the stranghold of micro finance

8/8/2019 The Stranghold of Micro Finance

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Appeared in People's Democracy, 2010 October25 - 31st Issue and

November 1-6th Issue

The Stranglehold of Microfinance

K Veeraiah

OF late microfinance is being viewed as a prime tool in achieving poverty

reduction and inclusive growth. Particularly after Grameen Bank fame

Mohammd Yunus was bestowed with Nobel Prize, this illusion became

widespread resulting in a major spurt in microfinance institutions across the

world. The proponents are focusing on turnovers, repayments and profits as the

indicators of its success, neglecting the ramifications of microfinance

institutions (MFIs) on poverty reduction or inclusive growth. Microfinance as avehicle of poverty reduction mechanism has its own limitations. At best, it can

play only a complimentary role rather than a key role, provided, it is governed

under panchayati raj system and borrowers command ownership of resources

of income generation. Realising this limitation, the Communist Party of India

(Marxist) correctly assessed, Conceptually, the governments and the World

Bank project of microfinancing and SHGs serve as an alternative to rural credit

which has drastically declined after liberalisation. SHGs cannot be a substitute

for institutional rural credit. Such an approach must be opposed.[On Certain

Policy Matters, Document adopted in CPI(M) 18th Congress in 2005]

Recent incidents in Andhra Pradesh come as a rude shock to the

proponents of financial inclusion through microfinance. These incidents

resulted in suicides of 57 people, out of which, 17 are the clients of the worlds

largest MFI, SKS Microfinance. As more than 30 of them are women, the

intensity of the shock is such that the government of Andhra Pradesh has been

forced to proclaim an ordinance. The Reserve Bank of constituted a sub

committee to look into various aspects of these modern 'merchants of ' who

have converted MFI into an industry. Earlier in 2006 in Andhra Pradesh, 2007 in

and 2008 in Karnataka, the role of MFIs brought several questions to the fore.

These incidents force us to rethink the efficacy of MFIs as instruments of

financial inclusion and of poverty reduction as well as its changing nature with

the entry of finance capital through private equity route.

PHILOSOPHY &UTILITY OF MICROFINANCE


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The concept of microfinance is having its roots in the neo-liberal project

itself. As neo-liberalism gripped the minds of policy makers across the

continents, the governments started retreating from the welfare state. Retreat

of development finance from provisioning of services and financial access

forced vulnerable sections of people to face financial exclusion. This resulted in

widespread struggles questioning the legitimacy of neo-liberal project, such as

in , during 1986. This crisis of legitimacy forced the neo-liberal think-tanks to

advocate structural adjustment programs with human face. As a way out from

the crisis of legitimacy, neo-liberal policy makers devised Emergency Services

Fund in directly targeting the households by eliminating the State

intermediaries, which evolved into microfinance in due course. As the avenues

for profit dried out, from 70s, the international financial capital is in search ofnew sources of profit. Both these efforts consolidated in the research results of

the then neoliberal stalwarts such as Joseph Stiglitz who worked on reforming

the small and micro lending structures across the countries and came up with

revitalising the traditional financial intermediary systems by opening space for

private capital and self financed efforts of people for financial inclusion. To

carry out these policy directives in the interests of international finance capital,

the World Bank-IMF along with their siblings such as ADB, IAB, DFID, USAID,JCB, formed into a Consultative Group to Assist the Poor (CAGP) as a global hub

to oversee this effort. Thus, the origins of the concept of microfinance are

rooted in 'think globally and act locally' attitude of the neo-liberal project. True

to their nature, these development initiatives are centred around non-

governmental organisations, as they are insulated from the limitations of

political economy of the State.

Providing small loans to individuals, possibly within the groups as capital

investment to enable income generating opportunities is the essence of

microfinance. To be eligible under microfinance schemes, the potential

beneficiaries were asked to form into groups by mobilising their initial thrifts

within each village. In this way, the duration between the formation of group

and their eligibility for loan helped private lending agencies to gauge their

cohesiveness and also the saving culture.

