Seeking new microfinance models

“When do you wish to be a debt-free person?” When I posed this question casually to Mastanamma, a Self Help Group (SHG) member and client of at least three Micro Finance Institutions in Tandur Village, of Andhra Pradesh's Ranga Reddy district about a year-ago, she just gave me a blank stare.

Struggling hard to service her multiple loans from 1992, she had no idea when all her debts would be cleared. It was hard to imagine the amount of interest she must have paid for over nine years when interest rates were between 30-60 per cent. She was in a debt trap, a fact she was probably not even aware of.

Since then, persistent queries to the heads and other functionaries of the top five MFIs in the country could never elicit a convincing response nor explain to me properly the ‘inextricable link' between the prosperity of the poor, microfinance and debt trap.

“They are taking loans to reinvest in business,” a top functionary of SKS Microfinance mumbled feebly, adding that the repayment rate was a whopping 99 per cent, the obvious implication being that the borrowers were prospering. Developments in Andhra Pradesh (AP) over the last four months would require any sensible observer to disagree with the prosperity theory. On the contrary, there is a growing threat of social debt in rural India.

Just consider the AP case. Over a 100 borrowers of various microfinance institutions allegedly committed suicide; some women confessed they were forced into prostitution by other group members to fulfil weekly payment obligations (the AP Government went on record with this!) and such stories abound.

It is not a coincidence, therefore, that AP accounts for over 30 per cent of the Rs 33,000-crore outstanding portfolio of MFIs in the country, with 142 registered MFIs operating in the State, according to a report submitted to the Malegam panel by the Government recently. Interestingly, till September 2010, almost all MFIs claimed a 99 per cent repayment rate from their borrowers.

How was this possible and why was there a sudden uproar about non-payments and coercive methods of recovery? Could it be that over 10 lakh SHG members and other clients of MFIs in AP might have reached a stage of bankruptcy after being forced to repay MFI loans by various means?

If so, further expansion of MFI-lending in other States too is bound to result in similar scenarios after a period of time when the repaying capacity of the rural poor totally dries up.

Multiple lending

Even the Malegam Committee report notes that repayment of old debt accounts for about 25 per cent of new loans taken by joint liability groups/SHGs in Andhra Pradesh, while another 25 per cent goes for income generation activities.

The panel's recommendation of a cap of 24 per cent interest rate plus one per cent insurance costs on MFI loans could still prove too high for the poor to bear.

Another important point is the repayment frequency. By suggesting that MFIs should be given the freedom to fix the pattern of repayment, the Malegam panel has, willy-nilly, increased the interface between borrower and MFI, the nature of which cannot be controlled at the ground level.

The measures to ensure transparency and fair treatment of clients by recovery agents are difficult to enforce as there are over 1,500 MFIs in the country.

There is also a need for all stakeholders to hammer out ways and means to tackle the problem of multiple lending, as the so-called self-regulation by MFIs has obviously failed.

In the absence of any mechanism to check multiple lending, the AP Act has put a system in place a system to prevent it. SKS Microfinance, for instance, could disburse just over 100 loans from November 16 till recently due to the strong scrutiny process put in place by the Act.

While Government intervention to the extent of clearing loans may be detrimental to the industry in the long run, it might be a workable solution in the short term, at least till the industry learns to regulate itself.

The Malegam panel's suggestion that no more than two MFIs should lend to a borrower may not work in the absence of a workable mechanism to check multiple lending.

These, along with many other recommendations of the Malegam panel make one point clear.

While the AP Microfinance Regulation Act (originally promulgated as an ordinance on October 15, 2010) approached the MFI sector from the social and borrowers' angle, the Malegam panel has taken an industry/banker's perspective by focussing more on capital adequacy, solvency and definition of MFIs.

Alternative model

Given the inherent conflict between social objectives and profit motives in the MFI industry, it is probably necessary to think of alternative models of reaching credit to the poor.

The SHG bank-linkage accounts for 58 per cent of the outstanding microfinance loan portfolio, but banks are worried over growing defaults from SHG members.

For instance, in AP alone, the dues were Rs 2,098 crore, constituting 16.42 per cent of outstanding loans as on October 31, 2010. It appears that growth in microfinance lending comes at a huge cost for both the poor, who are falling deeper into a debt trap, and the banks, which face growing NPAs. The AP Government has taken the lead by roping in some banks to fund Mandala Mahila Samkahas (MMS) directly which would, in turn, lend to SHG members at 10 per cent interest. The working of this model needs to be watched closely.

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