MFIs should not be judged by constitution of their formation- Vasudevan

Microfinance Focus, January 19, 2012: Microfinance Pioneer Prof. Muhammad Yunus has long been critical of the for-profit microfinance institutions. In a recent interview with Microfinance Focus, Prof. Yunus stated that commercial programmes should not be allowed to use the terms ‘microcredit’ or ‘microfinance’.

“On many occasions problems created by commercial credit programmes are imputed to microcredit programmes. This creates a bad image for the microcredit programmes”, he said.

In response to his remarks, P N Vasudevan, Promoter and Managing Director of Chennai based Equitas Micro Finance India, said that microfinance institutions should not be judged by the constitution of their formation but by what they do to their clients.

“And for every for-profit MFI which is known to be usurious in lending rates and greedy in profiteering, there are equal number of NGO-MFIs which are corrupt and carry out any number of mal-practices cheating their clients.  And so too, for every good and ethical NGO, there are equally good and honest NBFC-MFIs too”, Vasudevan said.

He further explains that difference in the operations of a not-for-profit and a for-profit MFI and how it impacts the end client.

Let us assume there are two MFIs, one an NGO and the other, a for-profit MFI.
Let us assume that the NGO-MFI which is a not-for-profit MFI lends to the poor at 35% p.a. It has weak controls and systems and hence there is high level of staff fraud. Clients are put to hardship because many times clients who have paid instalments are shown as overdue and they need to prove they have paid. Assuming the NGO-MFI does not have access to regular bank loans, it is unable to meet its committed dates for loan disbursal, putting clients to further hardship.  Since it does not have too much managerial bandwidth, it does not carry out any significant social activities.

Let us assume that a for-profit MFI lends to the poor in the same district at 25% p.a.  Further due to its outstanding controls and technology and systems, it is able to ensure high level of discipline in client servicing and staff frauds are almost unheard of, leading to peace of mind for clients. Due to its strong management and high governance, it is able to access bank loans and able to meet clients' needs for loan disbursement on committed dates.

“Surely the second one which is a for-profit MFI seems to stand out clearly as the better option from the client’s perspective”, he said.  However going by Prof Yunus’ view point, the second MFI should be regarded as a loan shark where as the first NGO MFI, should be feted.  Is this appropriate?

Highlighting the internal caps laid down by Equitas, Vasudevan said, “We have had internal lending rate caps in place right from our inception in 2007.  Thus, our lending rates have always been hovering between 25.5% to 27.5% through the last four years as against the latest RBI cap of 26% laid down recently”.

Equitas targets a RoE of about 20% but is the only MFI in the world to have  a cap on RoE at 25%.  Thus if the RoE ever looks like increasing beyond this level, Equitas has to necessarily reduce it lending rate to remain within this cap.

It has a cap on managerial pay at 40 times the lowest field staff salary, which is in line with the best and most prudent global benchmarks, he claimed.  This again is unique in the world of MFIs.

Equitas offers insurance to its clients for protecting life, property or our portfolio.  However as a policy it does not make money on selling insurance and the commission and get the insurance company to pass it to clients through reduced premium.

“We have created arguably the world's best MFI model in terms of technology, systems and processes ensuring seamless and efficient service to clients and staff frauds are almost unheard of, leaving the clients at peace”, he said.

Moreover, Equitas undertakes a variety of social programmes including primary health camps which have benefitted over 700,000 people so far and skill development training programme which has imparted training to over 225,000 people.

It is running 50 tuition centres which offer after school education support to children of its members. It is also running 4 schools giving holistic education as a game changer to children of our clients and similar background children etc.

Equitas spends about 11% of its profits on these social activities besides earmarking 15% of its net worth for the creation of school infrastructures.
“So, are we to be regarded as a fine example of an MFI which is focussed on giving genuine service to its clients or are we to be regarded as a 'loan shark' since we are a for-profit MFI by constitution”, questions Vasudevan.

“Yes, we are a for-profit MFI by our constitution, but we would be happy to stand up to be measured by anyone who desires to do so.  We can stand head to head with any MFI, whether for-profit or not-for-profit on any of our practices which are all built on strong focus on fairness and transparency and value systems”, he claimed.

His final request:  “Please classify MFIs as either Genuine or Fair MFIs or as rogue MFIs or loan sharks based not on their birth form but on what they actually do”.

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Compulsory Social Performance Measurement irrespective of form

Mr. Vasudevan has made a very valid point that it is not so much the form but what each organization delivers that should actually count. However, given the for-profit nature of business, it becomes always suspect as far as the intent and motive, however genuine.
Microfinance has always stressed on the twin objectives of social performance and economic performance. It is time that regulatory measures are brought into place to actual audit and measure social performance. Compliance to social performance audit should help in weeding out the wolves in sheep skin, irrespective of their "birth form". This will also allow funders and donors alike to measure how well their funds are being utilized in enhancing the life of their customers.


I agree with the comments.

Well said!

Names and forms are cheap. NGOs have had plenty of cases of fraud, including embezzlement by senior management. And what about countries that used to call themselves People's Democracies? Were they really run by the people? I understand Yunus' frustration, but he's directing it at the wrong target.

This is with ref. to Mr.

This is with ref. to Mr. Vasudevan's response to Yunus referred to above.While it may hold good in theory that an institution should be seen what it does to its clients. it also remains a fact especially in the case of MFIs (e.g. SKS Finance) that unless it is a member driven organization and equity coming mostly from the member clients, its loyalty remains with the promoters/equity providers and not necessarily with the poor clients who have no bargaining power.

hi Mr Agarwal, i understand

hi Mr Agarwal, i understand your frustration. however please understand mine also. you say for profit MFI's loyalties are with the promoters and equity owners rather than with the poor clients. can you make an emphatical statement that in all cases of NGO MFIs, the loyalty lies only with the poor clients and not with the persons who run the NGOs? can u say this is true for ALL NGOs?

My point is that neither can u say all NGOs are dyed in the wool stuff nor all for-profit MFIs are scoundrals. There are good people on both sides and bad people also on both sides. So why brand using the constitution? And what is the problem in accepting that our actions should be the determinant to decide about our 'goodness' rather than how we are born?


Well said sir!!!

Thanks a lot for responding to the comment of Prof. Yunus. Indian financial market is contextually different from that of Bangladesh. Though in principle we have borrowed few good points from Grameen we definitely have our own set of DNA which is not the replica of Grameen. Prof may be the father of microfinance but that does not ensure all that the father says is correct or deemed appropriate across the global microfinance scenario. I assume Prof. Yunus could have given some thoughtful remark.

We all know the quality assurance part of Equitas and the kind of effort it is putting in the field. I congratulate you sir!!! for all your endeavor and making difference in the lives and livelihood of people.

Amezing and truthful

Amezing and truthful information from PNV.I am sure none of the not-profit NGO's or MFI's giving this much of service to their clients.And also staff fraud is too high,hence its creats a bad opinion about all MFI&NGO'S in the society.

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