NATIONAL CONFERENCE ON

“Emerging issues in Business Management”

At JAIPUR

March 4th and 5th, 2011

Theme: Microfinance industry: ‘A curse or boon to the Indian financial system’

TITLE: “Microfinance industry: ‘An untamed white elephant for the Indian financial system”

Mr. Sandeep Mehta

Faculty, Proseed Business School (M) 09829647605

sandeepmehta_1@yahoo.com

Mr. Akhilesh Jain Dean, Proseed Business School

(M) 09352616800 akhijain@gmail.com

“First time when I visited the lady’s house there was just a lamp, next time there was a table and

chair and the third time there were even sweets to be served. The transformation microfinance

has done to the lives of several such poor is probably what makes me proud to be associated with

this industry in India”

-Kailash Ray, Branch Head, Sahayata Microfinance, Chittorgarh Branch, Rajasthan

“One should look at the incentive mechanism. If you go back to the person who originated the

whole concept of MFIs (Mohammed Yunus), his view of for-profit MFIs is a money lender. So if

it is for-profit and if there is aggressive lending, it's just money lending.”

-Yaga Venugopal Reddy, Governor, Reserve Bank of India

“Micro-credit is something which is not going to disappear …because it is a need of the people,

whatever name you give it, you have to have those financial facilities coming to them because it

is totally unfair…to deny half of the population of the world financial services”.

-Dr. Muhammad Yunus, Founder-Bangladesh Grameen Bank

Microfinance industry in nations like India has really grown by leaps and bounds. Last year the

growth of microfinance industry in India was more than 88 % both in terms of borrowers as well

as the amount of loan outstanding. Starting from “Grameen Bank” of Bangladesh to “SKS

Microfinance” in India the corporations have really entered into the big league of financial

markets where various examples can be found for real help to the poor. The dynamics of

operation in Microfinance industry is really unmatchable and it is creating almost negligible

trouble to the borrowers both in terms of borrowing as well as repaying the debt obligations.

This is just one side of the Microfinance Industry in India. People have started criticizing not

anything else but the ulterior profit motive of the MFIs. The recent corporatization has created

trouble for the philanthropic image of the Industry. Critics say that it’s become "Walmart" in

recent years. It has been stamped as profit making industry targeting the poor. The social motive

has somewhere been back staged in the race to grow bottom lines.

This paper will try to throw some light and will help to develop a holistic view of the

Microfinance industry in India. It is difficult to objectively criticize or praise the policies of this

industry but the paper touches the sensitive facts about the functioning of this industry.

Microfinance and Poverty alleviation- The basic motive of Mr. Mohd. Yunus in Bangladesh

behind establishment of “Grameen Bank” was to work for those people who remain isolated

from the so called “Financial Inclusion” and never got advantage of being associated with the

mainstream financial world where they can do activities like “Savings and Borrowing”. He

started working for the people who were around the university and really got succession his

venture. Grameen Bank started working in 1983 and now it has more than 2400 branches

nationwide with more than 7 million borrowers and a staggering 24000+ number of employees.

It was observed that around 48% percent of borrowers of Grameen Bank had moved above the

poverty line.

The data mentioned here clearly shows how Microfinance started and helped people of

Bangladesh in poverty alleviation. Almost same thing worked in India a couple of Venture

capitalists and other people took a step ahead and started SKS Microfinance. Now we know that

it really works if operated well and actually targeted towards the needy people. Indian

Subcontinent is probably the perfect place where Microfinance can lay a strong foundation

towards eradication of poverty in times to come.

The rate of return- Sometime there is an opportunity but there is a scarcity of resources and

otherwise the resources are in abundance and opportunities missing. Microfinance to a large

extent is a need of such scenario. A small loan of Rs.10000 can result into 40% rate of return it in

a short span of time. Probably it can create wonder for those people who are jobless and actually

remain isolated from the mainframe financial system. The statistics given above can really work

for small time business like tea vendors, Bidi making, broom making and a lot others. Probably

these are the industries of the nation which can work a lot for the basic about which we have

been talking loudly for years and years. The rate of return generated is for sure one of the best

compared to every industry of the nation and that is how Microfinance in India is shaping

people’s life.

Financial Inclusion- The media is full of coverage for several officials of RBI and other

government departments talking about financial inclusion or trying to spread the financial

literacy round the nation. Microfinance is really contributing by generating financial literacy

where it is required the most, the basic landing and borrowing of the nation. Those people who

could never see the face of bank are now aware about what is the financially disciplined way to

improve the situation and gain wealth. They are now talking about Micro insurance to be

provided to the borrowers which will help in fulfilling the decades old dream of Govt. of India

and Life Insurance Corporation for providing Insurance and allied services to the poor and rural

community of nation.

