Liza has started this excellent blog (http://seepcommunity.com/forum/topics/suicides-among-microfinance) about alleged microfinance linked suicides in Andhra Pradesh (AP). In continuation of
that I would like to steer the discussion on lessons that can be learned from this
crisis-in-making. There have been several developments around this since about
a month now, including state government passing an ordinance to rein in MFIs (http://indiamicrofinance.com/andhra-pradesh-mfi-ordinance-2010.html),
MFIs challenging the ordinance in court (http://www.thehindu.com/todays-paper/tp-national/tp-andhrapradesh/a...),
central bank constituting a sub-committee to review MFI practices (http://www.microfinancefocus.com/news/2010/10/29/rbi-sub-committee-...),
banks tracking back on credit supply to MFIs (http://www.forum4finance.com/2010/10/28/banks-refuse-to-lend-mfis-e...),
MFIs applying for registrations with state government (http://www.moneycontrol.com/news/business/registration-process-for-...),
MFIs agreeing to reduce interest rates to 24 (http://economictimes.indiatimes.com/news/news-by-industry/banking/f...
) and loan repayments being virtually frozen due to political backlash leading
to mass defaults (http://www.thehindubusinessline.com/2010/10/31/stories/201010315108...).
AP contributes about 1/5th of the global $30bn microfinance industry. What will
all this lead to is anybody's guess. It has been reported informally that
repayment rates are as low as 10% in the state. If the situation continues for
some more weeks, one should not be surprised to see the cracks in the edifice
with several MFIs declaring insolvency.
Excepting some rare cases that might have occurred due to unwarranted actions by some ill-trained loan officers, I don't believe suicides have direct connections with microfinance. If anyone is
aware of death trends in India the numbers reported in the weeks leading to
this crisis are not very surprising (http://blogs.hbr.org/cs/2010/11/indias_microfinance_crisis_is.html),
however unfortunate and condemnable these occurrences might me. There are
several other reasons MFIs have been dragged into this mess, SKS IPO adding big
deal of fuel to the fire. Having said that I do think there have been excesses
in the form of reckless growth, multiple lending, tendencies of profiteering
off the poor etc. The ongoing situation is a kind of correction, not imposed by
the market but by the state.
What lessons do we learn from this crisis? My two cents:
1. Profit making is fine, as sustainability of any business is paramount for
its success, but profiteering must be checked.
2. Excessive and reckless growth without focus on systems, internal controls
and most importantly client needs, could backfire sooner than later.
3. Irrational exuberance by investors and MFI practitioners leading to overvaluations
and in turn forcing MFIs to push the borders beyond capacities to deliver
returns to investors is dangerous.
4. Microfinance deals with vulnerable customer base and it is important to be
sensitive about their capacities as well as dignity.
5. Poor relationship with the state where state itself is a major player and
competitor is bound to result in political backlash.
6. Excessive mono-product reliance, gender and geographic concentration and
herd mentality is detrimental.
Any further thoughts?