MFIs have been maligned

A recent article ‘Life after Microfinance in AP’ ( Business Line , January 5) gives a one-sided view of the microfinance sector. The State government is, in fact, a pioneer in spreading the concept of microfinance in the form of SHG-bank linkage programme, now continued by Sthreenidhi Bank. The article gives an impression that the entire microfinance sector is dead in AP, which is far from the truth.

According to the article, the Malegam Panel appointed by the RBI has observed that a little over a quarter of MFI loans only were used by the clients for productive purposes. On a careful reading of the report, I regret to observe that I have not come across such an observation in this form. The Malegam panel refers to a report (Para 5.6.d – Page 8) about the usage of loans given by Joint Liability Groups (JLGs) and Self Help Groups (SHGs), as shown in the table.

The MFIs organise JLGs and the NABARD- promoted and government monitored groups are called SHGs. If the article is referring to the 25.6 per cent of the loans indicated in the Malegam report, it is not telling the whole truth, because the quantum of loans given for income generation purposes by SHGs is slightly lower (25.4 per cent) than the JLG category. The article tries to show MFIs in poor light through selective interpretation of data.

The percentage of loans given for income generation purposes (including repayment of old debts which is recognised as a priority sector loan by banks), is 51 per cent in the case of JLGs and 46 per cent in the case of SHGs. So, even here the JLGs score better. Other purposes include health, home improvement and education which are accepted as essential expenditures by the low income communities. Non-specified usage is 11.6 per cent under JLGs and 7.9 per cent under SHGs.

The Malegam committee has acknowledged the need for some consumption-related expenditure by the clients and suggested a ceiling of 25 per cent for such loans, acknowledging the ground realities.

impact on MONEYLENDERS

The article further observes that the absence of MFIs in the AP State has had practically no effect on the clients since, as per some studies commissioned by the government, the share of private money lenders in the rural credit market in the State has remained unchanged at about 30 per cent in the last two years.

This observation can be contested. There have been numerous news items in the recent past on the activities of the private money lenders and their charging of usurious interest rates.

Questionable recovery practices are on the increase in the State, particularly in the old city of Hyderabad. Several FIRs have been filed in police stations against private moneylenders.

The specific details of the studies commissioned by the government are not indicated in the article.

The spectacular performance of the two gold loan companies (Muthoot and Manappuram ) in the past two years clearly points out to the fact that the low income clients are desperately approaching these and lesser known companies, pawning whatever little jewellery items and other assets they have to meet their income-generating needs and other needs.

The turnover and net profit of these two companies, as per published reports, have increased by about 100 per cent (more than 100 per cent in the case of Manappuram) each year in the past two years (2010-11 & 2011-12), as shown in the table.

How can we say then that the share of the money lenders in the rural credit market has remained unchanged?

The credibility of the so-called studies commissioned by the State government is suspect.

The Sthreenidhi Bank is reported to be a co-operative institution. The plight of the AP State Co-operative Bank and other financial institutions in the co-operative sector in the State is too well known to be mentioned here. With political interference, and the absence of rudimentary corporate governance practices, one can easily foresee the fate of this institution.

The Agricultural Debt Waiver Scheme announced in 2008 has created serious moral hazard problems. Credit discipline has suffered irreparable damage.

Due to this measure and several other factors, it is not surprising to note that 43 per cent of the 94,647 village level Primary Agricultural Credit Societies (PACS) in the country were loss-making as of March 2011 and the overdues of co-operatives in 2010 were much higher at 41 per cent of loans given, compared with 34 per cent in 2005.

STHREENIDHI HYPE

One can safely conclude that Sthreenidhi Bank is going to be another white elephant in the stable of the Government in a not-too-distant future.

When the Sthreenidhi Bank was launched about a year ago with much fanfare, it was announced that it will provide loans to the extent of Rs 1,000 crore in a year’s time. But we learn that only Rs 400 crore have been disbursed so far.

If only the MFIs were allowed to function normally, this amount would have been many times more. The present outstanding loans with the clients from MFIs in AP is about Rs 6,500 crore. When will Sthreenidhi Bank reach this figure to take the place of MFIs, as is being claimed by the State government?

Developing countries in Asia, Africa and South America are recognising microfinance as an important tool to reduce poverty and encourage income generating activities among low income communities.

India, particularly one State in South India, seems to be on a witchhunt, driving out the MFIs from the State.

The repercussions of these myopic policies will be felt not now but in about two or three years when the low income communities, who have no access to mainstream banking, will realise how much they have suffered in the process.

Pakistan has 10 microfinance banks (the 10{+t}{+h} bank having been inaugurated in January 2013). Nigeria opened 37 microfinance banks in one state (Kano state) on a single day in January 2013.

The President of Myanmar recently declared in his address to the United Nations that microfinance was recognised as one of the important tools to tackle the problem of poverty in his country.

Yet, we continue to pursue retrograde policies.

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