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Success stands by Community based Microfinance !
By S. L. Jerauld and P.Inbaraj , Microfinance Practitioners from Tamil Nadu.
We believe that the main reason for recent Andhra pradesh Microfinance crisis is that they have not involved the Borrower Community (Target Clients ) as the stake holders . Most MFIs have now began to aiming at profit maximization from the poor clients and do not focus on their economic development.
To understand the current crisis we need to go back to the early history of Microfinance Institutions. In 1983 , Nobel prize winner Dr..Muhammad Yunus started the Grameen Bank in Bangladesh and within a short period of time it was declared a huge success.
In the Grameen model , before the disbursement of loan the staff members will take a detailed survey about the village and their clients . In the survey they will observe and collect the details about the group members and their socio-economic status . After that they will form the groups with five members , federating them into centers and linking them with Grameen bank .
The Grameen bank is owned by poor women and profits are shared among poor women .To maintain the affinity of the Groups compulsory and voluntary savings are practiced in the Grameen Model, this also helps to minimize the risks. Very small loans are then given without any collateral. In the Grameen model it is also very easy to supervise the credit by the Groups and staffs. All these measures ensure the success of the groups by helping them maintain credit discipline and also for Grameen Bank to recover the money it lends.
Based on Grameen Model in India many MFI’s have started operations and registered as NBFCs . They recruit highly educated management staff qualified from management institutes along with retired people from the Banking Industry who have taken VRS.
These staff are then given high salary and incentives which are based on how fast they grow operations . They sometimes introduce complex systems and Technology ( High cost ) which do not benefit the community . At the same time the Rating Agencies are satisfied by the fancy initiatives without knowing the reality of the ground operations.
These rating agencies then give them high ratings. After getting good ratings these MFI’s approach the Banks and Financial Institutions. Thus they soon get Bulk loans and are also able to raise their equity capital.
The MFIs also appoint inexperienced young people below the age group of 35 with out any care about the community or society. These staff members then get very high salaries,incentives and other perks. Due to the involvement of more costs in the implementation of above mentioned process the delivery cost is very high . This makes them to charge a higher rate of interest on clients.
The MFI management have incentivised the staff for early disbursement of loans and for ensuring 100% repayment , profitability. Thus the staff market the loan products to poor clients with out any survey or studying their repayment capacity . They have also given the loan to same clients (Multiple Lending ) . The field staff are forced to collect the repayment amount in weekly manner with out any default. If they do not collect it on time, the management penalizes the field staff by cutting their incentive and other perks. Because of these reasons only the staff are using rough methods for recovery from clients. As a result of this , the image and operations of MFI’s have become degraded in Andhra Pradesh.
To avoid this situation it is better to follow the Community owned NBFC model , where the client as stake holder like Grameen Bank . It is better to encourage the practice of savings and trainings with social thinking in groups. Due to this the Community will be the owner of NBFC , they will avoid dual loans and repetition of members in the different groups, and members in different NBFCs.
If any small default arises then the group usually takes care and they will repay their loan amount from their group savings . Here Group is the Guarantor for repayment of loan. The groups are repaying the loan installment to MFIs office in monthly basis. In this method the delivery cost of MFIs is also less and staff are also experienced with community thinking . It is mostly practiced in small MFIs and organizations like MYRADA, Hand in Hand Tamilnadu , SNFL, CREED , and other like minded MFIs.
But this successful model has been discouraged by the Rating Agencies. In future if the rating agencies encourages this type of community owned NBFC’s then the Microfinance sector will remain healthy in India. From this base we can also give orientation , training and developed technology to the community . This will result in community development and the crisis like in Andhra Pradesh will not repeat in future .
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