Are MFIs refusing to learn from past mistakes?

MFIs in Andra Pradesh keep hurtling from one crisis to another. The latest is the Andhra Pradesh government’s ordinance that seeks to regulate microfinance operations in the state. It is still not clear if the ordinance covers NBFCs, regulated by the RBI, or restricts itself to MFIs that are sought to be brought under NBARD’s control in the impending Microfinance bill. While the ordinance seems loaded against private commercial microfinance players (and favours the state-led SHG model), as N. Srinivasan points out, MFIs cannot escape the blame entirely. He faults MFIs on the following fronts – 

Multiple lending and associated problems faced in Kolar were not seriously internalised.

High interest rates even in the face of declining operating costs and the resultant high return on assets have been criticised over the last two years.  The proposition that high growth rates and accelerated expansion of outreach require high profitability has been questioned. The need for patience in recovering investments and the nature of equity (patient capital) that would best fit institutions in the sector have been time and again debated. 

Regardless of the ability of customers to pay high interest rates, the underlying political economy issues of doing business with vulnerable customers have been consistently ignored by some MFIs.  Even with the code of conduct in place from two networks, deviant behaviour was in evidence.  While suicides might not be related to loans at all (and not MFI loans either), by the kind of market behaviour exhibited by some MFIs, the sector added grist to the cynics’ mill.

These criticisms of the MFIs seem quite fair. Lessons from the 2009 Kolar crisis were either not taken seriously, or were forgotten in the heat of the battle, in the race for profits and unrealistic returns on investments. Earlier this year, the Association of Karnataka Microfinance Institutions (AKMI) brought out their assessment of the Kolar microfinance crisis of 2009The report roundly criticised coercive repayment collection practices –     

MFI staff required invariably to collect on time put various types of pressure on clients to repay.  A common practice is to undertake a vigil outside the homes of defaulting clients until payments due are made good. This is usually a matter of 1-2 hours but, nevertheless, causes tension in the family and community.

The spark that ignited the tinderbox of Kolar was the alleged verbal abuse of a client by an MFI loan officer. While the principle of zero delinquency was meant to ensure good collections, its rigid application in practice became a proximate cause of the crisis.

The report also suggested that the joint-liability principle may not be working as well at higher loan amounts since the risks were too high, especially when more than one member in the group was vulnerable to default.   

In Kolar, a group (which had borrowings from 4 MFIs) said that one of their members had run away and they did not want to pay for her. Another group of clients had faced repayment problems in the past but had pooled funds to repay for their group members. They said they did not like having to call fellow members from their homes, or to humiliate them by demanding payment in public. When, however, 5 members of the group defaulted it became impossible for the rest to repay. At this stage their family members had begun to complain about the system.

The other important point Srinivasan makes is that MFIs might have failed to take into account the political economy of doing lucrative business with the poor. This rings even more true since a part of the title of the AKMI report is “the role of external agents” and the report itself dwells on how other organisations in the region capitalised on the situation and “lit the tinderbox“. One would expect that MFIs would self-regulate their operations at least as a politically expedient step in a potentially inflammable situation. Instead, ‘Political interference’ was actually ranked a lesser risk in the 2009 Banana Skins report than in the preceding 2008 report


So, have MFIs played their cards wrong in southern India? With the latest ordinance in Andhra Pradesh, looks like MFIs will have to play catch-up. They have been painted as villains in the mainstream media through numerous newspaper reports attributing suicides and extortions to them, as opposed to success stories (anecdotal or otherwise) that have largely remained on MFI websites and institutional/academic circles. As India’s apex microfinance associations prepare to respond to the AP ordinance, at least one thing that’s clear is that difficulties for MFIs will continue to arise unless MFIs pro-actively take steps to learn from their past mistakes.

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