Microfinance, mega trouble

It is the human-interest anecdotes that grab your attention in Ramesh S. Arunachalam's The Journey of Indian Micro-finance: Lessons for the Future . While taking a timely and much-needed look at the factors that led to the crisis in the microfinance industry in Andhra Pradesh last year, the author relates interesting case studies of borrowers who were ensnared in a debt trap thanks to the easy availability of loans from multiple MFIs.

Take the story of Sarju Bai Prajapati from Bhopal. It is 2005, the UN year of Microcredit, and she is an “archetype of the poverty-ridden Indian woman, engaged in a daily struggle to make ends meet”. A skilled pottery-maker, she puts in 16 hours of hard work at making pots and then works on household chores such as cooking, cleaning. For the five-member family she is virtually the sole bread-earner. Her monthly profit of Rs 800, coupled with her son's remittance of Rs 1,200, is insufficient to meet the “crushing expenditure on health and food, increasing debts and spiralling medical costs”. She had an accumulated debt of Rs 23,000.

She is the “definitive, though unacknowledged” head of her household… and not due to any definitive shift from the patriarchal system. The position is thrust upon her because of her husband's paralysis. Over the years she has invested Rs 9,000 in her business, 90 per cent borrowed. This excludes “bribes paid to local municipal officials and goonda elements.”

Fast forward to 2010, to Zaheera Bhee in Kurnool, Andhra Pradesh, the hotbed of MF activity. The author enters the Nabee Saheb household, crammed into all of 60 sq ft, to find a tiny girl wailing for her mother, Zaheera, who has committed suicide. Her family says this is due to her “huge indebtedness”. She had borrowed a whopping Rs 1.6 lakh from eight different organisations, and with the weekly household income — including Zaheera and Nabee's earnings — being only Rs 2,700, there was no way she could keep her weekly repayment commitments. Worse, found the author, the woman never started any of the business ventures for which she had borrowed the money. A member of her family was surprised to find that one of the groups was a “willing and easy source of loans — even the local moneylenders would hesitate to give us more money”.

With “no serious questions being asked about the purpose of the loans” the family spent the money on marriages and emergencies; the debt trap ultimately claimed her life.

SIDBI's role

Arunachalam takes a critical look at SIDBI, the single-largest financier of MFIs, and adopting an unnecessarily apologetic stance, questions its frenetic pace in financing MFIs, due diligence, monitoring, and so on.

The book is also a very useful source to collate details on how five of the top 11 Indian MFIs, in terms of reach, were headquartered in Andhra Pradesh. The top three were in AP and had added a staggering 10.1 million clients between 2006 and 2010. A telling statistic is that of the 20.3 million clients with India's top 11 MFIs in 2010, as many as 17.5 million had been added after 2006.

Arunachalam asks some crucial questions on the speedy growth of MFIs and wonders if the real reasons for this growth were the credit needs of poor people, the MFIs' desire to push the “frontiers of financial inclusion”, or the “urgent need for the MFIs to show better operating performance”.

The runaway success of the SKS IPO, and its promoter Vikram Akula's comment that for the sake of a few rogue elements the entire MF industry should not be punished, leads the author to raise pertinent questions on who were these “rogue elements”. He urges industry associations, banks, regulators and other stakeholders to identify and bring to book these elements that caused the Andhra Pradesh crisis in 2010.

No better than moneylenders?

The author zeroes in on former RBI Governor Dr Y.V. Reddy's suggestion that “for-profit MFIs should be regulated as moneylenders; after all they are no better than moneylenders”. Questioning this premise, he says that having been associated with the industry for two decades “I can vouch for the fact that when it started out, at least in the initial years, and before hardcore commercialisation of the industry, microfinance was nowhere close to moneylending. He was aware of numerous cases where it had positively impacted the lives of poor people. Vis-à-vis the Andhra Pradesh legislation on the issue, he advocates the monitoring of MFIs either by the RBI, a specialised microfinance regulator or through Central-driven measures rather than measures taken by individual States.

Arunachalam describes how it didn't take too long for the MF crisis to spread from Andhra to a neighbouring State such as Tamil Nadu. Here, too, the SHG members wilfully defaulted on loans by either plainly refusing to repay instalments or complained of coercion by the MF male staff. He thinks the mess in India's MF industry will continue for a long time and the “credit culture in our low-income economy appears as good as dead”.

The unfortunate fallout of the Andhra Pradesh debacle is that banks are now reluctant to lend to SHGs because of “the hugely indebted rural/micro-finance credit system”. Bankers are afraid that fresh loans would only be used to repay old dues; particularly in Andhra Pradesh, the formal/alternative rural credit delivery system might be “close to collapsing”.

Even though portions of this massive 612-page tome — brought out on art-grade paper, that too A4 size, making the book too heavy to even hold in your hands — are written in a readable style, there is too much repetition. Even while reciting interesting anecdotes the author tends to overstate a point by repetition, and that takes away from the merit of the book.

But for researchers and serious students of microfinance, Arunachalam's tome will be invaluable, giving as it does details about the microfinance crisis in 2010 and examining critical issues associated with it. But the pity is that through some tough editing and ruthless use of the meethi chhuri , a weapon that the proficient variety of editors love to use, this could have been made an interesting book for a much wider audience, as the author does have an easy and readable style. Both the publishers and the author should consider bringing out a better edited and thinner paperback version.

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