From Business Standard
Andhra Pradesh chief minister N Kiran Kumar Reddy has asked the bankers to enhance the credit flow to self-help groups (SHGs) to avert the adverse affects of lending by micro finance institutions.
Addressing the state-level bankers committee (SLBC) meeting on Wednesday, the chief minister told them that the government wants the Rs 7,500-crore loans given by microfinance institutions (MFIs) to people organised under SHGs be transferred to the books of the banks by means of swapping to the extent possible. It needs to be done to save the poor from high interest rates being charged by MFIs, he said.
“I want bankers to go beyond the targets to achieve this objective,” he said at the meeting. An amount of over Rs 9,000 crore have been targeted under SHG-bank linkage programme for the year 2011-12 as compared to the actual credit flow of Rs 6,791 crore so far this year. The officials expect the credit flow to be at Rs 11,000 crore considering the additional demand coming on account of stoppage of fresh loan disbursement by MFIs under stricter control of the state government.
Few fresh MFI loans
The intent of the government is clear from the following fact: Only about 1,646 of the 60,833 applications forwarded by MFIs for fresh loans amounting to Rs 71 crore have been accepted by the district authorities while rejecting the rest of the proposals. Under the present rules, the MFIs can not give a single loan with out the permission of the district rural development authorities(DRDAs). The government has also barred MFIs from giving multiple loans to a single person.
In a further setback to MFI activities, the state government had chalked out a detailed plan of action for providing bulk loans to the Mandal Mahila Samakhyas (MMS), the federations of SHGs under the SHG-Bank linkage programme. Under this scheme the banks would extend bulk loans with a size of Rs 50 lakh and more to each of these MMS, which will be considered as community financial institutions.
The MMS will give loans to SHG members at a rate of interest not exceeding 18 per cent, according to the plan submitted to the SLBC by the government. Union Bank of India has already sanctioned Rs 50 lakh each to 20 MMS and 80 more proposals are under consideration, according to the officials of rural development department.
“The need for bulk finance to MMS is felt more than ever in the present context of MFI crisis. Currently, there is no way a SHG gets another loan during the currency of existing loans, and loan is not available to them for a period of 3-5 years driving poor to access high cost loans from MFIs/ money lenders,” a report said.
Shanthi Kannan, The Hindu
The Micro Finance Institutions (MFIs) have emerged as important means of financial inclusion (FI) today. The Union Government is of the view that creation of a dedicated fund for providing equity to smaller MFIs would help them maintain growth and achieve scale and efficiency in operations. With this intention, the Finance Minister in the budget for 2011-12, has decided to create “India Microfinance Equity Fund” of Rs. 100 crore with SIDBI. Similarly, to empower women and promote their self-help groups (SGHs), he has introduced a “Women’s SGH’s Development Fund” with a corpus of Rs.500 crore.
Mahesh Ramachandran, Co-Founder and Chief Executive Officer, Commonwealth Microfinance (India), feels if financial inclusion is to achieve its objective of banking the unbanked, the ICT (information and communication technology)-based FI services through the “Business Correspondent” (BC) model need to be provided till the scale of operation reaches economic viability.
Currently, almost all technology service providers (TSPs) and the BCs find the FI services a difficult business proposition.
Banks, being commercial entities, expect subsidy or incentive for taking up large-scale FI services; if the Finance Minister could allocate funds for directly compensating banks for rolling out financial inclusion services, it would help the TSPs and BCs to take banking services to the hinterlands with renewed vigour and enthusiasm.
P. N. Vasudevan, Managing Director, Equitas Micro Finance, wants to have a proper regulatory framework for the sector now. If it is created, the sector welcomes a proper regulatory framework which would enable it to play a positive role in financial inclusion.
Similary, the budget did not provide details of how the SHG fund was to be used or what would be the activities to be undertaken in this respect.
On RBI coming out with a set of guidelines for issue of fresh banking licences before March 2011, Mr. Vasudevan hoped that the new guidelines would focus on licensing those new banks, which would provide the whole range of financial services.
From The Times of India
HYDERABAD: With micro finance institutions trying to lure the poor by introducing new products that supposedly do not come under the purview of MFI Act, the state government is all set to issue a notification that will replace the word “SHG women” and include a generic word ” BPL households”, so that MFIs continue to adhere to the stringent norms laid down in the Act.
According to sources in the chief minister’s office, the law department vetted the notification on Friday in order to ensure that MFIs adhere to the existing stringent rules.
“The notification aims at bringing all kinds of MFI loan products, existing and future, under the purview of the Act. The MFIs are lending extensively to poor self-help group women and even their families. The notification will be made public in a day or two,” the source at the CMO said.
It was also learnt that the CMO was receiving queries about the new products being offered to their spouses and family members by the MFIs.