Micro Insurance is just one step ahead of Microfinance. further talks are there about including

these people completely in the mainframe financial systems which even talks about services like

credit cards, Mutual funds and home loans. For sure the thoughts are ambitious but even the

success of Microfinance was a dream someday which actually came true in past few years. SKS

recently tied up with Nokia Corporation which will offer cell phones to the members of the

former in easy EMI and SKS will be the collection agent for these EMIs.

Here we must mention one thing that these Microfinance companies will not be providing each

and every service to the end users but the database and the operation style of these companies

will surely help in reaching these destinations.

The fight over Interest rates- Microfinance industry has been boasting a lot on diluting the role

of Moneylenders in the nation who charge interest rates ranging from 24-48 percent p.a. (it can

even go up to 100 percent but on sporadic basis) per annum. But let’s look at the rate of interest

charged by the Microfinance industry also. The statistics says that minimum rate charged by

MFIs is not less than 30 percent per annum et al, which is actually more than the minimum

charged by the basic moneylenders in various parts of the nations. That is one of the primary

reasons why Microfinance companies have been criticized a lot round the nation. Though the

government and financial regulator of the nation have tried to identify the severity of the

situation and recently formed “Malegam Committee” is a proof of it. The committee has put the

upper band on the interest rates which is a tad lower than actually being charged by the MFIs in

India. The interest cost is high but it has to be high because the operational expenditures are high

in the industry where the loan officer will go and disburse or collect the money from the

members or borrowers.

Microfinance and U.S. housing finance industry- After the burst of U.S. housing bubble the

analyst community of the world is really working harder than ever. Indian states are cracking

down on microfinance practices as more underwater loan recipients opt to commit suicide rather

than face years of poverty and debt, Bloomberg Markets Magazine reports. While hard data is

tricky to come by, India's Society for Elimination of Rural Poverty says that at least 70 suicides

in the state of Andhra Pradesh this year were the direct result of microfinance debt, and

state officials speculate that over lending was likely a factor in some of the 14,364 suicides

during the first nine months of the year. As a result, Andhra Pradesh now requires companies to

go through local authorities before issuing loans, and has barred debt collectors from visiting

borrowers' homes.

According to reports, microloans in India have increased more than 88 percent a year, and more

than half of the 66 firms tracked by the company are for-profit. A 2010 company report found

that as of March, 2010 roughly 260 micro lenders had 26.7 million borrowers and 183.44 billion

rupees of outstanding loans. Analysts have compared the over lending crisis in Andhra

Pradesh to the U.S. housing bubble, observing that while "subprime lending was initially seen

as extending homeownership to poorer people, doing good," some lenders came to prioritize

profits over people. But micro lenders say that despite corruption, many firms are still doing

good work, and add that without a profit motive, it would be hard to keep the system going.

As we know that in some parts of the nation the condition of Microfinance and over lending is

same as it was in United States during the housing market bubble which did not shake U.S.A.

only but killed the investment and capital market sentiment all round the world.

Will it become like that or not is something which the time will be telling us, but if something

like U.S. housing bubble happened in India and especially in the context of Microfinance, it will

surely take a lot from us. The societal system there is pretty strong which lead to saved lives of

borrowers even if there was huge repayment default. But as we know that we lack a lot in terms

of social security systems and in this case defaults and recovery in Microfinance may kick start

the trail of suicide in farmers as it very often seen in case of drought in various parts of India.

The lack of education among the borrowers of Microfinance will surely add negative things only.

Here we must refer again the recently formed “Malegam Committee” which has come up with a

regulation of lending only below Rs.20000 per person and out of that more than 75 percent must

go for productive purpose only which will curb the end use of loans also. An organization like

CIBIL is also proposed for the overall Microfinance industry which will stop the multiple

borrowing as well as borrowing by those creditors who have bad repayment history.

If we take a positive stance and think that all of the recommendations will be implemented in a

fine manner than we may take a stance of hope that Indian Microfinance industry will never

become like U.S. housing industry and though we will be saved from a big trouble.

