When Muhammad Yunus was putting together his Grameen Bank brick by brick, penny by penny in the 1970’s, little would he have known that his model that aimed to bring about a social change for those in the lowest strata of financial spectrum will one day rouse a brigade of for-profit “loan sharks” to delve into the financial insecurities of the poor and dig for “money at the bottom of the pyramid”.
A case in point would be SKS Microfinance, India’s largest Micro-Finance Institution (MFI), founded in 1998 by Vikram Akula. The company has been much awarded for striving to alleviate poverty, and Akula has been hailed as the modern day Micro-Credit pioneer. But that was before the company made an IPO in July last year. An IPO by an MFI was something that Yunus disliked. “By offering an IPO, you are sending a message to the people buying the IPO there is an exciting chance of making money out of poor people. This is an idea that is repulsive to Me.”, he maintained.
And he was justified in his disillusionment as the moment an MFI goes public, its objective changes from social financial engineer to maximization of its shareholder’s wealth. Allegations of high interest rates and strong arm recovery methods leading to farmer suicides seen in conjunction with Rs 45,000 crores of outstanding loans paint a picture murkier than what it appears from the outside. Combine this with the ever increasing loan defaults and the ongoing crisis with Andhra government that led to collapse of several genuine MFI’s and we have a huge industry in dire need for regulation and restructuring.
And this is what the Finance Ministry seems to have set out to achieve with the Microfinance Institutions (Development and Regulation) Bill 2011.
The bill requires the existing MFI’s to register themselves with RBI, which will be given the power to issue directives regarding the interest rates and caps on profit margins besides issuing a code of conduct to be followed by the sector. RBI will also be empowered to delegate responsibility to NABARD as when it deems such a delegation suitable.
The bill also requires sufficiently large MFI’s to convert themselves into companies including those already registered as NBFC’s (Non Banking Financial Companies) and thus mandating audit of MFI accounts. It provides for creation of Microfinance Development Councils (MDCs) at the Central level and at State levels as advisory bodies along with numerous provisions aimed at bringing a regulated sanity to the proceedings.
As a result of diversification of their activities the MFI’s have started morphing into rural banks thus transcending into a territory which was hitherto a domain of co-operative banks thereby causing not only confusion as to functions of either one but also creating a conflict of interest that threatens to endanger the very fabric of an already fragile economy of the rural and unorganized sectors
But all this may just remain a moot point till the Andhra government’s (which claims state government is authorized to pass such a law rather than the Centre) case remains pending in the Supreme Court. Moreover, more than regulating the operations of MFI’s what the poor borrowers of the country need is proper technical and managerial skills to utilize the capital that they augur through the MFI’s. If the return on their investments continues to remain contingent upon external factors rather than their own efforts (Agriculture and allied activities being the quintessential example here), the loan defaults will continue and so will the coercive tactics from MFI’s who will have to contend with an army of investors breathing down their necks to churn in profits. The farmer suicides will continue unabated, the profits of MFI’s will continue to contract and we may see other states joining the chorus with Andhra Pradesh demanding a say in drafting bills that affect the lives and livelihoods of their poors.
Bill or no bill, MFI’s have been proved to be an indispensable tool of poverty alleviation. The policy makers have to keep in mind that the future generations may judge them on the basis of how much they were willing to bend to accommodate the poorest of poor during a period when the nation was taking giant strides forward towards becoming an economic powerhouse.

 

THIS ARTICLE APPEARED IN “FINSCOOP”, THE MAGAZINE OF DEPTT. OF FINANCIAL STUDIES, UNIVERSITY OF DELHI.