Confirming the development, principal secretary (panchayat raj & rural development) Reddi Subrahmanyam said the notification would be announced keeping in mind the issues highlighted by the district nodal officers ( DRDOs) regarding new instruments and the innovative methods being adopted by MFIs.
The state government recognises a family as those with an income of Rs 1 lakh per annum, both in rural and urban areas. The biggest hurdle for MFIs has been a clause in the Act that prevents them from lending to SHGs (who are being serviced by the formal banking system), without prior approval of the respective bank.
The Act makes it mandatory for MFIs to maintain accounts and furnish copies to the authority before the 10th of every month giving the list of borrowers and the loan amounts. The authority also insists on a duly signed receipt for payment made by the borrower to the MFI on account of any loan. It also bars MFIs from deploying agents for recovery.
The Act has been successful in bringing greater transparency in all money lending transactions by MFIs to the poor, said an official.
The state government brought in the Andhra Pradesh Microfinance Institutions (Regulation of Moneylending) Act, 2010 with a view to regulate the microfinance sector, whose representatives resorted to unlawful acts like forced collections and intimidation. The coercive actions were so severe that more than 60 loanees committed suicide, unable to bear the public humiliation by recovery agents.
By Rahul Kumar, The Hindu Businessline
The panel will enable big NBFCs to carry on microfinance on a larger scale than the current microfinance players, without regulatory oversight.
The objectives of the Malegam report are to protect the microfinance borrower, promote the SHG-bank linkage programme in preference to the MFI-JLG (Joint Liability Group) programme, ensure credit supply to the MFI-JLG programme, and protect the stake of banks and FIs in the microfinance sector.
The broad objectives are diverse and finding a balanced solution is a difficult task. The Committee’s observations are not without shortcomings.
BIG NBFCs BENEFIT
The committee recommends that for NBFCs to become NBFC-MFIs, 90 per cent of their total assets (excluding cash and cash equivalent) should be for microfinance activity.
On the contrary, it permits other NBFCs to engage in microfinance up to a cap of 10 per cent of total assets without specific regulation. The big NBFCs have an asset size of over Rs 10,000 crore. Ten per cent of such a size is bigger than the assets of the fifth biggest MFI in microfinance.
Big NBFCs can carry on microfinance on a scale larger than the current microfinance players without regulatory oversight. While the provision is obviously intended to encourage scale in microfinance it restricts the scope of product diversification of NBFC-MFIs.
This lack of flexibility of NBFC-MFIs, compared with the freedom of regular NBFCs, will allow them to gradually take over the market while functioning in an unfettered manner.
To prevent over-borrowing, the committee restricts the individual loan size to Rs 25,000. The aggregate outstanding loans of a borrower are restricted to Rs 25,000. The tenure of the loan is aligned with the borrower’s cash flow.
The committee mandates that 75 per cent of the loans by MFIs should be for income-generation purposes, and leaves the repayment frequency (weekly/fortnightly/ monthly) to the choice of the borrower.
However, the limit of Rs 25,000 is too low to procure income-generating assets, or to protect the borrower from negative market or environmental shocks. In effect, the recommendation may drive borrowers to borrow from informal sources.
The committee does not clearly define the scope of loans for income-generating purposes.
On the repayment frequency, the committee’s suggestions contrast with the JLG model, in which group decision prevails over that of the individual to ensure joint liability of repayment.
INTEREST RATE CAP
The third objective targets the growth of MFI-JLG programme because the factors driving the growth are found to be unjust.
The Committee recommends an interest rate cap to curb the growth. The interest rate cap is 24 per cent, subject to the net interest margin cap (difference between the amount charged to the borrower and the cost of funds to the MFI).
The net interest margin cap is 10 per cent for the larger MFIs (loan portfolio exceeding Rs 100 crore) and 12 per cent for the smaller MFIs (loan portfolio up to Rs 100 crore).
The margin cap applies at an aggregate level for the MFIs. The committee arrived at a normative cost structure to prescribe the margin cap with an overall interest cap.
The interest cap does not compensate for the higher cost of operation in remote areas. The committee’s view to restrict scope of securitisation for NBFC-MFIs will burden traditional sources of debt and equity funds. The committee allows only corporates with a minimum net worth of Rs. 15 crore to become NBFC-MFIs. The suggestion is intended to induce economies of scale and better monitoring and control.
To protect the stake of banks and FIs, the committee recommends provisioning norms and capital adequacy norms. NBFC-MFI is required to maintain an aggregate provision for loan losses, which is the higher of 1 per cent of the outstanding portfolio or 50 per cent of the aggregate loan instalments which are overdue between 90 to 180 days and 100 per cent of the aggregate loan instalments which are overdue beyond 180 days.
The capital adequacy ratio is 15 per cent and all of the net owned funds should be in the form of Tier I Capital.
The provision is inconsistent with RBI Master Circular on Capital Adequacy. The de-recognition of the Tier II capital and other instruments of Tier I capital will prevent the broad basing of the capital structure of NBFC-MFI.