Microfinance “An economic perspective”- Microfinance industry is working on the ground

level of economy which is a need of the hour. Directly and indirectly it has contributed a lot the

growth of basic and rural economy of the nation. Though it quantum is less but it has developed

purchasing power in the hands of people and did not let the rural economy suffer to a large

extent. The other side of the story says that it is one of the reasons for inflation in rural parts of

the nation. According to a social economic point of view we must not say that putting money

into the hand of the people is bad because it gives them an authority to purchase more and it

leads us to an inflationary scenario but because it starts from the very basic part of the nation’s

economy which is rural, a cyclical impact can be seen.

Microfinance- Is it a job destination? - Whatever the situation be, this industry is actually

growing faster in terms of both financials as well as reach. For those who want handsome

packages probably this is not a paradise of work for them because it does not pay huge but for

those who wants to pursue a career in social entrepreneurship this industry do a lot because at the

end of the day it pays. Institutes for specific Microfinance have started working. If the

expectations of various analysts goes right than this industry will provide a good number of jobs

for us.

The corporate governance issues- Soon after the listing of its equity shares SKS Microfinance

was in controversies related to the resignations of one of the members in the top brass, but this

was just the beginning of the controversy era for Microfinance industry in the India. In recent

time various newspapers and magazines have put tons of allegations on the historical conduct of

these organizations. A leading financial daily said that Microfinance companies have not been

less than Satyam or Enron when the matter of non-compliance to corporate governance it

discussed.

According to the article Microfinance companies have transferred most of the wealth into their

own promoter’s account which was actually to be shared with the female members of the

organizations and they (female members) were paid a futile some of 6-7 crore for the stake worth

more than 1700 crore today. Moreover the stake transfer activity was never discussed between

those people who actually deserved it. Most of the stake in the top 3 Microfinance companies

was owned by MBTs( Mutual Benefit Trust) which were owned by those women shareholders

who were associated with the companies when it started functioning, the stake was allegedly

transferred to the promoters accounts and they distributed not more than 1 percent of the total

wealth generated by promoters after selling stakes to various corporate giants. Today in the top 3

Microfinance companies more than 95 percent stake is owned by either promoters or financial

investors whereas in 2004-05 more than 90 percent stake was owned by MBTs which were

actually owned community members.

The corporatization- Microfinance companies were actually started with a point of view of

social service where the promoters had a point of view of poverty alleviation but now everyone

is able to see the extreme earning potential of the Microfinance industry in the nation and

perhaps this is the reason why big names like Lok Capital and JM Financial are now associated

with the industry. The industry in India has perhaps lost its vision of generating basic wealth for

poor rather it has stated generating wealth for the promoters or financial investors indulged in the

financing activities.

International financial investors are also not behind in the race, in 2007 Dubai based Legatum

Capital acquired majority stake in Share Microfinance for $25Million. Probably these are some

of the exercises which are killing the basic aim of Microfinance industry in India.

We all know that microfinance industry has done a lot for the nation and it is one of the reasons

for regained respect of the farmer community in some parts of India. It really worked well in

those areas where the farmers had to borrow from the ruthless moneylenders and that too on

extremely out of the world terms and conditions. But now if we listen to the whole lot of experts

talking about the microfinance industry in the nation we will for sure listen one unanimous

opinion which says “It is losing the philanthropic view of the business” which is perhaps the

reason behind the huge success of the industry in India. Suicides due to microfinance are not

better than suicides done by farmers in Vidharbha and Andhra Pradesh due to draught.

The industry has a lot to do in the nation like ours and especially in those areas which are

severely poor and completely isolated from the term “Financial Inclusion”, but the matter of

concern is its extreme corporatization and the deteriorating standards of governance. It is very

clear from the past conduct of the promoters that after looking at the initial success and the great

potential of the industry they became greedy and tried to capture almost every part of the wealth

which actually used to belong to the poor some day. What all we need is to put the aim of

philanthropy in the blood of Microfinance industry again and the scenario will be far better.

Akhilesh Jain Sandeep Mehta

Dean, Proseed Business School Faculty, Proseed Business School

(A Unit of Career Point Infosystems Limited) (A Unit of Career Point Infosystems Limited)

133, Shakti Nagar, Kota 133, Shakti Nagar, Kota

Reference and Bibliography:

1) “The poor as puppets”, Economic Times, 31 January,2011

2) “Micro Finance, The new mantra of rural finance to reduce poverty”, Kanika Taneja,

Delhi Business Review, Vol. 10, No.2 (July-December 2009)

3) www.rbi.org.in

4) “For profit MFIs are worse than moneylenders”, an article in Economic times, 23

November, 2010

5) www.indiamicrofinance.com

6) “National seminar on microfinance” at Jaipuria Institute of management, Jaipur, 2010