In, Mohammad Yunus, after bagging the Noble Prize became an

international face of microfinance. He experimented successfully with the peer


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group based modules. Yunus summarised the philosophy of microfinance based

on peer-groupings by saying, (It) smooths out the erratic behaviour patterns of

individual members, making each member more reliable in the process. Subtle

and at time not so subtle peer pressure keeps each group member in line with

the broader objectives of the credit program. Shifting the task of initial

supervision to the group not only reduces the work of the bank but also

increases the self-reliance of the individual borrowers. This basically targeted

women as its stakeholders. The success of microfinance is in mobilising

women. Women have been historically marginalised and their marginalisation

is more stark in the economic arena as well. They are easy to control morally

and otherwise at the time of collections the underlying cause of 95-99

percent of recoveries.

In the summit of Womens empowerment (1995), the then World Bank

president James Wolfenson presented this idea of incorporating women in thrift

groups to economically empower them. In 1997 in , the World Bank with the

support of Citigroup, Mastercard, American Express Bank, organised another

summit to structuralise the execution modules of microfinance. Finally in 2002,

the at the International Conference on Financing for Development explicitly

recognised that microfinance and micro credit as well as national savings are

important for enhancing social and economic impact of financial sector. The

United Nations was also co-opted into this understanding when the then UN

secretary general Kofi Annan announced 2005 as the Year of Microfinance.

Currently MFIs are having global assets worth $50 billion and are not

damaged much by the ongoing crisis of financial capitalism. This proves the

resilience of this industry. By the end of the 20th century, governments

appropriated the conceptual utility of microfinance by making it as a centre

piece in its developmental strategies focussing on women. This also helped the

governments to manage the grassroots who are disgruntled with the

consequences of structural reforms. This role of SHGs is nowhere more evident

than in the state of Andhra Pradesh when Chandrababu Naidu used SHGs as

powerful instrument to shift the tide towards TDP during the 1999 general

elections.

Another important aspect of the MFI as a developmental tool is turning


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the non-governmental organisations into self-sustainable entities. With this, the

whole concept of NGOs has undergone a major change as they shifted their

orientation from service to market and also from deemed agencies of

transformation into potential counter hegemonic social forces through

microcredit. They are gradually adopted into the circuits of international

finance capital through the generous funding from international agencies. As

neo-liberal project progresses, the popularity of NGOs as vehicles of

development also has gone up. This also led to a standardisation of NGO

pattern from group of social workers to CEO headed line department with

technocratic professionals heading various departments. We can see this shift

in all the NGOs active in MFI business.

Once NGOs were co-opted by finance capital, gradually they are

transforming themselves into banks, a phenomenon that began with the

Grameen Bank. In , Swayam Krishi Sangam, popularly known as SKS, was

enlisted first as an NGO, then re-registered itself into non-banking financial

company and finally ended as a private limited company. In the ever increasing

tying up of micro-credit organisations to circuits of international finance capital,

which is evident in Indian context, the external factors and needs are bound to

reflect on the internal structures of MFIs as well. Thus, the active collaboration

of NGOs with donor agencies driven by finance capital and tacit role played by

the state, resulted in establishment of unholy trinity which is trying to subvert

the democratically elected agencies, through which credit is channelised till

now, at the ground level.

INDIAN CONTEXT

The institutionalised origins of rural credit in particular and credit in

general goes back to the 1970s when the welfare state took initiative in

expanding the outreach and intensity of credit as a source of rural

development. In continuation, in the post nationalisation period, Indian banking

system's depth as well as outreach increased enormously. This growth is

reflected in its commitment to increase the bank presence in rural areas and in

its efforts to reach the most vulnerable sections of the society. A mandate for

all nationalised banks to expand their operations at least by 25 per cent in rural

areas helped to meet the first characteristic where as devising the concept of

priority sector helped banking industry to mould their orientations into social


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banking. Priority sector includes emphasis on directed lending to sectors such

as agriculture and small scale industries and also members of historically

disadvantaged sections of society. Put together, nationalised banks are

mandated to lend 40 per cent of their total lending to these sections/sectors

and out of that 25 per cent must be disbursed to individuals belonging to

weaker sections. The newly conceived program of Integrated Rural

Development Program (IRDP) became the policy vehicle to redirect the credit to

priority sector. Out of total bank lending, priority sector lending reached

nearest to its target only in 1987 and from then onwards witnessed gradual

decline. Particularly with the beginning of restructuring of Indian economy, total

lending to priority sectors came down to nearly half of the '87 peak.

