With the focus having shifted now from SKS Microfinance to the industry as a whole, it may take some time before the media stops highlighting the woes of microfinance institutions (MFIs). Banks have already started choking MFIs’ funding requirements, a knee-jerk reaction that may have disastrous consequences. In this context, there are three fundamental issues that need attention:
First, the issue has been escalated because of several suicides, allegedly due to coercive tactics employed for recovery by some MFIs. The real cause, however, is deeper. In rural areas the dowry menace is quite prevalent, forcing the poor parent to resort to heavy borrowing. The local moneylender takes advantage of this and lends at usurious rates. In recent years, MFIs have replaced the local moneylender to some extent because of relatively lower rates they charge. The problem is compounded because of multiple borrowings from different MFIs operating in the same area, moneylenders and banks, resulting in a heavy debt burden for the borrower, who finds it impossible to repay the loan from the income generated in the normal course of his vocation. In this case, a recovery is possible only through strong-arm tactics. Therefore, one cannot single out MFIs as being responsible for suicides without understanding the root cause.
Second is the issue of MFIs’ high rates of interest. The argument is that MFIs borrow somewhere between 12 and 15 per cent, add administrative costs of 8-9 per cent, a risk premium of 2 per cent and a small profit margin, which works out to 26-30 per cent. The trouble here is the high administrative cost of 8-9 per cent. It may be a fact that the recovery agent has to reach the borrowers in remote corners of the command area for a small sum every week, which becomes expensive. The problem lies in the recovery model. The operational cost could be drastically cut down by making the recovery cycle fortnightly or monthly.
The third issue is proliferation of MFIs in a short span of time. MFIs have been important spokes in the wheel of financial intermediation, particularly at a time when both the government and the central bank have been increasingly stressing on financial inclusion as a national priority. Therefore, it will be unwise to kill the industry through short-sighted decisions. Finally, since any financial intermediary, needs to be regulated, MFIs should be alive to the need for regulation, registration, control and transparency.
S Ravindranath, Chennai