MicroSave’s recent focus note (HT: David Roodman) carries policy recommendations for MFIs on saving the beleaguered microfinance industry. The message for MFIs is clear – “denial is no longer an option” and that if the industry doesn’t take action now, it will either crumble either under the weight of mounting losses or crippling government regulations (more likely, both). These recommendations for MFIs are notable only because they are in no way new ideas, and merely illustrate how unresponsive the sector has been – see the following points from the focus note –
- Transparent interest rates – for research on how microfinance clients understand their loans and interest rates, see here and here, pg 25-26; announcements
- Transparent operations and governance – a recent article by Prof MS Sriram, a S&P report and my comments from a previous blog post.
- Improve analysis and dissemination of social performance – why the reluctance??!!
- Establish a credit bureau – would be nice, if they really took off.
- Diversify product offerings (financial and complementary non-financial) – BASIX has been trying this for years now; see an interview with Malcolm Harper here
MicroSave also has policy recommendations for the government. This mostly contains advice for the government to be prudent. A brief discussion on some of the key recommendations follow –
- The note encourages the government to ‘recognise and build’ on MFI’s successes. I wonder, why doesn’t the government embrace the success? There are several reasons why the government can legitimately take credit – 1. The government is the default regulator and has allowed MFIs to grow and spread for all these years; 2. Public institutions (RBI, SIDBI, PSU banks) have played a significant role in infusing funds and resources; 3. MFIs in many parts of the country built on the government-led SHG programme. Whether SHGs are a success or not is a different matter, but one cannot deny the role of SHGs in creating/increasing awareness about financial inclusion
- The note also makes the case for public banks being more vigilant in monitoring operations of MFIs by using an area approach to lending. I am not sure how this will work in practice. Why should MFIs be subject to varying policies of banks. It should have access to funding from a wide range of sources, including private banks – the lenders should have to compete (responsibly) as well. And if there are multiple lenders, who will take responsibility to monitor MFI portfolios in those areas?
- Recognising the limitations of the SHG model is something that is easier said than done, especially when it comes to politicians. Public institutions are more likely to admit to the shortcomings of SHGs. SHGs in India are a bit like cooperatives in India – they are failing, but they must succeed. But will populist politicians take a pragmatic view of this? I am not hopeful…