In this interview, Professor Malcolm Harper analyses some of the underlying causes and consequences of the microfinance crisis in Andhra Pradesh. Professor Harper is chairman of the microfinance rating agency M-CRIL and editor of the volume “What’s wrong with Microfinance?”. He has been Professor of Business Development at Cranfield Business School, and as the former chairman of BASIX, significantly pioneered microfinance in India.

Professor Harper, you recently returned from India. How bad is the situation for the microfinance sector there?

I was in Delhi at a very large meeting of microfinance people, where of course Andhra Pradesh was being talked about a lot. I then spent some time in Orissa, in a village three kilometres from the Andhra Pradesh border. I called in on the local office – which previously I didn’t even know existed – of BASIX. And the local staff said there had been no trace of any repayment difficulties, even though the Andhra Pradesh border was so close by. This surprised me, and even they were rather surprised. Repayments were at the normal high level.

But I was running a course nearby and my students were interviewing various traders in the local market, and a few of them mentioned that one or two of the microfinance institutions, from which they had taken loans, had stopped making disbursements. And that of course has the seeds of trouble, because one reason why people repay is because they’re going to get another loan.

So it seems that the MFIs are having trouble refinancing themselves now, raising capital for their lending activities.

That’s inevitable, I think, because when the banks are beginning to wonder about the quality of their loans to the MFIs, they’re not about to release further loans. And that, of course, contributes to the problem, because – as I said – people repay mainly because they’re going to get another loan.

Microfinance in India grew at an incredible rate over the past few years, nearly doubling its portfolio every year. Was growth itself the problem?

In part, yes. There was an enormous unsatisfied demand; and some well-managed, outstandingly-marketed, well-capitalised institutions got into the business. The field was pretty well prepared because people were used to borrowing through the Self-Help Groups, so the notion of institutional borrowing was not new to them. Although microfinance institutions were new, the Self-Help Groups, which are a very good government-promoted scheme, had been in place and were also growing. So most rural women in Andhra Pradesh particularly were members of such groups, some of them more than one. And therefore when microfinance institutions came along ten years or so ago, they recognised them as a new form of formal finance, and jumped in and borrowed heavily – too heavily of course for their own good. And that’s where the problem started.

Were the interest rates too high?

It depends on what you mean by too high. Microfinance interest rates in India are the lowest in the world. They are still well over what middle-class people would pay for mortgages and car loans, but they are at stated rates of around 24 percent, which in actual fact reach around the mid-30s when you add on the various fees; which by microfinance standards around the world is very low. Actually that is around half of what the same people would have to pay to a moneylender. But it’s sufficient for a journalist or a politician to pick on and wave a big stick.

What about the pressures for commercialization in this sector, which was always heralded as a “social business” – did they contribute to the crisis?

Yes, undoubtedly. SKS, which is the biggest player, sold some shares to venture capitalists and did an IPO, and they were under great pressure to increase their size and increase their profits. And they weren’t the only ones, because following their example, a number of microfinance institutions – either because they wanted to grow and they needed equity in order to borrow more money; or with a little bit of, shall we say, greed by their promoters – were anxious to jump on this bandwagon. Growth and high profits were an essential part of doing that.

Microfinance looked like a tremendous investment opportunity for some time. Do you think that’s still the case?

No, no way. Not in India now. The shares of SKS – which is in some sense the main offender, if it is an offense – are worth less than half of what they were at their highest, and even far below what they were at their public offering which was just in August.

You work for the rating agency M-CRIL…

I’m chairman of the board, yes.

M-CRIL repeatedly warned about over-indebtedness and poor lending practices, even before the crisis broke out.

To an extent, yes. Perhaps not as loudly as we should have, although I don’t really think anybody could have foreseen this happening at this time and this scale. But we certainly were warning about it, though perhaps not as loudly and dramatically as we should have done. We definitely were saying “watch out”.

What role do you think the different levels of Indian government played in bringing about the crisis? Because some MFI representatives have claimed the Andhra government attacked their business in an attempt to save the Self-Help Group model, their own microfinance model.

That would be an oversimplification, but there is some justice in that. When I had some involvement in starting the Self-Help Group movement in Andhra Pradesh, in the early 1990s, we used to say that we’ve got the Self-Help Group system, and Bangladesh has the microfinance system; and we think that ours is rather better. It’s linked to banks, which are secure institutions; it’s cheaper, it’s built on local communities, and so on. This looked like a better approach because of India’s enormous numbers of rural bank branches, which Bangladesh does and did not have. So the general feeling was that this was the “Indian” approach, whereas Grameen Bank and it’s replicators were the “Bangladesh” approach, and it was interesting to see which would do the best job. But then, the microfinance institutions came into India around ten years ago in a big way

Do you think they were free-riding on the success of the Self-Help Groups?

To an extent, yes. And some Self-Help Groups’ members kind-of just walked across the road and essentially said: “Here we are, ready to borrow”. The fact that they were already borrowing from the Self-Help Group, and it might not be good for them to borrow from the microfinance institute as well, was sadly neglected.

BASIX opted for a different, less commercial variant of microfinance years ago. Is BASIX also less affected by the crisis?

Well, as I say, the BASIX branch I visited last week just across the state border did not seem to be affected at all. BASIX has a bank in another part of the state, and that is also pretty much unaffected. It doesn’t go under the BASIX name, but everybody knows it belongs to BASIX. However, BASIX’ non-bank activities, which are far larger than the bank are being pretty badly affected. I should imagine still that they’re not being affected as seriously as other institutions, because they offer very different package, with loans and intensive non-financial livelihoods services as well, a lot of them are rather larger loans, they work with men as well as to women, they do not work through groups in the same way, and so on. It’s certainly not a standard microfinance institution, because it has a whole range of products.

You see, the classic microfinance institutions are based directly or otherwise on Muhammad Yunus’ Grameen Bank, which consists of putting women into groups and lending them money, and then lending them more money when they repay it. That’s basically it. Very simple, roll it out, hence you can reach 5 or 6 million customers, as SKS has, in a very short amount of time. BASIX is far more complicated. It doesn’t do that sort of lending. It lends to individuals, and to groups of 4 or 5 business people with slightly more substantial businesses, which may be employing people, rather than those which are run by the typical microfinance customers. Also, most importantly, BASIX sells its customers livelihood services which are non-financial, for instance it shows them how to raise chickens, or how to run their shops a bit better, or how to vaccinate their cattle. And it’s working very hard to bring those non-financial services, as well as services to promote institutions, local cooperatives and so on, to the same level as its credit services. They’re not at the same level yet; they make money, not very much money, but they cover their costs and they’re reaching well over half of BASIX customers now.

As the former chairman of BASIX, you significantly helped to build up the microfinance sector in India in the early days. How does it make you feel to see it discredited in this way now?

I’m not surprised at all. Perhaps I didn’t have the foresight to foresee what is happening now, but even 10 or 15 years ago one was aware – or we were – that the straight Grameen method, which at that time was hardly being done in India at all, was really not the solution. And in fact in 2000, four years after we had started, in BASIX we did a survey of our and we found that credit only wasn’t doing them a lot of good. Some a little good, some a little harm. The poorer people were benefiting less, hardly at all. So we had a complete re-think, and said we’ve got to be offering people more than just credit. We are seeing that proven right now.

We kindly thank Professor Harper for his time, and for granting permission for the interview to be published here. This is the English original (and longer) version of an interview published in German by the Börsen-Zeitung, Frankfurt, page 4, on 14 December 2010. The German version can be accessed on our resources page.

(phil)