Monday, March 07, 2011

The attack on microfinance in India

India will soon begin to press charges in the suicide deaths of microcredit borrowers. This may have leaders of microcredit banks going to court to defend their practices. The government alleges that over 50 people in Andhra Pradesh committed suicide because they were over-indebted to microcredit lenders. These allegations are despite studies that say that microcredit borrowers are less likely to commit suicide over their economic situation.

Indian government leaders say that microcredit is charging too high of interest rates and conducting predatory lending practices against the poor. The controversy is bound to bring about more regulation for microcredit in India. Some say the regulation is welcome, but others worry that the restrains will go too far.

First, ths Associated Press article at Google News has an analysis of the situation in India.

Microfinance has excelled at getting a lot of money to a lot of borrowers quickly, disrupting established networks of power and patronage in the process.

Some say that remarkable growth has prompted a backlash from vested political interests.

"The poor is a constituency politicians see as their own turf," said Alok Prasad, chief executive of India's Microfinance Institutions Network, whose 46 members represent about 85 percent of the lending in the sector in India. "Anything which leads to greater empowerment of the poor makes them insecure."

In India, some say pandering for voters, corruption and competition with a state-backed lending program helped spark a crackdown that has essentially frozen microlending in the southern state of Andhra Pradesh, India's most important microfinance market. The central bank had to step in to try and prevent microfinance institutions from going bankrupt.

Government lending programs for the poor in India have been losing ground to microfinance groups. In 2007, state-backed self-help groups, which link local borrowers with banks, sometimes at subsidized interest rates, added 8.5 million clients, while microfinance groups added 3.2 million. Two years later, self-help groups added just 6.7 million clients, while microfinance groups added 8.5 million, according to M-CRIL, an Indian micro-credit rating agency.

M-CRIL director Alok Misra said the gains by the private microfinance groups have shamed the government and unsettled politicians who believe the self-help groups are an important means of securing votes.

"It is showing the government its own inadequacy," Misra said. "That's a big challenge for the politicians. Politicians feel poverty-lending should be in the government's name."

Next up, an opinion piece found at the Guardian focuses on the new regulations that might soon come to India. Writer Sarika Bansal says the government regulations will hurt the poor that the leaders are trying to protect.

Following the politicians' announcements, practitioners estimate that more than 80% of customers in Andhra Pradesh have stopped repaying their loans. MFIs have been bearing unprecedented losses, would-be customers have had fewer options for borrowing money, and international media outlets have been running apocalyptic headlines such as "India microcredit faces collapse from defaults".

Microfinance lenders say the present limbo is not sustainable. They insist the situation must return to business as usual, or more realistically, that new rules – ones amenable to both politicians and practitioners – must be established. The Reserve Bank of India (RBI) has been trying to do just this. They recently commissioned a high-powered group, the Malegam Committee, to study current problems in microfinance and create a new set of rules for the industry. This committee submitted an initial report on 19 January, and after rounds of discussion, the RBI will enforce the final recommendations later this year.

Unfortunately, most industry insiders have been disappointed with the report's draft. Of particular concern are the new recommended caps on interest rates. Malegam recommends large microfinance companies to have lending margins (that is, the difference between the borrowing and lending rate) of no more than 10%. Operating costs for many companies, particularly those that serve remote populations, are often at least this much. Profitability becomes nearly impossible. According to one industry source, the "interest rates were never really an issue in India in the past. What this cap will do is make it more difficult to expand into underserved areas or reach the poorest customers. Reaching these regions and customers is more expensive, and rigid margin caps take away a lender's flexibility to price for these higher costs. Companies will instead focus on areas where customers are easy to reach, which runs counter to the government's stated financial inclusion goals."

The Malegam report also places a low ceiling – 50,000 rupees – on borrowers' annual household income. The rationale is that microfinance was originally created to serve the poorest of the poor, and that ceilings will ensure they stick to that mission. Unfortunately, this recommendation runs counter to many academic findings. Microfinance has been shown, in several instances, to work best for people who are poor, but not entirely downtrodden. These customers, according to MIT's Poverty Action Lab, are more likely to use funds profitably and to repay debt. Brahmanand Hegde, founder and CEO of Vistaar Livelihood Finance, said that "the report is a huge disappointment to us. It is forcing the industry to accept conditions that run against any business sense."

No comments: