What's wrong with Microfinance Institutions in India ?

By Rajan Alexander

The views expressed in the below article are those of the authors and do not necessarily reflect the views of IMBN. IMBN is a platform for the microfinance community in India, if you have an opinion on the current crisis in Andhra Pradesh feel free to send us a write up through the contact page.

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About the Author

Rajan Alexander has over 30 years of work experience within the NGO/development sector. He initially worked in various senior managerial capacities with local NGOs and co-founded civic societies like EQUATIONS before representing a consortium of European donors in India.

Presently he is undertaking freelance consulting including multi-country studies for a wide range of clientele which include local NGOs, NGO networks, INGOs and bi-lateral and multi-lateral institutions. He can be contacted on devconsultgroup (at the rate) gmail (dot)com.

What’s wrong with Micro-finance Institutions ? Practically everything as the case of SKS illustrates.

By Rajan Alexander

When we started out in development a couple of decades ago, we instinctively targeted to reduce the influence of moneylenders, if not eliminate them completely. Why? They were seen as the traditional oppressors and exploiters in society. Their powers often overlapped with those of their caste and traditional village leadership.

Micro-savings and revolving loans often worked very well. Self-Help Groups (SHGs) being small and homogeneous, are controlled by members where borrowers themselves play a key role in the development of SHGs. They contribute small savings, regularly attend the meetings and participate in making the rules related to loans, interest rates, repayment schedules and mechanisms. These groups are thus are more likely to be characterised by self-management and self-reliance.

This is until the much-hyped micro-finance institutions (MFIs) burst into the scene.  They started easing out NGOs on the specious argument that we were not equipped with our limited capability to run micro-finance lending programmes. These MFIs operate under these two beliefs: “Having access to expensive credit is better than no credit” and “the observed rate is where demand equals supply”. These two beliefs were ironically the very same fulcrum the traditional moneylenders operate.

microfinance institutions india loans

Drowning under Debt ? Image-credit:devconsultgroup. blogspot.com

The result is an “animal farm” situation where we are now not able to distinguish between “pigs” and “humans” and vice versa. In fact, moneylenders have got a makeover by re-branding themselves as MFIs. A good example is Mohammed Yunus of Grameen Bank who comes from a traditional money-lending caste. And of course, he got the Nobel Prize and so did Al Gore & Pachauri. And thank God, the Nobel Committee did not confer Gandhiji the same distinction, by clubbing him with these scamsters. In India, it is  perhaps not a coincidence that  Vijay Mahajan, described as the Father of Microfinance, also comes from a traditional moneylending community.

A creature of neo-liberalism, the idea of giving small loans to poor people became the darling of the development world, hailed as the long elusive formula to propel even the most destitute into better lives. And boy the neo-liberals loved it as this rhetoric strongly resonated with their love of the non-state, self-help, fiscally-responsible and individual entrepreneurship beliefs. MFI besides fits very well with the main tenets of neo-liberalism that includes macroeconomic policies focused on eliminating inflation rather than expanding job opportunities; cutting government subsidies – including credit subsidies and opening domestic markets to imports, multinational investors and speculative financiers. The neo-liberal environment encouraged the image of MFIs to be spun as a golden bullet to alleviate poverty, inflating its sense of success and underplaying their lack of holistic vision and action.

Still there were many within the NGO sector, willing to speak out. Michelle C. Schaefer in her feminist blog highlighted the following:

“MFIs overlook several of its realities, including the shame and fear that many poor people associate with debt (suicide rates are high amongst those who cannot repay), illiteracy (not being able to read contracts), the possibility that debt is the last thing poor people need, macroeconomic emergencies and natural disasters — let alone personal illness, deaths within families, dangerous work conditions and spouse brutality.

Micro-finance detractors also list corruption, inflated interest rates, lack of savings services, non-transparent transactions, not reaching the “poorest of the poor” and joint liability amongst its many faults. One Bangladeshi man even describes Yunus as the world’s biggest loan shark.”

In the Indian context, perhaps the best refutation of MFI as poverty alleviation’s golden bullet comes from seasoned MFI consultant, Ramesh Arunachalam:

”Even if you lend at 0%, returns from agriculture would most likely be negative and micro-finance skirts agriculture and most of India’s poor are engaged in agriculture. So, micro-finance cannot and should not be expected to make a serious impact on poverty in India”

Prakash Bakshi, Executive Director, NABARD in an interview to the Economic Times was even more categorical:

“In a static village economy, there is little scope to have too many petty traders. Two-thirds of the villagers directly live on non-cash-crop agriculture, and another 20% are small-time artisans. The cycle of economic activities for these people range from about six months to one year. None of them generate income to meet weekly repayments, and none of these activities generate a rate of return to afford interest rates of 20-40%.

And if they borrow — and many are compelled to borrow at such interest rates because banks have failed to provide them with credit that they deserve at affordable interest rates — they would never be able to rise from their levels of poverty, and very often just go back a few years in their economic status.”

Read the rest on http://devconsultgroup.blogspot.com

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