The committee feels that the regulatory standards will meet the objectives and, therefore, allows priority sector lending status for bank lending to MFI.
However, the committee fails to give specific direction to precipitate bank lending. A specific allocation of 10 per cent of 40 per cent limit of priority sector lending of banks through revision in RBI Circular on Lending to Priority Sector is realistic.
On the funding source for NBFC-MFIs, the committee emphasises setting up a “Domestic Social Capital Fund” for “Social Investors”. The idea has limited relevance without clear guidelines for the fund to operate. Specific invitation to banks and government institutions to participate in the fund may ensure its success.
The recommendations may be seen as a useful framework of guidelines to regulate NBFC-MFI, but one that needs to be strengthened to facilitate the growth of microfinance.
(The author is CFO, Mimo Finance, a New Delhi-based microfinance company.)
By Virendra Singh Rawat, Business Standard -
Public sector Indian Bank has planned to expand its network of microfinance branches in the country.
From the current count of 32, the bank targets to increase the network strength to 60 by the end of March 2012.
These specialised branches cater to the financing needs of Self Help-Groups (SHG) in the rural areas by extending loans varying from Rs 60,000 to Rs 12 lakh.
“We had launched the microfinance branch initiative in 2007 and it has been highly successful with recovery percentage of 99.5 per cent,” Indian Bank CMD T M Bhasin told Business Standard here.
Since inception, the initiative had reached out to about 400,000 SHGs comprising 5 million people in the country and extended collateral-free loans totalling Rs 2,130 crore.
The Bank plans to launch two such branches in Amethi and Rae Bareli in Uttar Pradesh for SHGs functioning under Rajiv Gandhi Foundation, he informed.
Bhasin was in town to inaugurate the bank’s 69th branch in Lucknow region. Another 10 branches are located in the National Capital Region (NCR) of the state.
“By March 2012, we plan to ramp up our branch network in Uttar Pradesh and Uttarakhand to 100 and increase our total business to Rs 7,500 crore in the region from Rs 5,000 crore currently,” he added. A new zonal office will be opened in Meerut to cater western Uttar Pradesh and Uttarakhand.
The Micro, Small and Medium Enterprises (MSME) and agricultural credit growth posted by bank had been 34 per cent and 26 per cent, respectively.
On the need for capitalisation, Bhasin mentioned the bank’s capital adequacy ratio was in comfortable territory.
“Our capital adequacy ratio stands at over 12.76 per cent, while the Tier-I capital adequacy ratio is 10 per cent. At the end of the current quarter, our capital adequacy ratio is likely to increase to 14 per cent,” he noted.
The bank, which has 2/3rd of its network based in South India, primarily Tamil Nadu and Andhra Pradesh, will open more branches in the North to have equal footprint across India.
By Sameer Sharma, Economic Times India -
Social sciences literature now recognises social, human, and cultural capital, in addition to economic and physical capital. Even though independent, different types of capital possess attributes of interdependency and reciprocity. Simply, this means that even social capital can be transmuted into economic capital.
And, women groups repaying loans to microfinance institutions through frequent instalments in a group setting exemplify social capital at work.
The underlying idea, as Robert Putnam found in the Italian rotating credit associations, is that membership in associations (or SHGs) generates trust and norms of reciprocity. Typically, SHGs are small groups possessing ‘thick trust’ (trust based on personal knowledge of other actors in the group) that makes responses of group members predictable and enforcement of loan repayment relatively easy; therefore, attracting financial institutions to lend.
Accordingly, in social capital — relationships of trust embedded in social networks — the poor have a non-monetised resource that metamorphoses into loans and the attractiveness of the SHG model is founded on inclusiveness, the unique democratic accessibility of social capital, because all other forms of capital exclude the poor, ignorant, and unpropertied.
Furthermore, researchers agree that social capital is a multidimensional construct having several forms and two forms of social capital — bonding (that links people together with others like them) and bridging (social ties that cut across differences such as caste, class or religion) — distinguished by Avis Vidal, are generally accepted.
Bonding social capital promotes exclusive identities, gives precedence to the group over community and generates specific reciprocity ; in contrast, bridging social capital is outward looking, promotes acquaintances with different and distant people and leads to generalised reciprocity .
Importantly, as the work of Xav Briggs has shown, the outcomes associated with the two forms of social capital are different. Bonding capital helps the poor to get by or cope with particular challenges (social support), as opposed to bridging capital that helps to change the opportunity set and get ahead in life (social leverage).
Presently, lending activities of MFIs are primarily confined to lend and enforce collections drawing down on the social ties found in supportive groups. Recently, Dr Rangarajan , chairman of the PM’s Economic Advisory Council, also referred to the “flawed business model” in which the MFIs primarily leverage on the existing social ties to engage in multiple lending, that too for consumption.
