Sunday, December 05, 2010

Licence raj could kill microcredit

Although human life is less than the blink of an eyelid interms of the universe, it is staggering what it is able to create. Thirty million (yes, three crore!) poor women in Indian villages have taken small loans and started enterprises. With the loan they buy a cow to sell milk, or invest in a sewing machine to sell clothes or open a small kirana shop. What began as charity work by NGOs has become self-sustaining business, thanks to the entry of professional microfinance companies (MFIs) who are gradually replacing the village moneylender. In many districts, micro-credit is as common as a cell phone or a paan-walla. It has given women dignity, many of whom display the same intelligence and drive as our best entrepreneurs in Bangalore. It is financial inclusion at its best.

Success, however, creates envy as the Pandavas discovered in the Mahabharata. The problem began in October when politicians in Andhra Pradesh accused microfinance companies of loan sharking and causing suicides. They called for interest rate controls and told women to stop repaying loans. The police began to imprison MFI employees. The state issued an ordinance that requires MFIs to obtain government permission for each loan, which means that 1.3 crore tiny loans in Andhra villages will require prior approval—an impossible task, reminiscent of the dreaded licence raj and a clear invitation to bribery. Meanwhile, a credit culture of weekly repayments built over a decade is destroyed. Banks, fearing default, have stopped lending to MFIs, and this miraculous business is about to close, thus killing the hopes of three crore micro-entrepreneurs.

Microfinance companies charge 24% to 32% interest, which appears high until you realize that we too pay 30% on our credit cards and village money lenders charge 65% to 100%. Even the Nobel Prize winning Muhummad Yunus’ Grameen Bank charges 20% interest (based on subsided credit). The truth is that it is expensive to deliver and collect loans weekly in rural areas. Customers do not think it high because they earn far more from the businesses they start with their loans. Success invites rogues and some loan sharks have disguised themselves as MFIs (with names like ‘Vessel under the Borewell’) and are giving the industry a bad name by using strong arm collection tactics. Suicides are, of course, a terrible tragedy. But it is extremely unlikely that suicides could have been caused suddenly by professional MFIs who have built trust with customers over a decade. If rogue MFIs are responsible, they should be punished. Why kill the ethical ones through Licence Raj?

Officials want to shut this business because it threatens the government’s microfinance company which gives subsidized loans at only 3%. But women prefer private MFI loans because they say you need to bribe to get a government loan. And when you add the cost of multiple trips to the city and the bribe, the government loan ends up costing over 40%. The private MFI delivers the loan at the doorstep every seven days. Although official’s claim that women are being duped, we all know that a poor person is far more aware of every paisa she earns and spends.

Politicians had so far ignored MFIs, but the successful public stock offering (IPO) of one of the microfinance companies woke them up. If MFIs were making good money, why couldn’t they have a slice? They colluded with officials to announce a harsh ordinance that has brought the entire micro-lending industry to its knees. Since it is a matter of survival, they are waiting for MFIs to come running to them with bribes.

Microfinance should be regulated, but in an intelligent manner. MFIs should be transparent and be obliged to disclose interest rates. Competition should be encouraged—it will lead to lower rates. Rogue MFIs should be caught and punished. Imposing caps and harsh interest rates controls will destroy the industry as it did in Tunisia and Columbia. Countries that had tried to control loan rates have invariably killed their microfinance business for industry margins are thin. Our regulators should learn from countries like Peru, which has imposed capital buffers, and this has led to a stable environment.

This astonishing story reminds us that the poor do not need charity but opportunity. Just when microfinance’s success is inspiring other businessmen to seek a ‘fortune at the bottom of the pyramid’, such as Tata’s Nano, its own death would be a tragic loss. Crores of women would be thrown into the money lender’s clutches. Andhra’s image will also take a beating. Until recently, Andhra was hailed for pioneering this industry. An international official was heard to say recently, ‘corrupt officials and politicians of Andhra are about to kill the chances of the poor’. The new Chief Minister of Andhra, Kiran Kumar, should now step in and not allow this to happen.


