestead and village level activities ( BASIX for example) and created enthusiasm and confidence in institutional lenders for this activity. But greed has no boundaries and seeing large scale benefits with a little effort and much propaganda, others bee-lined and Banks qued up to lending to the opportunistic and showy MFIs. This led to mushrooming of MFIs accessing huge funds from Commercial Banks for their onlending activities. Most commercial banks lent them for 12 months with the result the MFIs had to recover in weekly repayments.
As on 31st March 2009, it is reported by NABARD that Banking Sector disbursed around Rs.3731 crores to MFIs, out of which Rs. 2700 crores were provided by 10 private sector banks and Rs. 561 crores by 10 public sector banks. In Private Sector Banks, ICICI Bank tops with Rs.825 crores, followed by HDFC Bank with Rs.786 crores and Axis Bank with Rs.636 crores. In Public Sector Banks, Indian Overseas Bank tops with Rs.244 crores followed by State Bank of India with Rs.144 crores and Bank of India with Rs. 70 crores. The latest figures of the bulk loans provided by Banks to MFIs may have crossed Rs. 6000 crores. SIDBI has the largest cake: It has established seven dedicated branches to dispense credit to MFIs in 2008-09 and has lent Rs.3398crores during the last ten years with outstanding credit of Rs.2137cr as at the end of 2008-09. SIDBI website indicates the ultimate number of beneficiaries from this package as 65lakhs. SKS Micro Finance has a substantial presence in this loan portfolio and it has placed its representative on the Board of SKS Micro Finance Ltd., which is in the eye of the storm. SHG-MFI –Bank Linkage has been provided to ultimate customers through MFIs and their agents/employees. Imagine what would happen to the Rs.22500cr lent through this window getting into the loop of NPAs of the Banks at the end of March 2011. Government of India would announce another loan waiver from the tax-payers’ money and recapitalize the losing public sector banks? The fiscal endurance to the monetary failure?
SBL programme implemented by NABARD since 1994 with the involvement of public sector banks, cooperative and rural banks creditably has no record of suicides or even extortion in recovery process. Capacity building of groups and building group dynamics saw several innovations that resulted in some of the groups taking up agricultural marketing activity in the villages. (For example, in Nizamabad District the SHGs collected maize crop of 3lakh tons and sold at remunerative prices for the farmers and good margins for themselves. There are also built-in insurance mechanisms as well. Andhra Pradesh leads this movement.
There are private players like the Cooperative Development Foundation (CDF)and Centre for Collective Development (CCD) that built SHGs around the concept of small savings of the Women groups initially. The group saves in small sums and the individual members’ needs are met out of the savings: the savings receive interest at the rate decided by the group ( this is around 12%p.a) and the credit for any purpose that the members approve would be charged at 15% and they also build ‘Abhaya Nidhi’ an insurance fund for any untoward calamity to any member. CDF has built a women’s dairy while the CCD has built even Oil Mill with the financial support of NCDC. Most of these groups have a livelihood support programme behind them.
The bulk lending in the MFI robes, on the other hand, has taken the ugly turn witnessed during the last few weeks due to the following reasons:
1. The incentive of booking such credit under the priority sector
2. Banks that usually stipulate stringent conditions on the high-risk ‘poor’ refused to see a part of it even when lending to MFI because of their myopic approach to priority sector credit.
3. The Commercial banks were quick to respond to the glossy balance sheets; foreign flows and the bee-lining of venture capital funds because of the minimum of 8-12 percent yield on these assets and near 100 percent repayments.
4. The investors walked away with the high returns, which is nothing but the rich walking on poor man’s incomes. Poor man’s rupees walked into rich man’s dollars. This is not certainly what either the Government or the RBI intended when they spoke of financial inclusion.
5. Micro Insurance is not linked.
Corporate greed overtook the poor man’s need. Banks too were no less greedy as they could fulfill their priority sector targets without having to actually go near the poor. The result was the sub-prime nature of the MFI-lending process.
CREDIT DISCIPLINE AXED:
But look at what would happen with the steps now taken: the repayments to MFIs would stop. MFIs’ in turn would have to seek postponement of their corporate loans. Their AAA ratings would all vanish in one stroke and they end up as NPAs. All the commercial banks and SIDBI would build up their NPA portfolio during the next quarter. The RBI will have to perforce revise its risk weights to MFIs. Since the money locked up is huge the percentage of NPAs would also be high and this requires capital refurbishing in most of the commercial banks as per Basel norms.
For a change the media espoused a right cause when they started releasing the stories of suicides of some of the MFI-lent borrowers. While the AP Government sounded the alarm with the ordinance that was really not necessary as the existing laws would take adequate care of punishing the usurious lenders on one hand and violent extortionists on the other, the MFIs have been disrobed. The question that still haunts is whether the registration of MFIs would help the cause of the poor. I doubt.
Why Suicides in AP alone?
