While south India has been the bastion of MFIs, the north is still a tough terrain. But with the microfinance business coming to a standstill in Andhra Pradesh, their primary market, following the enactment of the MFI Act, the MFIs have begun focusing on northern states.
Major ones like Share, Asmitha and SKS Microfinance, based in Andhra Pradesh, have now turned their focus beyond AP. Share has added 1,08,900 new borrowers while Asmitha added 30,000 during Oct 2010 to Sept-2011 from non-AP states. In case of AP, this was nil. The recovery rate too is over 92 per cent in other states, while it has fallen below 10 per cent in AP in the last one year.
Yet the hit they took in their biggest market, AP, is too big to cover. But for AP, south still remains an attractive market for the MFIs.
Why South scores?
“South always had the social organisation, education, enough number of NGOs, which the northern states lacked,” says Ela R Bhatt, founder of Sewa, illustrating reasons for MFI concentration in the south.
Kudumbashree, a Kerala government initiative launched in 1998, has 3.7 million members and covers over 50 per cent of the households in the state. Similarly, Andhra Pradesh has over 100,000 SHGs with around 1 million members.
According to B Sambamurthy, former CMD of Corporation Bank, and Director, Institute for Development and Research in Banking Technology (IDRBT), "the ecosystem for microfinance was well in place in the south and MFIs fully leveraged it.”
The huge concentration of MFIs in the south can only be proved by the impact their business had when the AP government imposed the MFI Act. In just one year, the industry’s size shrunk by Rs 10,000 crore from Rs 30,000 crore in October 2010.
“MFI diluted the basic spirit of SHG. There were certain rigidities in SHG and MFIs exploited them. For instance, savings by members for a certain period is mandatory before they become eligible for borrowing. Secondly, bank lending was essentially for productive purposes and consumption loans are not encouraged. While SHGs focused on scope and purpose, MFIs' focus was on scale and profit,” explains Sambamurthy.
The growth in some cases was over 150 per cent in Andhra Pradesh. Bhatt says this kind of growth was not good. “We need to grow more horizontally rather than vertically. The challenge is to remain small and yet be a big force,” she says.
According to K Paul Thomas, founder managing director of Kerala-based ESAF Microcredit, southern states accord a lot of importance to training and education, so it's easy for MFIs here to form sangams. In states like Maharashtra, Madhya Pradesh, Chhattisgarh and Haryana, the SHG concept is still very nascent, primarily due to lack of training and education. Historically too, financial intermediaries were way ahead in the south and this headstart still remains the key differentiator.
“SHGs were inclusive in their approach and they are well developed in south. There are also well-entrenched local institutions like chit funds and pawn broking. Low literacy rates are another factor. Bank presence in north is thin when compared with south. Low level of women empowerment is also a contributory factor. NGOs have played a more active role in forming and mentoring groups in South and this made a huge difference,” says Sambamurthy.
When Cashpor Micro Credit, an MFI headquartered at Varanasi, commenced operations in Uttar Pradesh, it found it a daunting task to form joint liability groups. It took Cashpor six months to form the first 20 groups in Mirzapur. “The initial years were tough. We missed our first year business plan targets by a mile,” says David S Gibbons, chairman of Cashpor.
ESAF, which has a strong presence in Kerala and Chennai, also serves some highly remote areas in Jharkhand, Maharashtra, Haryana, and Chhattisgarh. “As processes and systems are already in place for established markets, two meetings would be enough to start a JLG, whereas in non-established markets sometimes even five meetings are not enough,” says Thomas pointing out the difficulties at large, in forming a JLG.
Bhatt though does not think forming JLGs fast should be a concern. “It’s good if it’s taking time to set up a JLG. These should take a year-and-a-half. That’s how you get to know the poor,” says Bhatt, who founded Sewa, an organisation of poor, self-employed women workers, in 1972. Impact
The impact of MFIs in south is a mixed story.
“The focus of many MFIs is on increasing shareholder value and attracting more capital rather than improving livelihood of the people. Of course, access to credit has been made easy. Initially, MFIs had made a dramatic impact on risk capital providers but the impact was short lived. It is not a sustainable story. Present business models are dead in the sense they neither can attract debt or risk capital nor improve livelihoods,” stresses Sambamurthy.
Gibbons adds that a poor needs to be given loan continuously for four to five times to enable her to come out of poverty. Though the MFIs do help in uplifting the poor, he believes that microfinance is not the way out of poverty for everybody. In Cashpor’s experience, only about 25 per cent of clients borrow continuously for at least five years.
However, it’s saving that is more fundamental than lending. “Because it is an asset and it is in your name - you get asset ownership, and it earns interest so there is asset generation - these are essential to fight poverty,” points out Bhatt.
“Success depends on how you run it. So long as you are considered providers, the gap remains. But if you partner in risk sharing, risk mitigating, it works,” she says, adding who benefits is also very important. “If you are making profit, see who gets the dividend.”
For now, the only hope for MFIs to get back to business is the MFI Bill, which may come up in the winter session of Parliament.