The worm may be turning. The microfinance industry, after a disastrous second half last financial year and more pain likely in the first half of the current year, is being told by some of its investors to refocus on its primary objective: uplifting the poor. The crisis happened because some aggressive microfinance institutions (MFIs) tried to deliver on the commitments they had made to their global investors. Hence, this refocusing may be the beginning of a return to stability as well as slow and steady growth. The overall lesson is that only variations of social entrepreneurship can sustain lending to the poor. If that means slow growth and not accessing a lot of quick return-seeking global capital, then so be it. By losing sight of the cardinal objective of improving the lives of the poor and chasing numbers, the sector will open itself to the allegation that it is nothing but a moneylender dressed in modern corporate garb, as was levelled by the Andhra Pradesh government.
An index compiled for the sector by M-CRIL, the credit rating agency focused on it, fell from a spectacular compound annual growth rate of 76 per cent during 2005-10 to seven per cent (in portfolio terms) in 2010-11. The index is projected to fall by a massive 20 per cent in the first half of 2011-12 compared to the same period last year. The earlier growth rate and the positive sentiment it created among global financial players ended with the successful public issue of SKS Microfinance in 2010, and the sector troubles that immediately followed came to a head with the crackdown and legislative initiative by the Andhra Pradesh government. The silver lining is that the troubles are limited to that state, where repayments fell to a catastrophic 10 per cent of normal. While the MFIs with almost all their eggs in one basket came to grief, those with a more geographically balanced operation did not hit an air pocket.
There should, however, be no doubt that the first signs of new thinking are just that and not a general trend. According to Sanjay Sinha, managing director of M-CRIL, there is so far no strong international environment that makes MFIs focus on the financial needs of their clients, and not just their own achievement of client numbers and portfolio size, to replace the earlier irrational exuberance. There is a need to go back to the basics. The poor are the most vulnerable to external shocks: though small loans to them carry low short-term risk and offer spectacular returns, they have little ability to cope with external risks like flood, drought and sickness. Thus, returns in the medium term – with good and bad years averaged out – are likely to be modest, and private equity and venture capital firms looking for a profitable exit in five to seven years should go elsewhere. Only the spirit of social entrepreneurship, satisfied with low returns, is likely to offer long-term funding to the sector.