Going grameen in a typical micro-Indian way
By M Rajshekhar, Economic Times India -
The year 2010 was not good for Microfinance Institutions (MFIs). They entered the year on a high. Growth rates were dizzying. Players were readying to raise money from capital markets.
The segment was getting hosannas for being virtually the only financial intervention by the formal sector that reached the poorest of the poor. And now, as 2010 roils to a close, the MFIs are staring at heavy losses in its largest market, Andhra Pradesh, an uncertain regulatory future, and a greatly tarnished image.
What went wrong? The year began poorly for the MFIs with the RBI deputy governors telling that that the central bank was aware of the extent of benami loans being given by MFIs, the practice of writing off bad loans and sloppy corporate governance in some of the entities. That was in January.
A couple of months later, the concerns over corporate governance were heightened when the SKS Microfinance management sold all their shares (with the exception of unexercised options) before the IPO. And they were heightened further when the MFI fired its CEO, Suresh Gurumani, less than two months after its successful IPO. The resulting fracas hammered the SKS scrip, and raised further questions about the quality of corporate governance in the company.
Around the same time, papers and TV channels in Andhra Pradesh began reporting that women who had borrowed from MFIs were killing themselves. After 2005-06, when there had been similar reports of suicides amongst MFI borrowers, this was the second such outbreak.
This raised questions about the MFIs’ conduct with borrowers, and about their due diligence before proferring loans. One fact will suffice. It has been known for a while that the Andhra market was overheated.
Microfinance loan penetration amongst poor households was an incredible 823%, as per the industry’s own 2009 State Of The Sector report. Despite that, in 2010, the registered MFIs lent a total of Rs 9,000 crore — up from Rs 5,000 crore-Rs 6,000 crore the previous year.
Rival political parties saw this as a chance to humiliate the ruling Congress party. The state bureaucracy, which runs its own SHG programme and consequently has an adversarial relationship with the MFIs, drafted an ordinance imposing onerous conditions on the MFIs.
And the Congress, partly out of conviction and partly out of the need to respond to the opposition, overrode protests by the Centre and passed the ordinance. Since then, collections have plummeted in the state. Estimates suggest they are as low as 10%, from the initial reported 99%. Bank lending is down. Equity investments have all but stopped. The finance ministry is awaiting the RBI’s YH Malegam committee report before finalising a bill for regulating microfinance.
In recent years, the MFIs lost their way, focusing far more on credit delivery than on helping people escape poverty. Hopefully, in 2011, we will see the return of a form of microfinance that the village women appreciate. At this time, they are conspicious by their silence even as the AP government cracks down.