More Must-Reads on Andhra Pradesh

Beth Rhyne:

The blame for this unfortunate situation falls most squarely on the MFIs [microfinance institutions] that failed to restrain aggressive growth even as the market became increasingly saturated. Investors must also swallow a big spoonful of blame. Because they paid dearly for shares in the MFIs, they need fast growth to make their investments pay off.The divvying up of blame doesn't stop there, however. Perhaps the most important target is the public sector policy environment that has treated microfinance institutions as orphan children of the financial sector rather than helping them to build solid foundations. In fact, the environment in which MFIs have grown up could almost have been expressly designed to promote over-lending.

The ongoing microfinance crisis results from a combination of promoter hubris and observer envy....Competition has intensified as hubris and the imperative of equity valuations has led to MFI promoters pursuing growth at the expense of quality.

...having discovered a fresh spate of suicides amongst low income families in rural areas, the local media in Andhra Pradesh has whipped itself into a frenzy. Study after study has shown that suicides by low income families are attributable to complex socio-economic factors and it is rarely a single incident of coercive collection behaviour by a lender that is the cause, yet MFIs have been squarely blamed for the recent incidents oblivious to the well known fact that such families usually also have loans from family, friends, moneylenders and even banks. The growing wealth of microfinance promoters has generated observer envy and the controversial aftermath of the recent IPO has provided the stimulus to unleash the backlash that is characteristic of such rags to riches situations.The official response to such an imbroglio is typical; the Andhra Pradesh government has come down with a heavy handed ordinance unmindful of its constitutional validity and uncaring of the effects if MFIs are forced to cut back their operations.

One solution to this problem is lender restraint and due diligence over collection practices and MFI pricing transparency, ideally monitored by appropriate rating agencies. Paradoxically, another solution lies not in increased regulation but in an “indulgence” that the regulator has shied away from. MFIs registered as non-bank finance companies (NBFCs) have, until now, only been allowed to provide credit services to their clients. Though many have also provided insurance services (as aggregators for insurance companies), deposit services have been specifically prohibited by the regulator, the RBI. What this has led to is MFIs chasing investors for equity finance to provide them with the capital they can leverage for increasing amounts of on-lending funds from commercial banks.

Adding the dimension where the MFI is also partly dependent on service to the client for generating deposits that contribute to financing its operations will result in a more balanced MFI-client relationship than exists today.Since bank financing at 11-13 percent interest is relatively expensive, deposit financing on which MFIs pay 6-8 percent interest will be tempting. The experience of SEWA Bank in Ahmedabad, and the Grameen-2 programme of the Bangladesh Grameen Bank amongst others shows that the poor need deposit services even more than they need credit.