They Told You So

MicroSave is a consulting organization that specializes in designing financial services for the poor from the basis of a strong understanding of client perspectives. They have people in the India, the Philippines, Uganda, and Kenya. Never heard of them? I have to say, among microfinance organizations, they are rather awkward in public. But if their outreach to people like us isn't slickest, perhaps that is because they spend their time talking to clients and industry insiders, developing subtle insights. The vibe I get from their web site is that they are more comfortable below the radar.I recently discovered their series of India two-pagers. Notes 41--43 (free with annoying registration) were penned by Graham A.N. Wright and Manoj K. Sharma this past May and offered, amid the exuberance of the build-up to the SKS IPO, some pointed warnings about the industry's trajectory. Given their prescience, I'd say we should keep listening to MicroSave.Note 41:

The high margins and the seemingly limitless market, considering the poverty levels in India, brought private equity (PE) players to the sector. The industry stakeholders and banks welcomed this move as it was seen as a coming of age of the sector. A few voices expressed their concern that the entry of PE players would lead to rapid growth and commercialisation at a scale not seen before, but these were quickly brushed aside in the initial euphoria.The entry of PE players changed the game quite comprehensively. The money brought in was short term money and needed high returns of the order of 24--30%. The only way such returns could be realised was through rapid growth. The more money that was leveraged on account of equity, and the faster it was turned around, the more would be the profit. Growth, which till then was being supported by all stakeholders, became an end in itself and was driven by profit---the client and her needs scarcely factored.

This limited choice and mono-product environment is common in most countries when microfinance is taking root in new markets. But no countries in the world have had the sophisticated and extensive capital financing that is currently available in India, at this stage of the development of the microfinance market. As a result, growth rates...are absolutely unprecedented. [S]igns of stress and challenges are already appearing---with increasing regularity. [C]areful analysis of the issues suggests that the root of the problem almost invariably lies with the relationship between the client and the MFI. [E]ffective and sustainable microfinance is built on the relationships between client and institution. This encompasses not just the relationship between the front-line Credit Officers and their groups, but also the depth and diversity of the product relationships. In simple terms, if a client is getting a loan that somewhat meets her needs, she will be somewhat committed to repay it. Whereas if she is able to access a range of financial services that meet a broad spectrum of her needs, delivered by staff with whom she has a deep relationship of trust, she will make all possible efforts to repay any loans outstanding---in order to maintain that valuable relationship.The dash for growth in India has meant that, in most [big microcreditors], these critical relationships are almost non-existent. So in Krishna and Kolar many clients were happy to follow injunctions not to repay loans; and in Kanpur, Nirman Bharti’s clients had nothing to lose when they chose not to repay their loans. Elsewhere in the world, attempts by Government officials or religious groups to intervene and disrupt the operations of MFIs with real customer relationships and loyalty are greeted with protest marches and the surrounding of offices, as has been shown in Bangladesh, Uganda and elsewhere. It is difficult to imagine SEWA Bank’s clients tolerating the bank being shut.

Nonetheless, with the growing scale of the MFIs [microfinance institutions], the competition they provide for Government-sponsored SHG [self-help group] programmes and imminent IPOs from SKS, Share and Spandana, the Government and RBI [Reserve Bank of India], are showing growing signs of disquiet. The potential fallout from the SKS IPO is enormous. It is safe to assume that the growing stream of negative press will explode into a frenzy of accusations over foreign PE firms and unscrupulous Indian promoters profiteering on the back of the nation’s poor. Government agencies are likely to look for legislative routes to reduce the scope for MFIs, and the RBI (which actually intervened to protect the MFIs in the Krishna crisis) will look for levers to curb the excess. The most potent of the levers available to the RBI is, of course, to exclude lending to MFIs as part of priority sector lending, which would significantly decrease the flow, and increase the cost, of bank lending to MFIs overnight.