Additionally, insights available from a recent MIT study (Abhijit Banerjee and others, 2009) in 104 slums of Hyderabad show the importance of context while designing interventions for the poor. The MIT study found that pre-existing conditions of households matter. In response to MFI loans, households with existing businesses increase spending on durable goods (e.g., investment).
Households with high propensity to start businesses, finding loan amounts to be inadequate to start businesses reduce spending on temptation goods (e.g., tobacco , alcohol). And, households with low propensity to start businesses increase spending on nondurables spending (e.g., food, marriage, illness).
Therefore , the challenge, in addition to broadening and deepening ties, is to design specific interventions that are based on the existing business activities of households and their propensity to engage in income-generating activities. The fact that the bonding and bridging capital interact and mediation by intermediary structures is possible provides a useful way to access outside resources (build bridging capital) to transform social ties to economic capital.
Drawing from practice stories elsewhere , MFIs can work as intermediary organisations to design deep contextual interventions. Households having pre-existing businesses will require social ties that provide more than mere emotional support and everyday favours.
More useful are bridging contacts that can help them to get a crucial new idea or news of an impending market downturn or provide political and managerial access. The value of such bridging networks lies in the fact that they are not passive bridges, but are active links relaying important information and are also capable of endorsing (vouching for) the poor having limited access to money and other scarce resources.
For households with little propensity to do business, the MFIs intervention will include training and other support to help the households — including those with no formal schooling or language skills — to acquire and practise ‘public life skills’ to earn more than subsistence wages that only help them to cope with daily life.
Research by Michael Woolcock and others is increasingly pointing to the contribution of such linking social ties to help the poor to expand their opportunity set, for example, getting jobs through external contacts. Finally, for households with high inclination to engage in income-generating activities, getting ahead in life will require training and other support, such as leveraging funds from the government and locating funding sources to meet their complete fixed and working capital needs.
From Knowledge@Wharton -
The most recent crisis to hit microfinance began in India’s southern state of Andhra Pradesh, where allegations of widespread over-indebtedness, heavy-handed collection tactics and borrower suicides have stirred a national debate about regulating the industry.
In October, the state government slapped restrictions on microfinance institutions that crippled lending and sent collection rates plummeting along with the share price of SKS Microfinance, India’s largest for-profit microlender. On January 19, the Malegam Committee Report, released by the Reserve Bank of India, recommended a range of new regulations for India’s microfinance institutions, including interest rate caps, loan limits and income ceilings for borrowers. Some observers welcomed the news; doomsayers predicted a credit crunch and industry collapse.
While it is too early to tell how the sector will respond, the crisis in Andhra Pradesh has sparked heated debate and soul-searching throughout the world’s microfinance community. During a recent program for microfinance leaders at Wharton’s Aresty Institute of Executive Education, discussion turned repeatedly to questions of over-indebtedness, rapid industry growth, and the fine line between profits and purpose.
The microfinance sector has experienced “a rude awakening” by “a delinquency earthquake,” said one of the program’s 26 international participants, Kamran Azim, during a general discussion about the growth and sustainability of the microfinance industry. Azim, head of operations at the Kashf Foundation, a microfinance organization established in 1996 in Lahore, Pakistan, pointed out that methods and methodologies in microfinance have changed little in the past 20 or 30 years. Now suddenly, the earth has moved.
Sponsored by the Women’s World Banking Center for Microfinance Leadership, the Advanced Leadership Program at Wharton brought together microfinance leaders for a week of intensive study, brainstorming and networking to help prepare them for the challenges facing microfinance today. The goal of this year’s cohort: to find innovative ways to confront the global economic crisis, new competition, increased regulation and relentless pressure to perform.
“During times of accelerated change, there is a tendency to rely on known ways of doing business,” reads the introduction to one of the program’s courses. “Yet it is at just these times that innovation is of heightened importance.” At the same time, as several participants noted, the industry must find new ways to sustain growth without losing sight of clients’ needs. For some microfinance institutions, that could require a crash course in business fundamentals such as due diligence, sustainable growth and customer care.
The Effects of Over-lending
The modern microfinance movement began in Bangladesh in 1977, as an experiment by economics professor Muhammad Yunus, who gave out small, no-collateral loans to groups of borrowers too poor to get credit from traditional banks. Over the next three decades, the model he established became widely accepted and replicated in other countries as a way to fight poverty. Microfinance spread around the world and earned Yunus a Nobel Prize in 2006.
But over the past few years, increasing competition among lenders and a weak global economy have strained borrowers and microfinance institutions alike. As an increasing number of banks and for-profit companies entered the market and contributions from investors increased, some markets became over-saturated and borrowers over-extended. Microfinance institutions are now seeking ways to continue growing with less risk.
“We are in a tension field between sustainability and … social impact,” said participant Carine Roenen, executive director of Fonkoze, a grass-roots microfinance organization based in Port-au-Prince, Haiti. “You take one of these two poles out of the equation and things go wrong.”