Rajan Alexander said...

Castrate the for-profit MFIs to Recast the Sector!

The die has been cast with the introduction of the Andhra Pradesh Micro-Finance Regulatory Bill in the State Assembly yesterday. The Bill to replace the ordinance passed by the government in October 15th is scheduled to be discussed this coming Tuesday and passed as an Act by Wednesday, tightening the noose around MFIs.

So where is the future policy environment going?

MFI Watch

Anonymous said...

I really enjoyed your book India Unbound and recently discovered this blog. I like the way you can convey complex ideas so simply. :) said...

All people should get involveld, discussing is a good point.

Blognostic said...

In India, getting a government license has become synonymous with corruption. But, at the same time, too much freedom for private enterprise is also dangerous. A government-regulated private lending scheme is needed.

Anonymous said...


I would be indebted personally if you can pen a article about shri PV narshima rao.
I really felt bad with congress snubbing india's greatest leader at its annual 125th plenary session at buruari.
I really hope thinkers like you should stand and write as people ,acknowledge you.
I can't reach million ,but you can.
For Past few days ,I am also very disturbed as my gravest fear came true.I really had this presumption
that common man is big fool made by so called elite class (business man,media house,politician).
WELL WHATEVER ECONOMICALLY WE GROW WE CANT DENY ITS SOME LITTLE CHUNK(INDIA INC-corporates ) growing and they now dont want any enterpenuer r professional like us to grow.
I hope this message get across you and you get little moved about india deteriorating political class
and do write if least possible.

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maverick nerd said...

MFIs are themselves to blame for the situation. Annualized interest rates of 50% will attract regulators. I doubt claims of suicides arising out of MFI's pressures, since many of them have strong corporate governance. But regulation is required to protect lesser educated and gullible sections of our economy from super smart and suave marketing of MFIs. Let it hurt the sector. It will only hamper unnatural growth.

Anant Seksaria said...

Found your article really meaningful and interesting. Also your book on dharma has helped me in TOK, that too is extremely well-written :)

Vaibhav Jindal said...


how do u see the Malegam committee report?


am said...

Of the countless programs & opinions I saw/heard on this issue, this was the most sensible & sincere.

I cannot understand, how so many people mistake intentions for results, and greed for malice.

Thank you for articulating..

surkhab said...

Thank you for your article.

Peeyush sharma said...

this is agood article,

Anonymous said...

Additionally, MFIs have also to bear the burden of insuring their clients.

Does anyone has statistics about suicides before and after MFIs came? How are the new acts justified?

If we stratify the suicides in India, ALL professions will have their share (from soldiers to doctors). The poor and destitute may have a higher rate.

So how do policy-makers attribute the suicide RATE to a particular cause, such as MFI?

The same destitute/desperate person would have committed suicide anyway if he had not found a lender; or if he had been unable to repay the loan taken from a ruthless village lender.

And here's the best part: Given that the MFIs are supposed to give loans only to government-approved people, does the government guarantee that they won't commit suicide?

Ayurvedic Hepatitis Treatment said...

I am not sure if micro credit is a panacea for all illness for poor though. What with suicides in Andhra.

rohit said...

Must be an enjoyable read India Unbound by Gurcharan Das . loved the way you wrote it. I find your review very genuine and orignal, this book is going in by "to read" list.

Venkitachalam said...

Read your book The Difficulty of being good with great interest - very thought provoking.
Also read the article in todays Times of India on DSK et al. I wonder if the seeds of destruction are present in every one of us. Otherwise, taking the case of DSK, Rajat etc who are intelluctually endowed make those mis judgements.
You see it in the biological world too and with civilizations too.

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Anonymous said...

Thank you for your article.

Hayes said...

Gurcharan, Hi!Have always liked your writing and look forward to meeting you next time you are passing through Mumbai.Missed your invite last time but have read and liked your book on Dharma.Regards to Bunu and hope you are all doing fine.Is Bunu still having to take the B.P drugs?I am desperately trying to reduce my daily list!

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