It's been really disturbing to see the news around Microfinance Institutions (MFI) in India these days. By definition, these MFIs lend to the poor who cannot get access to bank credit and these are usually termed micro-loans since the amount lent itself is in few thousands of rupees (few hundred dollars).
Now what happened that these MFIs are in news? In an Indian state called Andhra Pradesh, where the largest number of MFI borrowers exist, there have been around 50 suicides and many have blamed that MFIs have used coercive methods to collect interest on these borrowed loans from these borrowers that has resulted in these suicides. MFIs deny it. While it is hard to say if this is true or not, which only an honest investigation can reveal, the thing that's been troubling me is the lack of transparency, not just on activities but on factors leading to policy decisions, in these MFIs. These MFIs charge an average interest rate of around 20%-40% annually. And MFIs say that such high interest rates are due to the high loan servicing costs. Reasons they give for this - the volume becomes more when lent in small portions to many individual borrowers; reaching and collecting money at remote villages and then there is the high risk factor to be calculated on these loans and the interest charged by state-run banks from where these MFIs avail money to lend to the poor.
Alright, the reasons they give seem genuine. But that's only one side of the coin. It's not an easy task for a poor who has had no or very little education and no or very little business-experience to earn an income that would surpass these interest rates. From the news I read, I see that the interest on these loans is generally collected on a bi-weekly or monthly basis. But many of the poor people who live in villages are largely farmers whose income is seasonal rather than monthly. Even if you consider just the non-farming people, there aren't many businesses that could be done in a rural village by such poor people that would give returns surpassing the high interest rates.
So now, these are the questions that linger in my head:
1. How do the MFIs decide on the people to a whom a loan could be given? Many times it is said that the loans are given to Self Help Groups (SHG) but what constitutes a credible SHG and what kind of verification is done?
2. How much percentage of the total loans in a MFI is for people who already have a business and want to expand and how much is going to people who want to start new businesses? Who is validating the claims done by the borrower to check the creditworthiness and how? What kind of requests for loans are trusted, validated and approved?
3. Since MFIs have been recently allowed to access capital markets, why are the interest rates still so high?
4. How does a MFI which has accessed capital markets differentiate the interests of an investor to that of a borrower? During times of conflict, who is given a higher priority - investor or borrower? What policies are adopted in this regard?
5. I know many MFIs share information to prevent a borrower from obtaining too many loans that would hinder his/her ability to replay. But are all MFIs registered in a centralized database?
6. And many more such questions.....
There has been a hue and cry about capping interest rates from the industry since they say that that would hinder growth in the industry and thereby credit to more number of poor people. Alright, let's not cap interest rates with a fixed number but why not set a target range for these interest rates? How about capping interest rates with a range instead of a fixed number? Why not the MFIs be asked to NOT exceed an interest rate of +X% the average of all MFIs' interest rates within a region (state)?
I ask for this because here is the problem - many of the borrowers are very poor and they traditionally depended on local village loans given by relatively richer people of the village to meet their needs. But these relatively richer people sometimes charged/abused the poor with super high interest rates and coercive collection methods. MFIs were considered saviors of these poor people in this regard. But the interest rates are still enormously high. While it maybe much lower than the ones charged by the relatively richer people of the village, it is still high, which will make the poor to reach the relatively richer people of the village to borrow money just to pay interest on these loans borrowed from MFIs. There is no way one could track if the interest that is paid timely is from earned money or if it is just again borrowed money from some other loan-provider. This might not be from another MFI but maybe from the so called relatively richer people who might suck the blood if the loan is not repaid.
These kind of borrowed loans would then spiral up and would cause the poor to reach a stage where he has no one to reach to borrow money to pay interest on these multiple loans and then comes the time when the poor is left alone to make a decision - a decision that sometimes makes him take away his own life.
There are many psyclogical ans cultural factors involved in this - for a poor man of this stage and in a country like this, debt is not just a liability but many times considered a shame. And if he is not able to repay the debt and when there are persons from the loan institutions knocking the house in a "harsher" way, the shame and guilt the poor feels reaches unimaginable stages. And this is where I get the fear about MFIs accessing capital markets. So my question again - How does the MFI differentiate the interests of the investor and the borrower, especially when the quarterly statement is not going to look well for that particular quarter? But I also agree the benefits of these MFIs accessing capital markets - especially this would reduce the dependency on loans accessed from the commercial banks by the MFIs, which should also be a factor that will help in reducing interest rates on loans given to borrowers from MFIs. But again, here is my question and fear - are these funds, accessed through capital markets, used to improve quality (by reducing interest rates) or to improve quantity (reaching more people without reducing the risk factors)? And not to forget the system-wide risk , since the public sector banks are in the link through loans to MFIs (if we look at the data from the Mix Market site, that has data about global MFIs, one can notice that the growth in the gross loan-portfolio of these MFIs is climbing at high-speed).
Now one more thing that needs to be done, as many analysts have been saying, is to allow MFIs to accept deposits. This would help the MFIs to depend less on commercial banks and capital markets and use more money present within their own system. Currently, the hindrance to this is in the Indian policy - MFIs are classified as "NBFC" - "Non-Banking Financial Company", whereas only institutions classified as "Commercial Bank" can accept deposits. I think a waiver needs to be given to MFIs in this, while making them accept to additional supervision by the Reserve Bank of India (RBI) - India's Central Bank. Also, some kind of study needs to be done to see if deposits below a certain amount could be insured, by a combination of the central and state governments' money, to encourage more savings by the poor.
There are two sides of the coin here - MFIs cannot simply sit idle on a loan or interest not repiad timely. After all, it is business and it is a loan, not free money. But since poorest of the poor are involved in this, who many times do not even have a proper, transparent and secured access to the legal system of the country, for any wrong doing by the bigger player in the game (read: MFI) and with increasing link to the system-wide banking, I would like to have a microscopic watch by the RBI on the activities of these MFIs, even if that requires new policies or amendments in policies by the RBI.
No comments:
Post a Comment