Fonkoze, Haiti’s largest microfinance institution, is used to operating under such tension. After hurricanes affected the lives of one-third of its clients in 2008, Fonkoze helped struggling borrowers by rescheduling existing loans. Since the earthquake in January 2010, it has distributed thousands of cash grants, and more than 10,000 new loans to clients, and has developed a catastrophe micro-insurance program.
“Microfinance, especially after Yunus received his [Nobel] prize, was branded as something that was good for the people,” Roenen noted. “And now Andhra Pradesh comes with a story where it is bad…. We can probably learn what happened there. The public knows and expects from us that we provide social value. But we need to communicate about that much more than we do.”
Over-indebtedness in Andhra Pradesh today has become “a fast-growing negative energizer which is really threatening the entire industry,” said James D. Thompson, director of Wharton’s Societal Wealth Program, during a class session on customer-centric innovation. He also advised microfinance institutions to focus on the customer — “to reflect thoroughly about customer needs along every step of the consumption chain…. One of the single greatest challenges in beginning to think like this is [putting] the customer at the center, versus the natural reversion to talking about us and what we do,” said Thompson, adding that building a mental map of how an organization operates from the customer’s standpoint appears simple at first, but is actually quite difficult. One course participant agreed, noting that during a group exercise “several times [we] took the position of the institution and not that of the client.”
Outside the classroom, microfinance institutions (MFIs) have also struggled to understand their customers’ needs.
The last three years have witnessed a wave of events stemming from over-lending, said program participant Inez Murray, executive vice president of New York-based Women’s World Banking. Among them: Nicaragua’s microfinance industry suffered a crisis in 2008 when a “No Pago” (No Pay) movement led to widespread defaults and violent protests; Morocco’s microfinance sector experienced a wave of defaults that led to the demise of one of the biggest MFIs; and Bosnia witnessed over-indebtedness after war recovery efforts spawned a large number of MFIs chasing too few customers. In each case, the root causes were complex: poor competitive practices — for example, cherry picking each other’s clients — as well as relaxation of due diligence as MFIs sought to grow rapidly; manipulation of clients by local political forces; and macroeconomic shocks. Microfinance “works in an ecosystem,” Murray said. “When it becomes too successful and money is involved, risk is created.”
Program participant Mavsuda Vaisova saw the negative results of overlending in Tajikistan, where she works as general director for Humo and Partners, a micro-lending fund in Dushanbe. Started with a staff of just 19 in 2005, the microlending organization now has 11 branches, 260 employees, 10,000 clients and an active portfolio of US$5.5 million.
“Last year, during the crisis situation, we saw what happened. People were killing themselves because they could not repay five or six loans,” Vaisova said. “These cases in Tajikistan happened so often [that we said] to all our creditors, ‘Please don’t push us because we cannot push people to kill themselves.’”
In some countries, the problem of over-indebtedness has been attributed to a lack of information: Without a system of credit bureaus or official identification cards for the poor, lenders could not determine a borrower’s credit history or the presence of existing loans from other lenders. But that was not the case in Tajikistan, according to Vaisova. The country has a good information exchange about clients, so microfinance companies were able to see that borrowers were already in debt. “They can see that this client has two, three outstanding debts with other organizations. Still, they would like to have more outreach, so they provide another loan,” she said. When given the choice, most borrowers gladly take advantage of the extra credit. “People cannot correctly evaluate their loan needs. They are just taking, taking, taking — and then they cannot repay.”
Traditional banks, too, have begun to woo the micro-borrower in many countries, increasing pressure on microfinance institutions to hold market share. “In this context of new competitors, of different competitors, bigger competitors than us, all this fight [means it can be] very easy to lose the mission,” said participant Rafael Llosa, general manager of Mibanco, a private bank in Lima, Peru, that focuses on micro and small businesses. “Because you are fighting to be the leader in the market and you are fighting to survive, you start [focusing] on other things.”
And yet, profits are essential if the microfinance institution wants to carry out its mission of poverty alleviation, participants said. “You have to charge interest to cover all expenses,” said Marie Louise Nsabiyumva, CEO of Burundi-based savings and credit cooperative C.E.C.M. and vice chair of the Burundian Microfinance Network. “Otherwise, you would disappear. And that isn’t useful for the client.” Added Llosa: “If we are not profitable, we are not sustainable. For that reason, it’s not an error to have profits.”
But how much profit? In Andhra Pradesh, state government officials in October cited microlenders’ quest for “hyper profits” as reason to clamp down on the industry.
Many microfinance companies in India seek investor capital, in part because of India’s banking laws, noted participant Vikram Jetley, chief operating officer for Bangalore-based microfinance company Ujjivan’s north region. According to the company’s website, Ujjivan has completed four rounds of capital infusions and plans to offer an IPO after three years of profitable operations.