This deterioration is linked to the change in RBI outlook about social

banking as a result of the government accepting Narasimham Committee

recommendations. In policy terms, it implied that the government agreed to

direct lending initiatives based on need, business prospects, profitability and

financial viability, minimising operations cost. In post-1991 period, National

Sample Survey Organisation surveys in two rounds, 1993 and in 1999 shows

that in rural areas 72 per cent of households are indebted to informal sources

of lending. Out of that 72 per cent, loans raised through informal money

lenders stood at 22 per cent and pawn brokers stood at 21 per cent. The credit

is redirected from weaker sections and sectors of society to capital markets

and consumer credit. This resulted in excluding the vast sections of people

both vulnerable and not so vulnerable people from accessing the financial

services thus leaving the field open for the entry of private financial

intermediaries. Exactly this was the time when Chit fund companies flourished

across the country. Chits like Margadarshi in Andhra Pradesh and Sriram,

Sundaram Finance in Tamilnadu became an all phenomena. These are

concentrated on individual clients rather than groups. In Andhra Pradesh itself,

thousands of chitfund companies became operational in 1990s. Some of them

took even the shape of private banks which collected thousands of crores in

deposits and disappeared overnight.

At the same time, influenced by the changes in international policy

scenario, governments both at the centre and in states adopted the concept of

micro-credit modelling around Self-help Groups (SHGs). NABARD championed


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this concept in . The implementation is more or less fashioned along the lines

of Grameen Bank in . Gradually the central government stepped into promote

DWACRA groups under Women and Child Welfare ministry. In certain parts,

they roped in NGOs and in some others they roped in political field workers as

it had happened in Andhra Pradesh to form DWACRA groups. They were told

that in due course, these groups, after reaching certain levels of savings, will

be linked to banks through loans to empower them. In all these efforts, women

stand out as key focused section. Crores of people were mobilised in these

structures across the country with more than 6 million self help groups (each

group contains 10-20 members) with 54.47 billion worth deposits as on 2009

March. The current process is riddled with low levels of lending and perceived

reluctance of banks to deal with SHGs as they are not cost worthy. Even thengovernments such as in AP promoted SHGs with a promise of getting them 25

paise interest with which SHGs swelled till recently. Thus the ground is well

prepared for the entry of first the NGOs and then the commercial MFIs to poach

this client base.

At this juncture, institutionalised money lending in the form of MFIs

entered the scene after realising the potential of this sector. They replaced

SHGs with joint lending groups (JLGs). In case of SHGs, there is no need of

collaterals but they have to run around the banks for loans. In case of MFIs,

different types of collaterals starting with ration cards, gas connections to

valuable items at home are initiated. As MFIs are in the business of advancing

capital for profit, they hunt around the needy JLGs. Thus, in currently two

streams of microcredit structures are under operation. As on August 2010, is

abuzz with 3000 MFIs lending Rs 20,000 crores to 28 million borrowers

experiencing 105 per cent of compound annual growth rate. The returns on

equity in MFIs increased from 5.1 per cent in 2008 to 18.3 per cent in 2009 in

MFIs. With assured interest rates varied from minimum of 30 per cent to

maximum of 60 per cent with which profit is certain, private equity portfolios

are eager to enter into this sector. The market's response to SKS' script

confirms this trend. MFIs, by mobilising capital from market sources through

equity and other market oriented instruments, became vehicles for the

circulation of finance capital. This is substantiated by the fact that by July 2010,

more than 200 billion USD is pumped into MFI industry. Once they enter, they


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drive the industry according to their own interests. Currently Spandana

negotiated for 60 million equity from Teamlease of Singapore. The World Bank

and its MFI arm, IFC are active in lending to the corporate MFIs in . The IFC

even announced microfinance initiative for Asia in collaboration with

Kreditanstalt fur Wideraufbau to lend to MFIs in . The DFID is coming up with a

new poverty initiative strategy focusing on states where MFI penetration is less.

