Fault lines of microfinance

Mismanagement in MFIs led to its fall

atul-k-thakur

Atul K Thakur | March 13, 2012



The brief euphoria generated by the private microfinance institutions (MFIs) withered away with the collapse of their doubtfully structured model. Its representative face in India, Vikram Akula’s high rise and bottom low with SKS microfinance initially caught the market’s attention towards this nascent industry and later made it synonymous with degenerated “business class”.

Business wise, private MFIs like mutual funds have always underperformed its peer group in the financial sector and both were first hyped and later saturated, leading to the slide towards underperformance on the backdrop of weak regulatory framework. 

The idea of microfinance was presented as altruistic, which was a fatal error. Had it started with the aim of optimising operational costs and providing low lending rates to the end users, it would have surely never got the tag of “non performing heaven”! Broadly, the managements of MFIs have missed the business mission as direct lender to the petty customers and instead they got accustomed to play as unethical lending brokers to the severely needy customers. Hence, they have been and still are playing a mean role between blood sucking moneylenders and organised financial institutions. Surprisingly, they do not feel bad doing this.

They charge almost 20% more than commercial banks and less than private moneylenders. Question arises in present scenario; do MFIs need a major revamping or simply shut down? So far, their managements have failed to realise the essential evils, foremost among them is acting as brokers on the money of banks instead sustaining in lending market with alternative cheap funds. Certainly, the private equity players are never going to spend their shrewd pennies in Indian MFIs without inserting unviable conditions and MFIs can no longer survive on the bank’s money, so there are bleak chances they would remain relevant to low scale financing. After Kingfisher Airways, it would hardly be a surprise if SBI loses more money as non-performing assets on the MFI ventures.

The bright performance of microfinance has only been witnessed in the inglorious Regional Rural Banks (RRBs), which have truly acted as financers to the poor rural folks on just lending rates set by the reserve bank of India (RBI). Despite that, they have always remained ignored and have never managed to get the attention they deserved. With cooperative banks reduced to a tool of political patronage and commercial/private banks lukewarm in lending microfinance portfolios, RRBs are the institutions that stand out as a beacon of hope. For revamping microfinance in rural and semi-urban areas, integration of RRBs into a single fold would be a revolutionary step besides giving it all the service/operational benefits as in case of Scheduled Commercial Banks.

RBI and finance ministry have to act fast to make Priority Sector Lendings completely stringent, and under such regulatory changes, banks would be liable to lend at least one-third of their genuine funds under the welfare measures. Prospects of microfinance would get a strong boost with it. Second, a regulatory change that is immediately required is to cap the MFIs lending rates at par with the commercial banks. If their business is tepid there should be no looking back. In present scenario, RBI can’t and shouldn’t afford the luxury of artificially keeping the solvency of beleaguered MFIs alive. The best it can do is to give them a fair chance to run in the Indian market.

The efficient and organised microfinance could be channelised well through the existing set of public/private sector banks under consistent regulatory monitoring of RBI. Private MFIs have to learn raising the seed capital for running a profit making business, certainly not only under the hippocratic guise of false idealism. Once they learn to compete with banks, their business model would become credible. Unbanked sections (at least 40 percent of the population does not have access to banking services) are big opportunity and that must not be taken for granted…end of policy hassles would make microfinance a truly vibrant area under the institutional finances. India may be the nation of poor people but it’s not poor itself, so chances are not yet dim for a better time ahead!

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