Whether it is farmers or micro credit borrowers, failure in repayment of loans is the root cause of suicides and these have been occurring mostly in Andhra Pradesh in spite of several measures taken by both the Central Government (separate package of loan waiver announced; interest subvention announced in the farm sector in 2007-08). This is because of the enlarged inadequacies of credit-related infrastructure for institutional lenders to move aggressively on one hand and social divide on the other. All the schemes announced by the Government have built-in rent seeking opportunities for the bureaucracy and politicians with only a portion of the schemes reaching the poor. Secondly, in the villages, there is a clear rich-poor divide on caste considerations. The sufferings on any account whatsoever are mostly unattended. The neighbours expect only the Government to take care of them. Andhra Pradesh is one of those few States declaring reduction of poverty to a mere 16% in the backdrop of state economy growing at a steady 6% and above at the beginning of this century. At the same time there is uneven distribution, rampant corruption and heavy politicization of any and all schemes that are meant to reach the poor. MFI could make a difference in this scenario as there were no strings attached to the loans and the loans were being available in bigger slices than the SLBs at their door step. Little did they realize that the no-strings loans had ropes around their necks running like a computer programme.
MANY UNANSWERED QUESTIONS?
When MFIs are basically indulging in money-lending activities with turnover running into crores of rupees that too with public money as their source of funds, why they were not brought under regulation so far when they ? What are their credentials and how are they allowed to freely operate in the entire country? If they were registered with any local authority could it have helped? What would such registration mean?
Under what parameters, the Banks were doing bulk lending amounting to hundreds of crores to unregulated MFIs? Whether they were lending against any collateral security offered by MFIs or whether their lending to MFIs has any relation to relative net worth of MFIs? What are the precautions taken by Banks to ensure against misuse of funds by MFIs or protect the public money in case of default by MFIs? When the Banks knew pretty well that this is for re-lending, why did not impose conditions on its use and cost of operation? Every lender imposes such covenants in their loan agreements.
Whether MFIs were lending to first time borrowers or are they double financing the existing borrowers of other banks or other MFIs? Are they informing other Banks/MFIs in case of double financing? Are they ensuring end-use of funds? Are they financing any income-generating activities or consumption activities?
Whether staff of MFIs has any credit assessment skills? Whether MFIs or their staff is doing a risk assessment of the borrower? Whether MFIs are educating the borrowers about the conditions and stiff repayment obligations?
Where is the need for MFIs to target the SHG-Bank Linkage beneficiaries? Whether the staff of MFIs was given stiff targets of lending and recovery in order to boost their turnover? Were these staff adequately trained and sensitized about the rural dynamics? Were the staff paid salaries or given incentives on targets? How did the staff recruitment take place and what are the HR practices of MFIs? Why is their staff behaving with borrowers in inhuman manner?
RBI FINDINGS ON PRIVATE SHG-MFI-BANK LINKAGE
A joint fact-finding study on microfinance conducted by Reserve Bank and a few major banks made the following observations as mentioned in the RBI Master Circular RBI/ 2010-11/52 RPCD. FID. BC.No. 05 /12.01.001/ 20010-11 July 1, 2010):
i. Some of the microfinance institutions (MFIs) financed by banks or acting as their intermediaries/partners appear to be focusing on relatively better banked areas, including areas covered by the SHG-Bank linkage programme. Competing MFIs were operating in the same area, and trying to reach out to the same set of poor, resulting in multiple lending and overburdening of rural households.
ii. Many MFIs supported by banks were not engaging themselves in capacity building and empowerment of the groups to the desired extent. The MFIs were disbursing loans to the newly formed groups within 10-15 days of their formation, in contrast to the practice obtaining in the SHG - Bank linkage programme which takes about 6-7 months for group formation / nurturing / handholding. As a result, cohesiveness and a sense of purpose were not being built up in the groups formed by these MFIs.
iii. Banks, as principal financiers of MFIs, do not appear to be engaging them with regard to their systems, practices and lending policies with a view to ensuring better transparency and adherence to best practices. In many cases, no review of MFI operations was undertaken after sanctioning the credit facility.
These findings were brought to the notice of the banks to enable them to take necessary corrective action where required. If lending to the poor is cost-intensive, and such lending is very necessary in the drive to financial inclusion agenda, the cost needs subvention from either the Financial Inclusion Fund or the Micro Finance Fund and the delivery mechanism for such subvention has to be worked out carefully.
This circular and the entire episode with consequences reflect that the RBI has to bring them into financial regulatory regime as they are also part of the overall financial stability mechanism. NABARD because of its one and half decades of active presence in the micro finance sector through SHG-Bank linkage programme, may have acquired the capabilities to regulate the system. But it cannot be a player and regulator and therefore, it may hive off this activity as an independent arm and then take over regulatory responsibility if the RBI were to continue to feel that it is not equipped adequately to handle this regulatory responsibility. Micro Finance Regulation and Development Bill 2007 has been well debated and its ineffectiveness has been articulated in full measure. The Bill drafted by NABARD with the assistance of SADHAN, deserves redrafting as it does not respect either financial regulation or legal fundamentals.