Thus, the entry of international finance capital and the profit oriented MFIs in

lieu of SHGs which thrive on bank linkages vitiated the market resulting in

suicides by the borrowers, who fail to repay in time and withstand the pressure

from the MFIs. This is what is happening in Andhra Pradesh and what happened

in some other states in recent years.

THOUGH microfinance has been adopted by government of as adevelopmental tool as early as in 1990s, the emergence of MFIs across thecountry varies from state to state. States such as Tamilnadu, Karnataka andAndhra Pradesh adopted the concept of MFIs and the entrepreneurial classgave it the shape of industry within no time. According to one study, there arearound 800 MFIs currently operational in and out of them more than 70 percent are concentrated in these three states only. Even in Andhra Pradesh thespread is more intense in coastal districts than in the rest of the state.Formulated by the World Bank, the then Telugu Desam government in AndhraPradesh gave a fillip to the SHGs and formed DWCRA groups, giving it a shape

of a movement. As membership in these groups is tied up with variousgovernment welfare benefits such as benefits under Velugu scheme, which isnow labelled as Society for Elimination of Poverty and provision of gasconnections, cheap food items under PDS etc, the number of DWCRA groupsincreased enormously from nearly 10,000 in 1994 to more than 3,50,000 in2001. Enthused by this success of SHGs, the Reserve Bank of constitutedTaskforce even went on to recommend that the poor is even ready to bear theburden of poverty elimination. NABARD played an important role ininstitutionalising the micro credit structures. By the end of last century, theseSHGs became eligible for funding even through World Bank loans undercommunity development fund. Submission of promising microfinance plans was

the key criteria to be eligible for loans from World Bank funds. Thus theerstwhile Chandrababu Naidu government resorted to support microfinance asa strategy to get hold on the support base among voters who are otherwisedisgruntled with his economic reforms package.

Once the large scale network was established under DWACRA, the

government took steps to provide bank linkages to the groups who could save

in group thrifts one rupee a day. Such loans provided by banks to these groups

would attract 9-12 per cent interest rates only. Despite all the tom-tomming,

the original record of bank loans to SHGs in 2002 stood at merely 0.6 per cent.After the RBI taskforce report, a good number of NGOs jumped into the MFI


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sector and started bridging the gap between the credit needs and formal credit

provisions. The banks also found in MFIs a supporting hand to keep them safe

when it comes to profit and loss assessment. The credit meant under priority

sector was diverted to newly emerged MFIs which in turn began lending

operations at exorbitant interest rates. According to the government of Andhra

Pradesh, more than 10 million rural poor women were organised into Self Help

Groups having more than 20,000 crore outstanding loans. Around 80 MFIs are

operating in the state contributing to the 23 per cent of an all India MFI market

share. Total lending through out the country stood at 30,000 crores whereas in

Andhra Pradesh itself, MFI lending stood at 9000 crores increasing its share to

nearly 30 per cent.

PHENOMENAL GROWTH

The answer to this question can be traced in the findings of 59th round of

NSSO survey report. This survey focused on the indebtedness of farmer

households. The study covers a period between January December 2003,

carried out in 17 states where 94 per cent of countrys gross crop area is

located. The important finding of this survey is the intensity and extent of

indebtedness in Andhra Pradesh. According to this report, the proportion of

households reeling under indebtedness had gone up from 25.90 in 1991-1992

to 48.60 in 2003, which reflects 87 per cent growth rate of indebtedness, as

reported by Indian Journal of Agricultural Economics. When it comes to Andhra

Pradesh, this growth rate worsened much. The indebtedness in Andhra Pradesh

had gone up from 39.90 per cent to 82 per cent. On both the counts,

indebtedness in Andhra Pradesh is far higher than the national average. This is

also the time, as we mentioned above, when the institutionalised rural credit in

general and agricultural credit in particular decelerated during the period under

examination. This confirms the fact that during the reforms period, as the

regular income streams are drying up, people started depending more and

more on debt options. Also, as institutionalised credit is not available, they are

also opting for private credit preferably through money lenders or through

private credit agencies. This also proves the fact that as the reforms deepen

across the systems, the market for debt is also increasing. This proved to be a

major market for players who are acting as financial intermediaries. The scope

of microfinance fits in their frames suitably. Not only that. This is also the sector


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where government does not have any regulatory mechanism. This further gives

unending opportunities to inflate their profit margins.

