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| Keep microfinance healthy | | Why not banking licences for the best? |
| Business Standard / New Delhi Aug 04, 2010, 00:22 IST |
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The initial public offer (IPO) by SKS Microfinance has catapulted the sector into the limelight, bringing lending very small amounts to very poor people right into the financial mainstream. This is a matter for rejoicing. If hardnosed risk capital can support such lending, then a major weapon will have been found to fight poverty. But Muhammad Yunus, father of microfinance, is not happy. His concern is that when you go for an IPO “you are promising your investors that there is a lot of money to be made and that is a wrong message”. His sense is that “poor people should not be shown as an opportunity to make money out of”. He would have been happy if investors were told upfront that this was a social business from which they should not expect any returns. On the other hand, SKS founder Vikram Akula has emphasised that it is the prospects of high and assured returns which will bring funding to the sector whose needs are gigantic.
There is everything to be said in favour of professionally run microfinance organisations proudly declaring that they are a viable business and emphasising that if you get your processes and skills right, lending to the very poor is, in fact, safer than commercial lending. But some of the current practices of target-oriented, hard-driving, corporate-type microfinance organisations have also given rise to a few unhealthy trends. Multiple lending (a borrower taking loans from more than one organisation) is rampant and the practice of securing group guarantees from borrowers ensures high recoveries but also introduces an element of peer pressure and harassment of potential defaulters. This leads to taking one loan to pay off another. So, in a sense, a bubble may be growing; annual growth rates of near 100 per cent, hardly sustainable, indicate so. Microfinance organisations charge upwards of 24 per cent interest. With growth, costs should come down and borrowers should benefit, but can you do that while chasing high quarterly returns? The more professional microfinance organisations have formed an association which has sought to self-regulate the sector by seeking to curb multiple lending and bringing transparency in lending rates, but its success will be known only with time.
Since high investor returns are justified on the need to secure continuous funding, and since microfinance has been found to be viable, attention should really turn to making available cheaper funds to the better run institutions so that they can keep up the good work without having to maximise profit always. This is important because the very poor are more vulnerable to shocks than other sections of society, and for them to have to clock a steady repayment rate of 98 per cent plus may not be realistic. One solution is to issue banking licences to the best run institutions so that they can access cheap funds. As RBI has promised a discussion paper on the issuing of new bank licences, the case for microfinance institutions to be included should be examined by the paper. After all, they are safer (have higher rates of repayment) than regular banks.
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