People's Democracy

The Stranglehold of Microfinance – II

 

K Veeraiah

 

 

THOUGH microfinance has been adopted by government of India as a developmental tool as early as in 1990s, the emergence of MFIs across the country varies from state to state. States such as Tamilnadu, Karnataka and Andhra Pradesh adopted the concept of MFIs and the entrepreneurial class gave it the shape of industry within no time. According to one study, there are around 800 MFIs currently operational in India and out of them more than 70 per cent are concentrated in these three states only. Even in Andhra Pradesh the spread is more intense in coastal districts than in the rest of the state. Formulated by the World Bank, the then Telugu Desam government in Andhra Pradesh 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 various government welfare benefits such as benefits under Velugu scheme, which is now labelled as Society for Elimination of Poverty and provision of gas connections, cheap food items under PDS etc, the number of DWCRA groups increased enormously from nearly 10, 000 in 1994 to more than 3,50,000 in 2001. Enthused by this success of SHGs, the Reserve Bank of India constituted Taskforce even went on to recommend that the poor is even ready to bear the burden of poverty elimination. NABARD played an important role in institutionalising the micro credit structures. By the end of last century, these SHGs became eligible for funding even through World Bank loans under community development fund. Submission of promising microfinance plans was the key criteria to be eligible for loans from World Bank funds. Thus the erstwhile Chandrababu Naidu government resorted to support microfinance as a strategy to get hold on the support base among voters who are otherwise disgruntled 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 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 59^th 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 country’s 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 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 India 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 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 these issues 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 RBI’s 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 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 Bengal 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 Bengal. 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 West Bengal is actively encouraging SHG movement in the state through co-operatives, RRBs, and PSBs. Unlike in other states, in West Bengal 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, 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 West Bengal is strictly monitoring the activities of the MFIs and the NGOs engaged in micro-lending. This is indeed a model 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.

 

(Concluded)