As it grows into a profitable business for sure and the MFIs repayment to

banks went up, the banks also reciprocated by lending more than $1 billion to

MFIs in the country. This also paved way for the entry of bigwigs such as SKS,

Reliance, Tata Mutual, apart from longstanding organisations such as Share and

Spandana. All these big players concentrated their operations in Andhra

Pradesh due to its vast SHG client base. Thus the MFIs in Andhra Pradesh in

particular and in in general became corporate entities. With an expansion of 60

per cent per annum it became a lucrative business opportunity attracting so

many big names into the industry. It is appropriate to refer to the Business Line

newspaper which editorially commented on this shift by saying, Over the last

decade, businessmen whose goals were not the same as those of the original

do-gooders, entered the micro-finance space. They had a firm eye on profit

opportunity and there was a proliferation of micro-finance institutions. Through

clever marketing and image-building, they all donned a halo of virtue that

sought to hide the fact they were, in fact, just large-scale village-type money-

lenders by another name. As the big names started entering into microfinance

business in the state, the small ones and the ones who started these

operations on non-profit base depending on mobilising internal resources were

crowded out by the big boys. In that way, the operations of microfinance not

only got consolidated in the hands of a few operators, but they are also

witnessing monopolisation of microfinance sector in the state.

SHIFTING THE ONUS

There are multiple aspects to the issues that are come up for discussion.

For now we will confine to certain aspects and limited issues. The human rights

violation by MFIs is not a new issue in Andhra Pradesh. A study conducted by

district collector in Krishna district during 2006, the first time when complaints

came up about the morally hazardous methods of recovery staff, concluded

that all MFIs are charging almost 50 per cent interest charges over the loans.

The governments paved way for levying interest rates nearly 400 times than

regular bank interest rates. Even now, for the most commercial loans such as

vehicle loans or housing loans banks are charging nearly 12-14 per cent only

where as MFIs which are supposed to be instrumental in financial inclusion are


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charging 50-60 per cent of interest. This whole exercise results in three tier

interest unlike one tier interest as it was in case of banks lending directly to

consumers. Once bank is fixing its rate of interest at 14 per cent, the operation

costs will be added to that which depends upon the size of the MFI and the

profit. In some cases, the debtors failing to face the pressure of MFIs collection

staff lost their mental balance. In some other cases, the women were forced to

pawn their mangalasutrams, and other valuable goods in houses. In certain

cases, invoking the group collaterals, MFI staff forced the rest of the group

members to repay on behalf of their defaulted group member. In all the

occasions, the MFIs are violating the human rights of debtors. All these re-

payments are confined only to weekly interest payments. Amidst so many

attacks, the state government issued an ordinance. In a nutshell, all theseissues revolve around regulating MFIs in levying interest rates. Though NABARD

is supposed to be the nodal agency with a dedicated executive director cadre

person with a department lined up, there is no voice of NABARD in the whole

episode.

Nearly two weeks before the state plunged into this controversy, RBI

issued a directive to the banks asking them to take steps to cap the interest

rates. RBI master guidelines categorically keep the burden of regulating

interest rates on the shoulders of scheduled commercial banks. All the

nationalised banks in unison refused to implement the said directive stating

that it hurts the market sentiments as they are lending capital for profit and

capping interest rate down the line would have a potential risk of non-

recoveries. There is multiplicity of responsibilities among the various

government agencies resulting in leaving the MFIs large and small

unregulated. The RBIs permission is necessary for all MFIs to start lending.

Once they get clearance they can approach financial agencies to raise loans to

lend under the respective structures of MFI. Hence the RBI is holding keys to

regulate them. It can regulate in different ways. First the RBI has to asses the

magnitude of financial exclusion and resources to deal with the state as a unit.