“We have two different kinds of investors,” he noted: pure social investors and private equity investors. “As a part of our mission, we have clearly defined that our return on equity would be at best 15%. So someone who is looking for a really aggressive return on equity would never come with us.”
Established in 2005, Ujjivan uses the Grameen model of lending to groups of women borrowers and focuses on urban microfinance. It currently boasts a 99.12% repayment rate from its more than 975,000 customers in 20 states.
Regulated by the Reserve Bank of India as “Non-Banking Financial Companies,” microfinance institutions such as Ujjivan must maintain a minimum capital adequacy ratio but cannot take deposits, according to Jetley. “So we have to go to the capital markets. Otherwise we will never be able to scale up.”
Before the crisis, Andhra Pradesh was awash in micro-investment: the state holds about one-third of India’s microloans and hosts some of India’s largest for-profit microlenders, including SKS Microfinance, which raised $358 million in an initial public offering in August 2010. (SKS shares have since lost more than half their value after peaking at 1404.85 rupees on September 15.)
According to Narasimhan Srinivasan, author of “State of the Sector Microfinance India 2010,” the number of microloans in Andhra Pradesh now amounts to almost 10 times the number of poor households in the state. But Srinivasan also reports that not all loans came from microfinance institutions. Borrowers in Andhra Pradesh can also get credit from the Self Help Group (SHG) program, a government poverty alleviation program funded in part by the World Bank that offers microloans at below-market rates. Srinivasan found that one-third of loans distributed in Andhra Pradesh were given out by microfinance institutions, while two-thirds were given to borrowers in the SHG program.
“The Andhra Pradesh crisis happened because the government has been going there and promising a 3% rate of interest while my rate of interest even on our debt funding is 12%,” said Jetley. “How can you survive? This is not an India problem; it’s one state’s problem. It is not cascading to other states.”
Oversimplifying the challenges in Andhra Pradesh and painting the entire microfinance industry with the same broad brush will not help find creative solutions going forward, said participant Georgette Jean-Louis, CFO of Fonkoze, the microfinance institution in Port-au-Prince, Haiti.
“I think the sector right now is at risk because everybody is trying to take what happened in one part [of the world] and say it is the same thing that is happening in Peru, in Haiti, in Taijikistan or in some part of Africa,” Jean-Louis stated. “Yes, there is a problem [with] what happened in India. We have to learn from it, we have to study it, in order to prevent it from happening in every part of the world…. But at the same time, you have to look at the context. You have to look at the environment. You have to look at what happened and study it instead of globalizing [it and treating it as] the same monster that is happening to you.”
Every country is different, she added, and solutions must account for the differences and involve everyone. “There are lots of stakeholders. Government has to play its role. Microfinance has to play its role. The investors have to play a role. And then we can find a solution.”
The recent developments in Andhra Pradesh and other hotspots have brought industry leaders together to explore ways to limit the potential for overlending in the future, said Women’s World Banking’s Murray. “The sector has to do this and build coalitions. It must also engage in self-regulation. However, this will only work up to a point. Legal regulation will likely be required, but this needs to be done in a way that enables growth.”
The industry is focusing heavily on finding ways to measure social impact, and setting industry standards by which microfinance institutions can self-regulate. Organizations are also pushing product diversification: After years of extending credit, many microfinance institutions argue that other types of financial services could have an even greater impact than loans. Savings accounts, for example, would give poor households a safe place to store emergency funds. Insurance products would help them manage risk.
In a study in Morocco, Women’s World Banking found that women borrowers tended to set aside 40% of their incomes for health emergencies, Murray pointed out. “It’s pretty easy to argue that spending 20% on an insurance premium and the other 20% on investing in business to get out of poverty” could be a better option long-term, she said.
And growth — for both borrowers and lenders — is what microfinance institutions say they want. “We believe there’s a tremendous future for microfinance … if you focus on having an impact at the client level and the household level, creating services that will enable poor people to make better choices for how to use their money,” Murray added. “We’re absolutely optimistic that the microfinance sector is here to stay.” Problems in Andhra Pradesh and other hotspots are “essentially a lot of growing pains. The key is not to throw the baby out with the bath water.”
By B Krishna Mohan, Business Standard India -
As of October, the outstanding amount stood at Rs 2,098 crore, or 16.42% of the total.
Banks, which of late are seeing lower repayments from microfinance institutions, are facing a similar problem again. This time, it’s from the government-nurtured self-help groups (SHGs).
The government has admitted that recoveries from SHGs in recent times had fallen to 70 per cent. In the last ten years, loans worth Rs 29,000 from banks were arranged to SHGs, which had a near 100 per cent repayment history. There are over one million SHGs involving nearly 10 million households in rural and urban areas of the state
According to banking officials, the overdues under SHG lending are mounting. As of October, the amount stood at Rs 2,098 crore, 16.42 per cent of the total loan outstanding of Rs 12,777 crore.
