Kyusuibu Honbu
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vedic village kolkata
I'd love to live in one of those
India Developing, but still a long way to go
- Thread starter NSG_BlackCats
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I'd love to live in one of those
Mirza Jatt
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Water Car Engineer
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India's poor need help to help themselves
Until recently, microfinance has been the golden child of international development. Microfinance companies would lend small amounts of money to poor women who would, in the ideal scenario, use them to start small businesses. Their interest rates were typically lower than loan sharks' but still high enough to make a profit. Around the world, development experts believed microfinance was an ideal way to alleviate poverty, a smart way to "do good" while also "doing well".
How times have changed.
In the last few months, many people have become newly critical. In November, politicians in the southern Indian state of Andhra Pradesh started making bold claims about how microfinance's crushing interest rates and strongman tactics were, among other things, leading to suicide among over-indebted borrowers.
Some of the politicians' statements were considered dubious to industry insiders – the Wall Street Journal, for instance, found suicide rates among microfinance borrowers to be five to 10 times lower than among the general Indian population – but they resonated with the public. State politicians ordered private microfinance institutions to stop lending money, and likewise told borrowers to stop repaying existing debt.
Within India, microfinance has historically had its strongest foothold in Andhra Pradesh. Private microfinance lenders had, in aggregate, disbursed more than 150bn rupees (£1.8bn) to more than six million customers. Around the world, experts looked to the state as the Indian business torchbearer.
Given this, Andhra Pradesh politicians likely knew that if they began openly worrying about multiple borrowing, coercive recovery tactics, and suicide related to private microfinance institutions, the rest of the country would carefully listen.
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."
There have been isolated instances of customer protest. In Vishakhapatnam, Andhra Pradesh, customers staged a sit-in outside a public bank, demanding more government-sponsored loans. Without private microfinance companies, they are finding it difficult to lead the lifestyles to which they had become accustomed.
Nobody today can predict the future of the sector. If Malegam's current recommendations are enforced, however, we may see some private microfinance institutions being forced to shut down. The international development community's golden child may sadly suffer a premature death.
Until recently, microfinance has been the golden child of international development. Microfinance companies would lend small amounts of money to poor women who would, in the ideal scenario, use them to start small businesses. Their interest rates were typically lower than loan sharks' but still high enough to make a profit. Around the world, development experts believed microfinance was an ideal way to alleviate poverty, a smart way to "do good" while also "doing well".
How times have changed.
In the last few months, many people have become newly critical. In November, politicians in the southern Indian state of Andhra Pradesh started making bold claims about how microfinance's crushing interest rates and strongman tactics were, among other things, leading to suicide among over-indebted borrowers.
Some of the politicians' statements were considered dubious to industry insiders – the Wall Street Journal, for instance, found suicide rates among microfinance borrowers to be five to 10 times lower than among the general Indian population – but they resonated with the public. State politicians ordered private microfinance institutions to stop lending money, and likewise told borrowers to stop repaying existing debt.
Within India, microfinance has historically had its strongest foothold in Andhra Pradesh. Private microfinance lenders had, in aggregate, disbursed more than 150bn rupees (£1.8bn) to more than six million customers. Around the world, experts looked to the state as the Indian business torchbearer.
Given this, Andhra Pradesh politicians likely knew that if they began openly worrying about multiple borrowing, coercive recovery tactics, and suicide related to private microfinance institutions, the rest of the country would carefully listen.
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."
There have been isolated instances of customer protest. In Vishakhapatnam, Andhra Pradesh, customers staged a sit-in outside a public bank, demanding more government-sponsored loans. Without private microfinance companies, they are finding it difficult to lead the lifestyles to which they had become accustomed.
Nobody today can predict the future of the sector. If Malegam's current recommendations are enforced, however, we may see some private microfinance institutions being forced to shut down. The international development community's golden child may sadly suffer a premature death.
Water Car Engineer
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Water Car Engineer
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bhagat
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