By K.A. Prasanna
Andhra Pradesh government cracks down on predatory practices of Microfinance Institutions
The Andhra Pradesh government has constituted district level ‘Task Force Committees’ (TFCs) to investigate the unethical practices of micro finance institutions in the state. The committees were constituted after the government received many complaints against the loan shark practices adopted by some leading MFI’s of the state.
The ultimate goal of microfinance is to enable the poor to build assets, increase incomes, reduce vulnerability to shocks and economic stress and improve quality of life by enabling better access to education and healthcare. The microfinance industry has grown at a rapid pace across the world and has created a positive impact in the lives of millions of poor people.
The Micro Finance Institutions, instead of providing credit at affordable interest rate, exploiting the situation and looking for a return on investments in excess of 30% p.a. The borrowers pay exorbitant rate of interest. Most of their income goes for servicing the debt with no savings. This kind of situation is no better than the one the poor borrowers had experienced with the traditional moneylenders. They also defeat the very purpose of establishing the Micro Finance Institutions.
Micro finance should not be viewed as a business venture where one can expect very high return on investments. Governmental and statutory regulations, including the imposition of an interest-rate ceiling, are bound to happen. This will adversely affect the operating results. More importantly, the sector, which sucks the blood of the poorest of the poor, (very high interest rates) does not deserve any support. The IPOS will make the promoters, and other venture capitalists including some P/E funds that have stakes in these companies’ millionaires. And the hapless borrowers continue to live in abject poverty. It is time that the regulators look into this ugly side of micro financing.
Despite the vast expansion of the formal credit system in the country, the dependence of the rural poor on moneylenders continues in many areas, especially for meeting emergent requirements. Such dependence in the case of marginal farmers, landless laborers, and petty traders and rural artisans belonging to socially and economically backward classes and tribes whose propensity to save is limited or too small to be mopped up by the banks.
Micro finance is the provision of financial services to low income clients, including consumers and the self employed that traditionally lack access to banking and related services. It is a movement whose object is to create a platform, for as many poor and near poor as possible, to have permanent access to an appropriate range of high quality financial services, including savings, insurance and fund transfers, at an affordable cost. Those who promote microfinance generally believe that such access will help poor people out of poverty. Microfinance is one of the tools that can reduce the suffering of people by financial services that enable the poor to use the existing knowledge and experiences.
In 1994, the RBI constituted a Working Group on NGOs and Self Help Groups (SHG). On the recommendations of the Group, the Reserve Bank advised that the banks’ financing of SHG should be reckoned as part of their lending to weaker sections and such lending should be reviewed by banks at regular intervals. As a follow up of these commendations, the RBI took a series of measures in April 1996 to give a thrust to micro-finance based lending. Currently, all loans by banks to MFIs are categorized as priority sector lending, that banks have to fulfill as part of their social obligation and regulatory requirement.
The interest rate applicable to loans given by banks to micro-credit organizations or by the micro-credit organizations to Self Help Groups/member beneficiaries is left to their discretion. Since the advances to MFIs are classifieds as priority sector advances, the applicable interest rate is around 15%p.a. However, the MFIs are collecting interest between 24% to 36% p.a. from the hapless borrowers. The Micro Finance Institutions, instead of providing credit at affordable interest rate, exploiting the situation and looking for a return on investments in excess of 30% p.a. Micro finance should not be viewed as a business venture where one can expect very high return on investments. RBI should put a cap on the interest to be charged on the end users, as most of their income goes for servicing the debt with no savings. This kind of situation is no better than the one the poor borrowers had experienced with the traditional moneylenders. They also defeat the very purpose of establishing the Micro Finance Institutions.
The RBI should also exercise greater control over MFIs, bring more transparency in their operations and derecognize the MFIs, which are known for bad corporate governance.
RISKS / MATTERS OF CONCERN:
SKS has limited operating history and the fast growing and rapidly evolving business make it difficult to evaluate the business and future operating results.
The company has no dividend history.
The report of the audited financial statements for the year ended March 31, 2009 records statements that there were delays in the deposit of undisputed statutory dues to appropriate authorities and there were instances of fraud on the Company by employees.
Governmental and statutory regulations, including the imposition of an interest-rate ceiling, may adversely affect the operating results.
The promoters/share holders are being profited at the cost of the hapless poor, down trodden and other weaker sections of the society. Unethical and unsustainable business model. The initiatives taken by the Public Sector Banks – for financial inclusion will make the presence of MFIs in rural areas irrelevant in the next couple of years. Even otherwise government will not be a mute spectator to the exploitation. Government is bound to regulate the interest rate in favor of the beneficiaries, which will make these kind MFIs redundant. AVOID.