We thank both Mr Mathew Cherian and Mr Pradeepta Nayak for their contribution to the debate. This is what ultimately enriches the knowledge, as we get more views and members share their perspectives. Below we continue with the sectoral issues and look at the issues of sustainability of the sector.
Mainstreaming of any sector always is regarded as an important event as it brings sustainability in the sector, however considering this brought out problems of plenty (I am sure many will call it greed), there is a need to understand what could have prevented the same. We all are aware that micro-finance activities have been going on for a number of years (admittedly at a much smaller scale), but such widespread abuses of over-lending never occurred, simply because the sector always worked using social dimension. Instrument of this dimension has been, NGO, which ensured that there were mechanisms of assessing the need and paying capacity of borrower through the SHG Groups. Since the groups represented the community in which the borrower lived, SHG had a clear understanding both of the need of the borrower as well as her/his paying capacity. Clearly the models followed by the MFIs of present genre just ignored this vital mechanism.
One could argue that problem is too quick expansion of the sector. That is a point, however it is worth comparing what happened in the Telecom which has seen enormous growth with tariffs touching to record lows, enabling a large number of people with low incomes, both from urban and rural areas getting access to the mobile telephony. Thus competition does work. Of course, there were several issues which affected the sector, as it was expanding and more and more players joined the sectors. Some of the issues which immediately come to mind included high tariffs, lack of transparency in charges by various players in the sector, DOT (Dept of Telecommunication) being the dominant player in the sector tried to nip the competition through various restrictive practices, including delay in providing interconnection to the private players. Even among private players disputes arose on access of each others’ interconnections. Had these issues been not resolved in a timely manner, the competitive growth of the sector could have been affected. TRAI was able to resolve these issues as well as fix tariffs for such inter-connections. It developed framework which helped create rules for the different players in the sector in a competitive spirit.
There is no such regulator in the MFI sector which can set framework to ensure that the spirit of microfinance is maintained. Perhaps this has been the bane of the problem. Appointment of the regulator would not only streamline the sector but could usher in healthy growth.
——- next series would look into legal aspects of MFI sector indicating turf battles, perhaps one of the reason why the sector does not have a regulator.
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Hi everyone. A very Interesting discussion.
But I do feel issues of ‘sustainablity’ and ‘impact’ (by reaching a critical mass) of the Sector are also relevant and that is where mainstreaming becomes important. In this regard, while cheaper interest rates is an issue (this was always higher than the bank rates). I believe right now the problem has arisen due to multi-loans and no assessment of a person’s paying capacity. Importance of Community through SHGs, etc. in this regard are well known and do not really need repetition. Perhaps that is an important aspect of regulation which needs to be paid a lot more attention.
In this regard I agree with Lourdes comments on the issue of repayment-capacity of the borrower.
warm regds
subhash mittal
Coming back to the core issues raised in the two articles….There is a need for microfinance. The need can be served if all micro finance institutions stick to “Micro” in its true sense. The key elements of microfinance was not that of providing finance but making people credit worthy. The issue with banks was that they did not consider the poor as credit worthy since creditworthiness was related to having assets that could be mortgaged. Microfinance originally came in to build up and demonstrate creditworthiness of the poor not on the basis of capacity of mortgaging assets but repaying capacity of the poor. There are many defaulters in the country with huge assets being mortgaged and failing on repayment which are then termed as non performing assets by the banks. The crux of finance markets therefore is repaying capacity. NGOs were able to demonstrate this very well but then with many of them transforming themselves into MFIs this was lost. SKS is one such example.
Therefore how much is micro to help poor become creditworthy so that they can then access larger finance from the banks directly. The first part of the article states this quite clearly. Rs. 5000/- to Rs. 20000/- The repayment capacity of such amounts over two to three cycles of loaning and repayment and with some micro assets or capacity for some assets being created I suppose is sufficient evidence for creditworthiness.
Are our MFIs really MFIs or as is the case in a number of other situations in the NGO sector self proclaimed MFIs – Mathew’s suggestion of self regulation is much appreciated here, but then how do we promote self regulation in a culture of self proclamation!!!
Regards
Lourdes Baptista
SKS was built on grants and taxpayers moneys… that is true wholly true.. and the promoters of SKS are frauds.
Also there are others who use the joy of giving to raise funds without accountability or being transparent by telling people that the concept itself is stolen and that percentage of moneys raised is kept as a transaction fee and others who sell clothes that they get as collections for personal profit … sad are the ways of the world and charity… its becoming a racket surely but swiftly
BEWARE ??!!
Jeroninio Almeida
Partly true – SKS Society (Swayam Krishi Sangam) was registered as a non-profit society in 1997. In 2003, it transferred its business to SKS Microfinance Ltd, a company. Shares of the company were issued to five mutual benefit trusts. This shareholding has been gradually diluted by issue of shares to other private and public investors.
So SKS Microfinance was never a non-profit – it took over the work of a non-profit. This model (aid turns into trade) is being replicated across India faster than you can blink your eyes. All for the benefit of the disadvantaged, no doubt.
This is not privileged information and is available in the SKS prospectus.
Best
Sanjay
I believe sks started out as a ngo? Amita
Dear Group Members:
It would be useful to keep this in perspective.
While I am sure there are structural problems which MFIs are facing, these are not necessarily due to lack of regulation. The housing finance market in US collapsed despite one of the finest and most expensive regulatory systems. So to say that Indian MFI problems will be resolved just by passing a law is not at all valid. Same applies to self-regulation, with even more force.
Secondly, SKS is not an NPO / NGO – it is a commercial company, which has made a very successful public issue. We should not therefore mix SKS with other genuine NGOs.
I would say the real problem with microfinance is too big a buildup of expectations. No one questioned the gospel of microfinance: ‘it will solve all the problems of the poor, is humanitarian to run and is self-sustaining to boot.’
Microfinance is not the silver bullet for poverty – there are limits to people’s entrepreneurial abilities and the size of the market. ‘Humanitarian finance’ is probably an oxymoron (as Shylock demonstrated so well). And it just costs too much to get so many loans out to so many people, for the MFIs to charge 12 percent on reducing balance.
Finally, I am sure Mr. Prahlad meant well when he asked people to look for the fortune at the bottom of the pyramid. Unfortunately too many people took his advice. And no one thought about how the fortunes lying at the bottom of Egyptian pyramids were actually made – by the Pharaohs at the expense of ordinary citizens!
Thanks for your time,
Sanjay Agarwal
Dear All,
As chair of Credibility Alliance I have always maintained that self regulation is better than regulation. The sector needs norms which are desirable and then these need to be adhered to. If we as part of the Voluntary sector do not stand by the norms of accountability we will then let in regulators inside.
The problem in accountability and governance in the non profit sector is that many MFIs were only conscious of growth at whatever costs. I am sure there have been some good ones. When Types like SKS Microfinance were twisting the rules agencies and networks like SADHAN should have raised the red flag. At the same time WEF and Davos were giving them awards. When we are not mindful and watchful on our own internal affairs, outside regulators come in.
I am sure norms designed by Credibility alliance ( available on http://www.credall.org.in) can be used for the MFI sector. Even the big NGOS in microfinance never ever joined accountability networks. It was too infra dig . Hence now the fall from grace.
I think the MFIs and the voluntary sector needs to introspect or we will end up as newspaper villians even if we are not.
Regards ,
Mathew