Monday, October 18, 2010

Macro of Micro Finance

( Writer is Senior Associate Producer in CNBC-AWAAZ and IIMC alumnus) 
Last week has been very busy for at least those who track the micro finance sector in India. I do not claim to track the micro finance so deeply, but due to the facts that I follow the sector a bit more than others and personally I like the concept of micro finance, I decided to pen down my thoughts on the recent happenings related to the issue. Lets start from the very basic things. Though the term MicroFinance gives impression that it is a petty section of the financial world, I must tell you that this is not so. Note some facts here: about 18% of Indian population (which translates to more than 20 crores people) carries a micro finance account (these include small post office savings as well), only in our country there are more than 3,000 micro finance companies or NGOs who works as self help groups (SHGs) and involved in micro finance works and the total loan outstanding of Indian MFIs lies between Rs. 160-175 billion. These are the facts which are enough to tell you how MACRO the business of Micro Finance in India is.
Its all about business
Now, I come to the issue due to which micro finance sector is in news these days. According to the latest report, about 25 borrowers of MFIs have committed suicides in recent weeks in Andhra Pradesh due to the harassment of the lenders (and out of these 25, 17 borrowers were the clients of SKS Micro finance, the biggest MFI of the country). When there was too much hue and cry over it, the Andhra Pradesh Government passed an ordinance to check irregularities by MFIs, which provides 3 years sentence and Rs. 1 lakh penalty for harassing borrowers. Also, the banking sector regulator RBI appointed sub-committee of its board to look into the micro finance loans as there are allegations on these MFIs that they charge exorbitant rate of interest from their borrowers. So far so good. But here the questions which pop up is that whether the suicides were committed only due to the harassment of borrowers and if the MFIs have been charging so much interest rate, why were the respective authorities silent till yet? 
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No doubt, penury and financial crisis may be the reasons behind the suicides in Andhra Pradesh, but is it due to the pressure of MFIs only? There are high chances that some of the borrowers could be borrowing from other sources such as moneylenders as well. So only to nail MFIs over the suicide issue is not correct according to me. So far the charging of high interest rate is concerned, all over the world the interest rate on small loans for small borrowers is almost double that of the base rate (or prime lending rate) of the banks. There is high risk involved in such loan as there is no collateral or normally the borrowers don't possess any valuable asset which can be mortgaged. This is also the reason why big or mainstream banks do not borrow money to the poor people and hence the need for micro finance company. Of course, there should be some check on the MFIs to see whether they are exploiting the poor. If current rules are talked about, RBI has no direct control over interest rate being charged by MFIs as they are regulated by same set of rules as non-banking financial companies ( NBFC). Though the MFIs get concessional funds from banks under priority sector lending so it is assumed that the benefits need to be passed on to borrowers.
Vikram Akula, Chief Executive of SKS Microfinance claimed that of the 26% interest rate, 8.5% is the cost of borrowing, 9% cost of delivery, 1% put aside for hardship cases (as per RBI rules), corporate tax is 3% and the company margin is 4-5%. He is ready to lower down the rate of interest by 2%, at the same time he cites the SIDBI study, according to which the annual income increase for the borrowers after gaining back the cost of capital is almost 45%. If SIDBI study is to be believed it means that the system of micro finance has been doing the work of poverty alleviation very well. Here I would present some more facts about MFIs in India. Out of the 10 biggest MFIs, 5 are based in Andhra Pradesh, these include SKS, Spandan, Share Microfin and Ashmita Microfin. Only the SKS has more than 7 million borrowers to whom it has disbursed more than Rs. 14,000 crore. This is not a small figure and it is enough to make one understand the importance of micro finance in our country.
Muhammad Yunus
The pioneer of micro finance in the world Muhammad Yunus has got Nobel Peace Prize for his exemplary work in poverty alleviation in Bangladesh. His Grameen Bank is a role model for the MFIs all over the world. Though Muhammad Yunus is also critical of the MFIs charging a very high interest rates and is of the opinion that MFIs should not charge more than 15%. He also criticized the MFIs going public for raising funds. I am a great admirer of him but here I differ with him as I think if the money raised is used for the welfare of a larger section, there is no problem. Muhammad Yunus argued that the benefits of the micro finance should be passed on only to the borrowers and poor and should not be used for paying dividends to the investors. But I feel that if any business has to grow big, it should be based on sustainable model and so there is a need to add as many people with the business as possible and for it, if you pay dividend, there is no harm. Remember that business don't run on ethics only and for a larger cause of poverty alleviation, innovations like micro finance need to be developed. The chief mentor of Infosys N R Narayanmurthy, who is called corporate saint in industry circle, made a killing through his PE fund Catamaran, when the SKS was listed on stock exchanges as he got 1.3% share of the company in lieu of his investment of Rs. 28.12 Crore in January this year. The market value of SKS is about $2 bn and the investment of  Murthy is worth Rs. 117 crore today. So, if a saint can make money by promoting social business, why should not the larger public be part of it? Am I sounding pro SKS here? No, I am only saying that the attempts should be made for promoting such social business more and more in our country and we should refrain from taking any step which could hamper the growth of such social innovations (especially when we talk about financial inclusion and want to achieve the goal as soon as possible).


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