Spotlight
New Delhi, 23 January 2021
Microfinance & Poor
NEEDS SOUL SEARCHING
By Moin Qazi
The microfinance sector is again facing
troubles, this time in Assam with stress in rural households and a spate of
loan defaults raising the spectre of a repayment crisis that hit Andhra Pradesh
way back in 2010.
A law enacted by Assam on December 30, 2020,
to regulate microfinance institutions (MFIs) threatens to pose severe
operational challenges to the microlenders operating in the State. This could
possibly harm the credit culture of borrowers in other neighbouring States as
well, a section of industry feels.
The AP Microfinance Bill, which had imposed
similar restrictions on operations of MFIs, especially with respect to
collection of dues, had unleashed a crisis in the sector. This subsequently
forced a significant number of MFIs to shut down or move out of the State
An internal study conducted by Microfinance
Institutions Network (MFIN) last year, a self-regulatory body for the sector,
showed that indebtedness of micro borrowers in Assam is more than double the
national average while it is four times in a few districts where borrowers are
facing or experiencing distress on account of indebtedness..
Born out of the simple notion that the poor
can save and are bankable, microfinance is an approach to financial inclusion
based on providing small denomination loans and other financial services to the
working poor and others who lack the collateral, credit history, or other
assets and are not served by conventional banking. It has generated
considerable enthusiasm, not just in the development community but also at
political levels. It has infused an entrepreneurial spirit in tiny business
like clay-brick makers, seamstresses, and vegetable sellers.
Microfinance clients are
drawn from Joint Liability Groups (JLGs) or Self Help Groups (SHGs). JLGs are purely
credit groups comprising usually five members who cross-guarantee each other's
loans. Self Help Groups (SHGs) are savings and credit groups consisting of
10-20 members whose primary objective is promotion of savings. MFIs use the JLG
route, whereas SHGs are financed by banks and the cooperative sector, cooperative
banks, cooperative societies, et al.
In the last decade-and-a-half, microfinance
institutions (MFIs) in India have struggled to gain legitimacy as credible
institutions even though they have demonstrated the ability to deliver
financial services to unbanked low income households sustainably. Serious
doubts on their modus operandi, high interest rates, governance, client
treatment and transparency continued to bedevil the sector.
The explosion of multiple lending and
borrowing was a prime cause, and it was positively encouraged by MFI lenders.
Poor households took on multiple loans from different sources, often only for
the purpose of repaying one of the lenders, and this was actively fed by the
combination of aggressive expansion in the number of clients and strict
enforcement of payments. When it came to credit they were continually
“bicycling”. This implied that microfinance customers spun the pedals by paying
off one loan with the next. This was often because women feared losing this
crucial lifeline and falling off the “credit bicycle”.
Poor households, in particular the rural
poor, are exposed to unsteady flows of income. The reasons are many, including
seasonal unemployment related to the agricultural labour cycle, sickness or
death in the family or weather shocks among many others. Given the variability
and vulnerability of their income, they value formal microfinance because it is
more reliable, even if it is often less flexible than their other tools to
manage their cash flow. Banks offer cheaper credit but are mired in thickets of
red tape.
Microfinance needs a relook and has to
undergo soul searching. When it comes to microfinance it is very important to
think outside of the borrowing box. It will have to move beyond its traditional
roots. Recent evidence suggests that relatively simple tweaks to microcredit
products — including flexible repayment periods, grace periods,
individual-liability contracts or the use of technology — may change their
impact for both clients and institutions. Microfinance institutions should be
consistent in applying best practices in evaluating repayment capacity,
offering transparent terms and conditions and using credit bureau information
to avoid overstretching clients with debts.
Poor households are not well served by simple
loans in isolation. Microfinance provides a bandage where a major operation is
needed, and at worst, it deepens the wounds while the bulk of microfinance
portfolios may be commercially sustainable and attractive to conventional
investors, reaching the still-excluded will continue to require innovation and
experimentation. More than micro-loans, what the poor need are investments in
health, education, and the development of sustainable farm and non-farm related
productive activities.
To enable the poor to work their way out of
poverty, they need to be enabled to move from one step to another of the
financial ladder through graduated credit. Credit should be made available in
staggered doses, with every new tranche disbursed after satisfactory repayment
behaviour of the clients. This will also ensure that the vulnerable groups do
not get into a debt trap; it will also make credit dispensation more efficient
and qualitative.
Credit can be both an opportunity and a risk
for low-income families. It is necessary to open doors, but it can also be a
barrier. A person can dig oneself into a lot of debt, preventing the ability to
move up financially. Loans can be malignant. Some people shouldn’t take on
debt. Some businesses are too risky. And the temptation is always present to
take these costly loans and scrimp on groceries. When they miss loan payments
because a lingering illness keeps them away from their business, they get into
the regular default cycle. That’s acute over-indebtedness.
Access to small loans for tiny businesses by
itself won’t miraculously enable the poor to take them to a new level. It will
not build a steady business because a lot of them face several barriers. A
modest cash injection cannot generate a stable income, or create a profitable
cycle of trade and income particularly when the daily struggle of most of these
people has to do with making a living, feeding their families, educating their
children and staving off ill health.
The notion that microfinance has the
potential to spark sustained economic growth is misplaced. The direct evidence
of microfinance’s impact is less than overwhelming. In several cases, these
financial activities can damage the prospects of poor people. Microloans do
create opportunities for people to utilise “lumps” of money for augmenting
incomes and mitigating vulnerability, but that doesn’t necessarily mean
investing in businesses could lead to sustained revenue growth. Not all microloans
produce beneficial results, especially for those engaged in low-return
activities in saturated markets that are poorly developed and which are prone
to regular environmental and economic shocks.
Consumer protection in microfinance is not
just about fair treatment and safeguarding of clients’ individual rights, but
also about proper governance of microfinance institutions. The industry must be
in a position to achieve its fundamental social mission of poverty reduction,
while ensuring sustainability of operations. Microfinance institutions must
deliver demand-driven, quality services to these clients, to low-income people
and develop the industry in a healthy way.
The hard truism is that microfinance has been
saddled with misplaced expectations, and we have lost a sense of its more
modest, even though critical, potential. It is actually a tool in a broader
development toolbox, but in certain conditions, it happens to be the most
powerful tool. It will make the poor a little more resilient, but it is not the
answer on its own. It has all to do with how we are using it and how we are
defining the outcomes.---INFA
(Copyright, India
News & Feature Alliance)
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