The business model of the microfinance sector must change, emphasized C Rangarajan, chairman of the Economic Advisory Council to the Prime Minister, at a conference on the sector here today.
He said the microfinance movement must have as its ultimate goal the desire to help the poor and enable them to come out of poverty. Providing credit for productive purposes at reasonable rates of interest must be the goal, he said.
He said two initiatives could provide a significant surge for microfinance institutions (MFIs). One, the growth of the bank self-help group linkage programme. Two, expansion of the programme for business correspondents (the intermediaries who help expand a bank’s business, for a fee). The two will constitute the main pollars of the future development of bank-related microfinance even as other forms of microfinance institutions will continue to grow, Rangarajan said.
He was speaking at the Microfinance India summit, organised by ACCESS, a non-profit organisation (NGO).
He asked MFIs to be transparent on the interest rates they charged. He said it was necessary for MFIs to keep the overall cost to the borrowers at a level consistent with the repaying capacity of borrowers.
Regulation needed
K V Eapen, senior official in the Union finance ministry, recalled how Mohammad Yunus, winner of the Nobel Prize for his work in spreading microfinance in Bangldesh and elsewhere, had remarked that what was being done in India can be called anything but microcredit. He said the government and the sector had to decide together on the regulator and the type of regulations needed. Most states were already treating the sector on par with money lenders, said Eapen, and unless there was an agreement on regulations, the sector would suffer.
He said the proposed microfinance bill for non-banking finance companies should be ready in another three months, around the same time as the report of the Malegam committee on microfinance.
The conference was marked by a sense of gloom, with suicides in Andhra Pradesh triggered by the micro credit burden being the sub text of most presentations. While the annual report of the sector released by Microfinance India called for comprehensive regulation, image-rebuilding and the weeding of deviant institutions.
The report also said the sector had moved far away from the poor. it noted the number of microfinance clients was 10 times the number of poor households in Andhra Pradesh. So, the loans had transformed into consumer finance from micro finance. In Orissa, for instance, the ratio of MFI clients to poor households was better, at 1.8. It was 4.0 in Tamil Nadu and 2.8 in Karnataka and Bengal. In sum, the non-poor customers were at least two to four times more than the number of poor households in the population.
Defensive reactions
Reacting to these figures, David Gibbon, chairman of Cashpore Microcredit, said: “I feel embarrassed to be identified with the sector.”
“It is nothing but human greed that has caused the downfall of this sector,” said C S Reddy of APMAS, an Andhra NGO that provides technical support to self-help group federations. “What prompted the MFIs to charge huge interest rates, when they are now bringing it down?” he asked. “There was a competition between MFIs to keep the interest rates high. No one wanted to miss the profits that the poor were giving.”
Others defended MFIs. Said Vijay Mahajan, founder of BASIX, an chairman of the MFI platform, MFIN: “I cannot abandon the sector when it is in trouble. I am Bhishma Pitamah and will forever defend the Kauravas,” he said, with wry humour. MFIs may have been greedy, may have erred but that is not enough reason to criticise the principle of sustainable financial inclusion, he said.
Mahajan said it was hypocrisy to expect all the poor should get financially included and also also be charged at the rate of three to six per cent. A few did the wrong thing, but the sector was not to blame.
Some top names opted out of the meet at the last minute. Vikram Akula, founder of SKS Microfinance, in controversies since it floated a public offer, did not turn up and his office also refused to engage with the media. Naina Lal Kidwai, country head of HSBC India, was scheduled to come but did not.
