Is microfinance primarily a victim of political feuds?

It would seem so, if one were to believe a recent post by David Roodman highlighting the political intrigue fuelling the microfinance crisis in Andhra Pradesh. Roodman cites Amy Kazmin of FT

Some argue that the outcry against the microfinance sector is being deliberately fanned by Jagan Reddy, a disgruntled, out-of-power Congress party politician – and the son of the late chief minister Y.S. Reddy, who was killed in a helicopter crash while in office last year.

Reddy junior believed he deserved to inherit his father’s mantle and position. But New Delhi’s Congress-leadership – read Sonia Gandhi – did not share that view, and has supported the current chief minister K. Rosaiah.

So the theory goes that Reddy is out to do anything he can to embarrass the Congress party’s high command, including its golden boy, Rahul. Indeed, his newspapers and TV channels have whipped up public and political backlash against microfinance companies.

I understand how this makes for a fascinating story. But I am having trouble believing this. If targeting Rahul Gandhi was the point, rival (ruling) political parties in states like UP, Bihar or Orissa would have done this long back, on one issue or the other – if not microfinance, on mining or NREGA. One only has to scan a few newspapers to get a sense of how passionately these rival political parties hate Rahul Gandhi. And Rahul himself has been reported praising both SHGs as well as MFIs – the two warring factions in this microfinance mess. 

So why microfinance; and why Andhra? N.Srinivasan calls it a ‘Crisis by Invitation’ and he should know…

The earlier Guntur experience in the same state in 2006 apparently had vanished from corporate memory. The Kolar incidents last year brought up the problems of concentration of loan exposures and erosion of lending discipline induced by competition. The reaction of the sector to Kolar was to announce codes of conduct and some arbitrary limits on the number and amount of loans. The more fundamental problems in customer appraisal, pricing, recovery methods, transparency, and customer grievance handling were being taken up for resolution, but too slowly.

The AP government came up with district level task forces earlier this year to enquire complaints against MFIs and very clearly indicated its discomfort. The response from the MFIs was not substantial, either in terms of dialogue with the government, or reforming operations in the field.

The exponential growth and high concentration in AP was not accompanied by the required sensitivity in dealing with vulnerable people.

In a potentially volatile environment, MFIs have been slow or worse, unwilling to learn from experience and that shows! Any new industry, especially ones in the social sector runs the risk of facing stiff partisan opposition. What matters however, is how well one prepares for the crisis, protecting as many flanks as possible. There will always be opportunistic politicians and vested interests, but there are only a few instances where key protagonists face the risk of being locked out of their own turf. 

A recent example comes to mind – the IPL. Lalid Modi was booted out in the course of events that were triggered off by a mere tweet – a fall so swift and so far down that no one could have anticipated it, let alone Modi himself. No one in this story is clean, with everyone having their own shares in the pie. But what was clear was the brash arrogance of Modi that alienated him from his influential friends who initially egged him on, but always had the power to pull the plug on him at any time of their own choosing – which they did. Modi had left too many loose ends and is now paying the price. 

This comparison might be a bit stretched and there are layers of complexity exclusive to each. Surely, I am not painting the microfinance sector as roundly corrupt. MFI staff I met in West Bengal in 2007 used to say that they had to be very careful of local political workers, who were looking for the slightest chance to attack and discredit MFIs. I heard similar stories in Karnataka. So its not like MFIs were unaware what the potential risks were. Here is an industry that has such enterprising and visionary individuals, people who understood development as well as business. But as an industry, MFIs seem to have failed, this time at least. Why did they not plan better? Why did they not self-regulate more forcefully? Was it greed and arrogance, or were they plain naive? 


3 Replies to “Is microfinance primarily a victim of political feuds?”

  1. David, I agree. I am just worried the conspiracy angle sounds juicier and wanted to put forth my opinion. Of course, I might be far from the truth – I am in Ghana, not in India.


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