The State Level Bankers’ Committee (SLBC) recently said they could extend loans to the rural sector only if there was a continuous thrust on prompt repayment. It urged the government to assist them in recovery, especially loans given under the SHG-bank linkage and weaker section housing (Indiramma) programmes.
With banks putting the onus to increase the recovery from SHGs on the government, the Society for Elimination of Rural Poverty, the nodal agency for the SHGs, issued an advisory on December 24 asking them to repay on time.
“Our groups repay the loans on their own. But if bank officials come for recovery, it implies that the group is not functioning properly,” the advisory said. Some groups have taken loans worth Rs 500,000 from banks, which have issued guidelines to increase the amount up to Rs 10 lakh for repeat loan cycles after repayment of the earlier loans.
The delay or non-payment of dues happened because groups did not take loans based on their repayment capacity, the advisory said. Here, MFIs have been criticised for resorting to overlending, which burdened the borrowers and as a result affected their repayment to banks.
Suggesting a community-based recovery mechanism, the advisory said SHGs could get the loans below Rs 1 lakh rescheduled to 36 months and those above to 60 months to enable them to repay.
“The SHG loans and those given for Indiramma houses will not be waived. If the repayment is delayed, the interest burden will increase. Banks will initiate measures to recover the loans,” the advisory said, adding only groups that were prompt in repayment would be eligible for the government’s Pavala Vadi scheme — loans at 25 paise interest (3 per cent per annum).
The advisory asked the groups to take fresh bank loans only for livelihood enhancement and use the group savings for meeting household expenses.
“The recoveries of overdues are indeed a major concern for the banks,” said Andhra Bank chairman and managing director and SLBC president R Ramachandran. Andhra Bank is the lead bank in the state.
From Little Miss Plugged In -
Microfinance is really hype!
Microfinance has become in the recent years a major trend. While no microfinance institutions existed 35 years ago, today estimates account 7000 of them serving more than 20 million poor people. The microfinance global fame kept increasing the past decade and got international recognition with the UN declaring 2005 the International Year of Microcredit. Finally the excitement around Microfinance would reach a peak with the 2006 Novel Peace Prize “decerner” handed over to Muhammad Yunus and the Grameen Bank of Bangladesh.
What is Microfinance exactly? Is it some kind of charity?
The idea behind microfinance is simple and has existed for centuries: poor people do not have access to banking service such as credit or saving account. Based on this observation, microfinance institutions have developed a business model to make lending to the poor, less risky and profitable. Microfinance is not a charity; it is an expansion of banking service to a larger share of the population on earth. It is pure business opportunity.
How do you they contain the risks of non-repayment while making it profitable?
Because this category of people, per say, have a lot less money and properties, they have a much higher risk to never pay off their credit; for the banks, this means microfinance activities are high risk. On top, issuing microloans vs bigger loans translate into much higher administrative cost. As a result, for microcredit to be a profitable business, microfinance institutions had to review and modify their usual credit business model. That is why interest on microloans are much higher than conventional interest (they can vary between 20 to 70%). To contain the risk of non-repayment, institutions carefully select the kind of people they give microloans to. Most of the microfinance institutions only work with small groups of women because they are the target group that have shown the best repayment rate.
So banks are lending money to women only… wow that’s real empowerment isn’t it?
The spread of Microfinance institutions have given women a new role to play. In a society where they usually have no voice, no influence and no financial mean, the rise of microfinance appears like the ultimate opportunity that men would not impede them to use. Taking up a microloan and therefore bringing home money to the household or using it to start a business to improve their lives is sthg a husband would rarely oppose. Somehow targeting microcredit at women is a way to support women’s empowerment. Credit gives them more control on family finances and assets and therefore more economic power in their household. This also translates into more social consideration and they become more engage in their community.
Sometimes it is not all good for women…
However two major worries darken the view of microloans. First of all, some men use their wife as a mean to reach the money. The woman administratively hold the credits and she is entitled to paying it off, they do never know the taste of it as their husband or father get hold of it. Secondly, many women take up a loan to realize couple of weeks later that they do make enough money to pay off the loan and interest. This is not only because they lack business skills but also because interest rates are really high. As a result, it is critical that women have reached a certain level of empowerment prior to get hold of a microloan. Self-Help Groups of women are being set up in this goal. Being part of a SHG is agreeing to put savings in every month. The savings of all the women are being tracked by the group. When one woman needs money, she must gain support from the whole group. As part of a SHG, women learn record keeping, accounting but most importantly they find a place to speak up. The SHG enhances women’s confidence and capabilities by helping each other. That is one liberating step towards empowerment. It is also crucial to rely on local NGO activities to teach women business skills. Otherwise, women might get a microloan and find herself in debt, taking a second loan to pay off the first one!
