As India celebrates Diwali this week, the debate about how to deal with microfinance has calmed a bit. But since I wrote up my analysis of the root causes Andhra Pradesh showdown (part 1, part 2), the news has taken few further twists. Here’s an update:

  • Vijay Mahajan, Chairman of BASIX and speaker for the MFIN industry organisation, stated on TV: “Alot of the reasons for invoking the ordinance were the creation of the microfinance sector itself. There has been a certain degree of wrongdoing by our sector. And as the president [of MFIN] I am the first one to accept it, I want to do it on record.”
  • The interest rate disclosure requirement under the new microfinance ordinance in AP has uncovered interest rates far higher than previously reported – up to 60.5 percent. I wish I was surprised; but MFIs usually neglect to factor compulsory savings, fees, etc., into their publicly quoted rates.
  • The AP government has published the complete list of complaints of malpractice and suicide launched against the MFIs – see it here.
  • A massive borrower database in AP will go on-line in January, in an effort to clear up the mess.

Meanwhile, India’s vibrant media and civil society have been grappling with the issue, as are some American media. The rest of this post is a digest of the most provocative, insightful and intelligent commentary I’ve seen on the subject.

Corrupted. Amy Kazmin, Financial Times: “Suicides by debt-burdened farmers are not new in India’s southern state of Andhra Pradesh, where crop failure and aggressive tactics by moneylenders have long been a deadly combination. Indian microfinance schemes – mostly started as donor-funded charities – were conceived precisely to rescue the poor from such loan sharks. But a recent wave of suicides by borrowers of what has evolved into a huge, forprofit microfinance industry – charging interest rates between 26 to 30 per cent – has raised serious questions about whether the pursuit of profits has corrupted Indian microfinanciers’ original social mission.”

Told you so. Editorial, microfinancefocus: “A year ago … [Daniel] Rozas wrote: “The spark that sets off a large-scale delinquency crisis can be anything and could come at any time – a rapid drop in economic growth, a populist political movement, a religious decree, or a collections effort gone bad.  One can’t control the spark, but one can control how much fuel that spark can ignite.” That spark has now been ignited.  Whether the flames can be put out quickly enough to prevent disaster is by no means assured.  We hope they will be.  But it is also deeply disappointing to see the sector having come to this point.”

Moneylender-funded haloes. A. Dharker, DNA: “The shamelessness with which Americans bankers have paid themselves million dollar bonuses while pauperising their middle-class clients is too well documented to require repetition. But a micro finance institution? Somehow that was meant to be different. Ever since Mohammed Yunus was given a Nobel for his work with Grameen Bank, the world was under the illusion that micro-finance was a benevolent exercise, and people like Akula wore a halo that shone in any light. Now we know that the halo dazzled us so much that we failed to see how fat their wallets had become. … The microfinance bottom line works because of the traditional money lender. If he charges 50% interest, anyone charging half of that seems like an angel.”

The boom has ended. M. Bateman on indiamicrofinance: “Any which way you look at it, this is not a good advertisement for the ‘microfinance-as-poverty-reduction’ model, and in a region too that was long held up as a spectacular positive demonstration of the far-ranging impact of the commercialised microfinance model. Moreover, often held up as important examples of a new type of business, a so-called ‘social business’, their activities to date do not suggest that this new business structure operates in favour of the poor as much as is all too often naively claimed for them. … What we are seeing today in AP, in actual fact, is the beginning of the end of AP’s commercialisation-driven microfinance ‘boom’.”

Inevitable. M. S. Sriram, Economic&Political Weekly: “It was inevitable that the commercial model of microfinance in India, with its minimalist and standardised model of lending, would grow into a bubble and run into trouble. Many microfinance commercial organisations have entered the market in search of profits and are competing to lend to the poor. … For these institutions, the poor are not seen as human beings having individual identities and needs. Instead they are seen as data points that add up in their profit statements. The anxiety for growth is dictated by the fact that the investors in the market-based models are impatient and look for high returns – and then exit!”

Subprime regulation. S. Dalal, Moneylife: “The RBI had better not shirk its responsibility and get down to regulating MFIs. … All these actions will make sense if they lead to a dispassionate assessment of MFIs, without being influenced by the powerful lobbies working for MFIs who like to dismiss criticism as being alarmist. One can only say that it is precisely this attitude that gave us a global financial crisis in 2008.”

