Keya Sarkar: Micro finance chalks out a path

OUT OF FOCUS

Over the last week all those working in the micro finance sector in India have been very concerned about developments in Andhra Pradesh. In fact, it would not be an exaggeration to say that three or four districts of Andhra account for 20 per cent of the micro loans disbursed in the country. So anything that happens in any of these districts is of greatest significance to the whole industry.

Across the country, a sudden spurt in interest in this industry has led to a surge in activities of micro finance institutions (MFIs). This, together with the fact that many private sector banks and foreign banks are now not only keen to fund the rural and urban poor but are setting for themselves very ambitious targets, is leading to increasing competition. Often unhealthy.

Public sector banks, however, regard MFIs in the same way they viewed mainstream NBFCs two decades ago""as those which will exploit the business opportunities that the banks themselves are failing to seize. They are therefore lobbying with the RBI and, worse, with political players to stem the rapid expansion of MFIs.

In Andhra the situation has been complicated by the fact that the state government, as part of its Vision 2020 policy, has initiated a World Bank-supported Rural Poverty Elimination Programme (named Velugu), being implemented by an independent organisation""the Society for Elimination of Rural Poverty""set up under the Societies Act.

While the aims of both Velugu as well as the MFIs coincide""which is eliminating poverty""the means differ. The former uses considerable donor funding to set up self-help groups, which are then financed by banks. The latter strives for sustainable financial viability and therefore has to create groups and administer the small loans at its own cost. There is, therefore, a considerable gap in the interest rates charged.

The vernacular media (some of it owned by those who are also large chit fund operators and therefore stand to lose if MFI activities increase) have played up how the MFIs are charging "usurious" interest rates, and indulging in "coercive" collection practices, "poaching" SHG members, and taking "illegal" collaterals. Some of these fears may well be true but the step taken seems alarming. Last week, the administrator of the Krishna district closed down over 50 branches of two MFIs""Spandana and Share Microfin""operating in that region.

Crisil, which had a rating "outstanding" on Share Microfin's fixed deposit programme, has reaffirmed its ratings. I quote a recent press release: "In the case of SML, CRISIL believes that the scale of the current developments is not significant enough to materially impact the business and financial profile of the company to merit a rating downgrade. The affected loan portfolio constitutes only about 5 per cent of SML's total loans outstanding as of February 28, 2005".

However, what is worrying both the affected organisations and other industry players is that such behaviour of bureaucrats, with the covert backing of politicians, might just send a message to borrowers to not repay. And that destroys a discipline which MFIs have built up over years.

What is happening in Andhra actually puts in focus what is ailing the micro finance industry in India. Since the industry is of recent origin, and the RBI and the ministry of finance have only recently turned its attention to the need for regulating this growing sector, there are bound to be cases of excesses. What is therefore of great importance is what can be done to ensure robust organisations which can stand up to any regulatory scrutiny.

In the wake of the current crisis, MFIs, which have a major presence in Andhra (SHARE, Spandana, SKS, BASIX, Aadarsha), MF associations (Sa-dhan, APMAS, FWWB), and banks and financial institutions ( Sidbi, Nabard, ICICI Bank, HDFC Bank, ABN Amro Bank), held a meeting in Hyderabad on March 20 to decide on crisis management responses. These would be:

1. Pro-actively establishing dialogue with authorities to understand their point of view on MFIs and to explain the MFIs' point of view;

2. Public audit covering both the models""SHG-bank linkage and MFI operations""by a credible organisation;

3. Adopting a code of conduct for MFIs to use the crisis as an opportunity to improve the practices in the sector;

4. Adoption of a code of conduct for banks/FIs: It was pointed out that part of the reason for the crisis was target pushing and credit concentration by banks and FIs to certain geographical areas and certain MFIs.

5. Media relations: It was decided that all MFIs and banks/FIs should interact with the media on their own to educate them about the facts of microfinance. The maligning of MFIs in the media, particularly in the language press, should be countered through meetings with editors and reporters.