Accordingly, it can allow certain number of MFIs to start operations in that

particular state. Proliferation of MFIs in a particular area is also causing trouble

to the clients, with the competition amongst the MFIs. Once competition enters,

even the service oriented MFIs will be forced to apply market dynamics


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resulting in moving away from the objectives. Another source of regulation

could be banks, particularly nationalised banks that are providing loans to MFIs

either as start-up capital or in the form of equity in successful ventures. There

ends the role of banks leaving the money trail aspects untouched. The RBI in a

communique to the government of AP felt that the state governments are

appropriate agencies to regulate MFI operations. The ministry of finance even

after these inhuman incidents, still went on to say, We don't intend to

regulate rates. It is not just feasible to control them. As mentioned above it is

surprising to note that the key nodal agency for financial inclusion, NABARD is

not letting us know its mind. With the multiplicity of responsibilities, MFIs are

left unregulated.

The states under Left Front governments stand out with a stark

difference. The government of Andhra Pradesh is talking about recovery in

the presence of panchayat officials now, where as governments in and Kerala

internalised SHGs model by bringing them under the control of panchayati raj

system. This helped them to channel the credit to the needy families unlike in

Andhra Pradesh where the channeling of credit is market driven as a way out

for expanding consumer credit. A research conducted by Centre for Socio-

Economic and Environmental Studies, confirms this assessment as well as the

experiences of . As long as SHGs, MFIs became integral parts of democratically

elected local bodies, they can be of useful instruments in developing rural

infrastructure such as sanitation and housing. Once they are devoid of such

democratic set up, they will be driven by market based needs whose

consequences are there to see in happening in Andhra Pradesh now.

ROLE MODEL

The LF government in is actively encouraging SHG movement in the state

through co-operatives, RRBs, and PSBs. Unlike in other states, in rural co-

operatives are working excellently as purveyors of credit to SHGs as also

mobilising their small thrifts to help them to be self-sustaining. A year or so

back, the state government provided a big relief to SHGs directly financed by

co-operatives and the banks by capping their lending rates to SHGs up to Rs 5

lakh to four per cent only. The banks are generally charging interests at 10-

11per cent per annum. The state government is subsidising them to the extent

of the differential for SHG loans, so that neither the lenders sustain any loss,


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rather with very good recovery rate which is the feature in the state, they are

having good earnings therefrom, at the same time the SHGs liability is only to

the extent of a meagre four per cent. Just imagine the difference between four

per cent and 40 per cent! With such small rate of interest, SHGs find it

worthwhile to borrow and repay and with repayment their loan size also grows

giving them more financial coverage and expanded activities. This subsidy is

strictly not available to MFIs, as the declared policy of the LF government. This

is, therefore, an active intervention by the state government to save the poor

borrowers from the clutches of the MFIs. It is also heartening to note that the

MFI activities in West Bengal is at a marginal level only, compared to Congress

and the BJP-ruled states. The Left Front government of is strictly monitoring the

activities of the MFIs and the NGOs engaged in micro-lending. This is indeed amodel before the whole country.

There are certain limitations for microfinance as vehicle of poverty

reduction and inclusive growth. The efforts to reduce poverty through

microfinance cannot address the multidimensionality of poverty. It considers

poverty as a consequence of unrealised market potentials. That is the reason

for its focus on supply of credit as a way to realise the market potentials

leaving the structures of poverty untouched. It also refuses to recognise that

the structures of poverty and social exclusion are widespread and reinforcing

each other. To deal with such a multidimensional phenomenon, microfinance is

ill-equipped. The second limitation of this concept is its inherently contradictory

nature. As the above explanation informs, microfinance is fully a commercial

concept which cannot satisfy the socio-political needs to address the problems

arising out political economy. Not only that, as the concept itself is having its

underpinnings in the neoliberal project, it cannot be a vehicle for social

transformation. Another limitation is its services for limited period. A borrower

is supposed to be helped through micro-credit for one time to put it in use for

productive purposes. This is not dealing with market side ramifications. In case

of incomplete cycle of credit, the clients again are forced to borrow to repay the

old dues. That is resulting in the vicious cycle rather than creating a virtuous

cycle.

the stranghold of micro finance

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