The MFIs’ taking credit for reaching those poor where the institutional credit mechanisms thus far failed to reach has some justification. But the route they chose became questionable. If, as they aver, the poor get the money at the door step and they were able to get a multiplier out of it and therefore the MFIs are reasonable in expecting a major slice of it, is patently absurd. The poor, if they start earning more than what their existing style of living demanded, should be enabled to save a good pie for the future and for better insurance and protection of the next generation. The MFIs that did not create livelihood opportunities, and barricaded sustainability have no license to squander public money in the name of equity. Growth with equity should also be matched with social justice and this is instantaneously absent in the present MFI approach.
*The author is an Economist and Member of the Expert Committee on Cooperative Banking, Government of Andhra Pradesh. The views expressed are personal.
Five myths about microfinance
The microfinance bubble has burst. The AP government ordinance, the AP opposition fs campaign asking borrowers not to repay and the sheer public hostility towards MFIs . all these have put the brakes on MFI activities for now. We need to rethink the role of MFIs in the rural economy . In order to do so, we must first grasp some of the myths on which the MFI sector has rested th US far.
MFIs are crucial to financial inclusion: The big impetus to financial inclusion came way back in 1969 following the nationalisation of banks. Secondly, financial inclusion is not just about giving small-ticket loans. It is also about taking deposits and providing basic banking services.
MFIs are hardly the pioneers in microfinance. The early initiative came from the self-help group (SHG) movement started by the government of India in 1992 under the auspices of Nabarad and with the involvement of banks. This is the biggest outreach programme of its kind in the world. It covers 86 million poor households and has extended credit of .Rs23, 000 crore. MFIs cover 30 million customers and have lent over .Rs30,000 crore.
Under the SHG scheme, credit is linked to savings (unlike MFI credit). There is focus on capacity-building among borrowers. The rate of interest is 8-10% with monthly repayment. The suggestion that MFIs are crucial to financial inclusion is only part of an attempt to give respectability to what is increasingly a profit-driven activity.
MFIs have reached out to those ignored by banks: The contention is that MFIs complement the efforts of banks by reaching out to those ignored by banks. This too is not true. AP has an average credit/deposit ratio of over 105% and a ratio of over 80% in half the districts. (The national average is 63%). AP does not lack credit. MFIs would have been made a real contribution had they fanned out to states where the credit/deposit ratios are low. Instead, they have focused on AP.
They have done so because AP houses nearly a quarter of the SHGs. MFIs chose the easy route of tapping into established SHGs for making loans. This was viable in the early stages but, over time, it has led to the problem of multiple lending and excessive debt burdens.
It is no different from private banks in India marketing consumer loans or US banks marketing subprime loans. œ MFIs are an important mechanism for alleviating rural poverty: Credit is only one of several instruments needed for fighting poverty.
Secondly, credit can help alleviate poverty if it goes into income-generation schemes. MFI credit, for the most part, is for consumption. Thirdly, returns to agriculture are so low that it is inconceivable that it can service interest rates of 24% and above that MFIs charge. Since agriculture is the key to rural poverty, it is ridiculous to suggest that MFI credit can help alleviate poverty.
MFIs have substituted moneylenders who used to charge even higher interest rates: The comparison with moneylenders is flawed. Moneylenders don ft go out and market their loans as MFIs do. Besides, moneylenders make loans strictly against collateral and this is a built-in check on lending.
Secondly, MFI interest rates in AP are said to be have been in the range of 24-60%. At the upper end, the rates are no different from those of moneylenders. Yes, MFIs did substitute moneylenders in a way because many moneylenders found it expedient to set up MFIs themselves . they could then have easy access to bank funds!
High operational costs means that smallticket loans cannot cost less than 24%: If this is true, how is lending to SHGs viable? The high lending rates of many MFIs translate into fat salaries for executives and abnormal returns. (Some have return on assets of 5%; a bank is lucky if it makes 1%).
Public sector banks (PSBs) have long had branches in the rural areas. Small loans will be one element in their portfolio which will include low-cost deposits and other products. With branch costs fully written off, it is hard to see why microfinance provided by PSBs needs to be priced at 24%. If indeed the operational costs turn out to be steep in some areas, then the bank correspondent and other models need to be developed.
PSBs have not put their best foot forward in respect of microfinance because they lack the incentives to do so. Most are listed now and have had to focus on earnings growth, which is easily provided by corporate and retail credit. The regulatory cap on interest on small loans was a dampener. (The cap is now gone). Lending to MFIs qualified as priority sector credit, so PSBs could not be troubled to build their own portfolios.
Many people think the recent problems with MFIs were the result of some excesses. With a little tweaking here and there, MFIs can be in the forefront of financial inclusion. They are wrong. The entire MFI model needs revisiting. At least PSBs are much better placed to pursue financial inclusion on their own. The AP ordinance and its fallout ensure that the go-go days for MFIs are over. And that is all to the good.
When the Banks lend for Corporates they are expected to form a Consortia if the same Company were to receive credit at the hands of more than one Bank. Peculiarly, in the case of MFIs, no Bank preferred to lend via a consortium route with the result the same list of primary borrowers may have gone round different lending banks to qualify for the priority sector classification. Why the RBI is a mute spectator to this is typical failure of regulator. Hopefully, the Malegaon Committee would take this into consideration.