By Ramakrishna Nishtala, Founder Director & COO, Vistaar

Microfinance Focus, March 07, 2011: The debate on MFIs and their role in financial inclusion has been fierce and often very intense.  At the outset, I would like to clarify that I have no intention of defending the alleged wrongdoings of any of the MFI players, be it coercive practices of loan officers or the supposedly questionable practices of some promoters. There are agencies tasked with the responsibility of investigating these issues and we can well wait for their findings. This article focuses on the actions and attitudes of several other key players. While each of them has significant influence on the future of the MFI sector, it is concerning to see that their level of understanding of the grass root level situation varies between shallow to outright prejudiced.

Let’s take the bankers to begin with. Their common refrain is that MFIs are no better than moneylenders. When confronted with a similar sentiment from one banker who said he can’t think of any business which will be viable at 30% interest rate, I decided to engage him in further conversation. ‘Granted that some MFIs charge 30%, what do you think should be the rate of interest that customers should be charged,’ I asked. ‘ 22% would make it viable for customers’, was his response. When I asked him in rupee terms, what’s the difference to the customer, he had no idea. He seemed quite astonished that to a customer taking a Rs.10000 loan with a repayment every week over 50 weeks, the difference between 30% and 22% interest rate translated into approximately Rs.8 per week and no more! But of course, you cannot blame him as he is used to lending crores of rupees to each client over tenors of 3 to 5 years and so the economics of a Rs.10000 loan to be repaid in one  year was Greek and Latin to him. I did not feel it necessary to take him through a mathematics tutorial that, by the way, money lenders on a reducing balance basis rarely charge less than 150%.

What about the regulators? I am sure there are several people in the regulatory body who understand the brass tacks of the MFI industry very well but they have not been sufficiently forthcoming. Instead, we have a report from Mr.Y.H.Malegam, one of the most respected names on the RBI Board and a person on whom the hopes of an entire sector were pinned. What’s the depth of work that Mr. Malegam and his committee do before coming up with their recommendations?

This is best summarised by Mr. Malegam’s response to how the committee arrived at what is the income level to be considered as a cut off for a microfinance customer. ‘We spoke to several MFIs and most of them seemed to take Rs.50000 as the maximum annual income level for their customers and so we decided to go with it’, or some such words. The fact that there has been virtually no MFI thereafter which has agreed with Mr. Malegam on this point leaves one wondering which MFIs had he spoken to before coming up with this recommendation.

The Government of Andhra Pradesh, which has played a pivotal role in bringing matters to a head, seems to have its own agenda of pushing its SHGs program. How well connected with reality is its approach? Mr.Reddy Subramanyam, the Rural Development Secretary to the AP Govt insists that MFIs must operate with not more than 8% spread which he believes is more than viable. We have of course yet to understand his school of economics in which the Govt runs an SHG program with a repayment rate of 80% and interest rate of 3% and calls it sustainable.

There are several luminaries from the academic world who have written about the MFI sector. The writings by some of the academicians from India have been incisive and in-depth, notable among them being Prof.M.Sriram. Unfortunately there have also been several others who received wide coverage less for their credentials to write about the sector and more due to the fact that they write from foreign Universities and have access to the Editors of pink page newspapers in the country. Meeting a Radha or a Revathi in some village on their occasional visits to India and weaving an article around these random single meetings and indulging in some heavy MFI bashing, these worthies have shown themselves in poor light not to talk of the newspapers who have given them credibility.

Not all is gloom and providing some relief was an article written by Saurabh Tripathi of The Boston Consulting Group. In one of the few fact based articles on the sector, Tripathi forcefully argued that the banks will never be able to match the MFIs in their ability to serve the poor, largely due to the cost of the average bank employees being 5.5 times that of the MFIs. This is of course apart the fact that the MFI employees have to start their day as early as 6.30am in most locations, something which bank employees who struggle to reach their bank branches by 10am would be hard pressed to match.

The pre-budget Economic Survey of the Government of India highlights the significant role that the MFIs have played and will need to play in the financial inclusion agenda. It goes so far as to suggest that the MFIs are well placed to offer basic banking services in a cost efficient manner, something which commercial banks would always struggle to do. It demonstrates a great deal of pragmatism and a grounded approach to dealing with the sector, which unfortunately has been missing from most of the other key players.
As we await the final regulations from the RBI, we sincerely hope that the regulator will ignore the ill-informed hype that has often threatened to drown out all else and they will pay heed to the voices of reason and fact. Such an approach alone will help to bring the sector back on rails.

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