MFIs should welcome regulation. Editorial, The Hindu: “It is obvious that the MFIs face an extremely challenging environment. They should welcome uniform regulation, more transparency in their operations, particularly interest rates, and governance. They are providing a valuable service, and only by being transparent and sprucing up their governance can they acquire legitimacy in the financial mainstream.”

Robbin’ the hood. D. Sharma, Tehelka: “The portfolio of MFIs has grown by 97 percent, and the number of beneficiaries has gone up by 60 percent. The unprecedented growth is in a way shifting the game from the hands of the villains of the story, the sahukars or moneylenders, to a sophisticated, media-friendly organised class of neo-moneylenders. These are not the usual banias but a highly educated class who literally rob the poor. And they have done it remarkably well.”

(Not) the Messiah. S. Nath, Forbes India: ” “I feel like my whole life’s work is turning to ashes. I’ve spent the last two weeks, just running to regulators and government officials, defending microfinance,” says the founder and chairman of BASIX [Vijay Mahajan]. … Despite all its success, many of its peers feel SKS’ aggressive growth has put them on a back foot. Its for-profit image is making regulators deeply uncomfortable. SKS is intriguingly eroding its own messianic image before the world.”

Savings as the answer. S. Sinha (M-CRIL), microfinancefocus: “The ongoing microfinance crisis results from a combination of promoter hubris and observer envy. … In an environment of frenzied growth, MFI lending quality has declined and internal controls have failed to keep pace; if some loan officers have engaged in inappropriate behaviour with clients, it comes as no surprise. The “indulgence” required from the RBI to enable the provision of microfinance services in a more measured way is permission to provide deposit services.”

Work together. APMAS unpublished comment to NABARD: Over the past 2-3 years the [mal-] practices have become more serious as the MFIs have been interested in more than 100% growth per annum and giving more than 20% return on equity. … Of course the MFIs have been in the rat race and have been fully in the profit maximizing mode. … There is a need for a well-defined system of regulation & supervision. If there is no regulation, the poor women will be indebted and result in extreme steps like suicide. … Government of India, RBI, NABARD, Banks and State Governments must collectively evolve an effective regulatory and supervisory system.

But finally, I must address the cynical views of some who seem to think the crisis came out of nowhere and is a product of the government and media causing a stir about nothing. Of course the crisis is being used by many as a vehicle for their own purposes, sadly, but from all the available evidence, the roots do lie with the actions of the microfinance industry itself. The cynics might want to think about the words written by industry insider M. S. Sriram in May (6 months ago):

What Is Wrong With Indian Microfinance. “The question is not whether there is multiple lending. The question is whether the lender knows the absorption and repayment capacity of the borrower. It is impossible to know this if we are doing a group meeting in 20 minutes and moving on. It is impossible to address this when we have standardised products and offer a higher loan each cycle. Our credit officers are trained to be robots following a process mechanically and are prohibited to think. Therefore multiple lending is a problem of the MFIs. We clearly do not know our customers enough, and do not have the time to know them. …

There was a crisis in Krishna (Andhra Pradesh). We read it as a jealous government programme trying to get back at us [How easy to just do that again!]. This was a crackpot zealous set of people who just wanted to shut us up because we were immensely successful. Then there was Nizamabad (Andhra Pradesh). We said that this is communalisation. How could this happen to a secular business like lending to the poor. Then Kolar (Karnataka), and Idukki (Kerala).

This is not a localised response. People of different orientation and different backgrounds are getting upset with our business. We can have a micro argument for each one of these and be satisfied with “I am the best and nobody understands me” syndrome. Where are we going wrong? Is there something in what is happening?

There are talks of self regulation and passing a bill. Self regulation is an oxymoron. I should show responsible behaviour and I have regulated myself. Period. I do not need a peer group to regulate my already good behaviour. Therefore it is a question of intent. If I want to be responsible, then no law will prevent me from being good.

Regulation is needed to deal with the deviant behaviour. Therefore regulation is not preventive, it is only a framework to deal with an event after it happens. The industry has to auto correct. I do not think there is any other way.”