If the banks select carefully who they lend to, can the real poor still get money?
Indeed, not all microfinance programs target the poorest. Their mission is not to alleviate poverty and these institutions are not charities. They either do not really target the very poor but rather modest families that conventional banks have not reached yet or impose an indecent interest rate to balance the risk of non-payment as well as the high administrative cost associated to a small loan.
Conclusion: microcredit does not make it all.
Another risk is that all this excitement around microcredit encourages governments to invest less into development programs when other vital antipoverty measures are urgently needed. Microfinance will never solve the need for basic health service, infrastructure and education. Even at the individual scale, microfinance is too often talked as a poverty relief tool when it is just offering capitalism to the poor. Capitalism have great benefits for the one who can and knows how to play the game, but for the unskilled, untrained and unaware, capitalism will bring more poverty. Take a poor woman who has 3 children, no job and an alcoholic husband. If she receives training and guidance and knows how to make her business work and grow, this tiny bit of capitalism that microcredit is in her life will do a lot of good. She could start a small business, buying raw materials for jewelry with the loan, she would sell the goods at the right price that enables her business to grow and her to pay off the loan. If you take the same woman without training and guidance, she won’t know how to “invest” her loan. She will spend the money and have no return on it. She will find herself in the same situation as before she took the loan, only an extravagant interest rate to reimburse on top. And the irony is that she might take another loan to reimburse the first one.
From Equity Master -
Shakespeare once said, “A rose by any other name would smell as sweet”. But, in the case of the Indian microfinance industry, this phrase did not work too well. If you call yourself a microfinance institution (MFI), armed with a social cause, you will get slammed if you only chase profits. Maybe, this will work in your favour for a while. But soon enough, the basic rules of economics start to kick in. More on this point later.
Andhra Pradesh (AP) alone accounts for around 30-40% of India’s overall US$ 6.5 bn microfinance portfolio. It is also the birthplace of a number of big name microfinance companies including SKS Microfinance, Spandana, Share, Asmita etc. It is the proverbial cash cow of the business in the country. MFIs and SHGs (self help groups) were heralded as new ways to alleviate poverty and empower women in the state. This led to the phenomenal growth of the industry. With so many microfinance companies present, the rural poor were for the first time spoiled for choice. They had a tempting buffet of loans in front of them. And, not knowing any better, they opted for more than they could handle on a single source of income.
|Source: Financial Times website|
When a few players in an industry earn abnormal profits, other players then decide to join the party. The established few, e.g. SKS, Spandana had some knowledge on microfinance operations, handling borrowers, etc. The newer, more aggressive players in their aim for quick profits opted for strong arming techniques in order to earn their share. The poor borrowers eagerly lapped up loans initially. But, ultimately they overleveraged themselves. And with interest rates hovering between 27-30%, this was not a good idea.
The entire microfinance model is based on group lending. If one borrower defaults, the others have to carry their weight. Rather than facing the shame of default, some of the women borrowers turned to suicide. When these numbers racked up, the authorities started crying foul. But, 2010 was not the first time that this happened. The first case of suicides due to aggressive operations happened in the same state of AP in 2006. A number of branches were shut for operations and the industry faced a temporary crisis.
But, the crisis did not go away. Lending rates were still prohibitive. Borrowers were overleveraged. And, post the listing of SKS Microfinance, a lot of unresolved issues came to the fore. Anyway, this time, the government finally took matters into its own hands. In October it passed an Ordinance to help regulate microfinance activity in the state. Recently in December, the government passed a Microfinance bill, with similar provisions. This bill is expected to be soon enacted into a law, but it faces strong opposition from the MFI network.
Some of the main features of the bill include a monthly instead of weekly collection period. They are also not allowed to lend to women self-help groups (SHGs) already serviced by banks. In order to prevent coercive lending practices, the MFIs are now only allowed to collect their repayments from a designated government location such as a village panchayat. Earlier, they could visit borrower’s houses to recover money. There was no interest rate cap declared, however.
All these moves, since the passing of the ordinance materially impacted the operations of MFIs in AP. Collections dropped to 20% from 95% previously. SKS’ shares were hammered on the exchanges. You may think that these moves would lead to the failure of the industry. But, after facing these challenges, the industry can, and will grow stronger.
Taking away the capital that helped a young woman set up a business in a village, is devastating. Once she has tasted the power of being an entrepreneur, the desire can never go away. Banks, PE, and Venture capital firms who lent money to the billion dollar industry, all cannot write off these loans as bad. They do see microfinance as a key growth driver for Indian financial sector.
The industry has to bounce back stronger than before. It will have to work around the new laws and regulations that will come up in AP and other states. The business model needs to be reworked. It needs to find that ‘magic number’. The interest rate that is both reasonable and profitable. It will have to try and manage the delicate and difficult balance between social good and business profits. Having said that, the industry will take some time to become lucrative for shareholders.