On Microfinance: Who’s to Blame for the Crisis in Andhra Pradesh?

I would like to add a dimension to Beth Rhyne’s perspective on “Whose to blame for the AP crisis?” The two main contentious issues in the AP crisis are the unaffordable interest rate and collection practices, which have led to a comparison with the notorious money lender. To my mind, both these issues, to a certain degree, trace their roots to the lack of comprehensive financial services for the poor.

MFIs have successfully reached loans to the poor, but not other financial services. It is accepted that the poor have entrepreneur opportunities that provide returns of 20-30% per month and which can therefore absorb the very high interest rates on loans, arising from high transactional costs. However, the interest rate becomes unaffordable when the loan is used, not for income generation or cash flow smoothening , but other purposes. With easy access to credit, loans are being used by low income households as substitutes for other financial products. In a situation without life or accident insurance for the main income earner, a loan is taken to tide over the “emergency” from death or disability. So is the case in a medical “emergency” requiring hospitalisation of a family member. In the absence of planning and saving for life cycle events such as birth, marriage and education, loans become surrogate savings and an alternative for insurance products that the middle class can access. Poor women in the slums of Mumbai have said to me again and again that they are often compelled to resort to borrowings to tide over “emergencies”.

A 98 or 99% repayment record to MFIs has been celebrated as evidence of the credit worthiness of the poor. In doing so, have MFIs become a victim of their own success? By accepting this as the underlying premise , restructuring and delinquency management were considered to be unnecessary. Having these in place would only increase operational costs, which in turn would further push up interest rates or affect sustainability.

In reality, when field officers are faced with non-payment, and don’t know what to do, they resort to whatever methods they consider work. The industry needs to strongly introspect if even in a small minority of cases, in the absence of proper direction, the village money lender’s method has become the role model for collection . In any lending business, dealing with non payment has to be part of the policy and process, and not left to the discretion of the person on the spot.

Had the loans not been used for emergencies, the repayment would not have become a problem. The emergency, however, was not caused by the MFI – but by poverty, vulnerability and lack of other financial products. The MFI loans, at a much lower rate than the moneylender, probably gave some more staying power to the family.

To address the present crisis, the government and regulator need to introspect as much, if not more, than the MFIs. What is needed is an acceptance that MFIs can reach where others have failed, creating an enabling environment permitting MFIs to deliver, but deliver with responsibility, more than just loans.