Global IssuesDEVELOPMENT: The Last Mile Credit Service Stays, But With Clamps
'For the loans that we had taken seven to ten years back from microfinance institutions (MFIs), not us, but they MFIs must refund us half the loan amount, because they have taken repayment two times over with interest, that too', says 32-year-old Vijaya Kasipati, who lives in the village of Lachapet in Southern Indian State of Andhra Pradesh.
'While offering a loan, MFIs often quote a '10 to 12 percent ‘flat’ rate of interest, which, on the face of it, appears like a good deal. However, there is a catch. This 'flat' rate of interest means that it will not be calculated on reducing balance. It implies that even after the borrower has paid a few installments, the interest would still be calculated on the initial sum borrowed, and not on the balance loan amount. The result is a hidden final rate of interest of around 36 percent , explains Jamuna Paruchuri Director for advocacy at Andhra Pradesh government’s Society for Elimination of Rural Poverty (SERP).
What began as a ‘last mile’ model of providing credit service for the poor women who were excluded from mainstream banks, microcredit industry in India is battling for survival amid a political and governmental backlash, dwindling cash flows and high default rates.
'The SHG women are not repaying. They say the MFIs had taken repayment many times over by cheating them,' says Paruchuri, who after the 2010 xxx in Andhra prades tasked with finding out from rural women in Self Help Groups (SHGs) about their experience with MFIs. SERP works with 1,11,02,494 women in 9,94,595 SHGs in 22 districts of Andhra Pradesh.
Elaborating on what she learnt from the SHG women about the modus operandi of MFIs, Paruchuri adds that all loans are on weekly repayment basis with a 52 week time schedule. By the twenty-fifth week when the borrowers repay half the loan with interest, the MFIs convince them to take a second loan — which is the very same repaid amount. As a result the borrowers go on repaying interest on the initial total sum borrowed and this second loan, many times ending up paying up to 72 percent interest.
'As the last mile, door-step credit provider, in rural outbacks where banks do not want to operate, we are irreplaceable', says Muhamud Amin, chief of Adhikar, an eastern India Orissa State head-quartered NGO which launched its microcredit arm in 2004. 'The long-winded procedures that banks follow to sanction loans deters the poor and uneducated from approaching them', he adds.
'In Orissa’s Malkangiri province where naxal activities dominate large tracts, we began lending in 2008; Bangladesh immigrants did well with petty businesses with our loans. Today they want us back.' says Amin. ' In neglected provinces like Malkangiri where poor people had had access to micro-credit ten years back, discontentment and resultant naxal extremism would maybe have not have built up', says Gopal Biswal, a branch manager of Adhikar Microfinance.
Amin adds that that MFIs with a social background like Adhikar are not to blame for the current imbroglio as they hold only around 30 percent of microcredit portfolio while for-profits hold the much larger proportion and are pressurized for higher profits by investor shareholders.
On the other hand in Orissa coastal province Nayagarh where borrowers are better educated and informed, Adhikar faced massive defaults after October 2010. 'There was over-lending with eight MFIs dumping their loans on the same poor groups, sometimes four loans made out in the name of four family members but repaid by one earning member. Defaults aside, borrowers also held back repayments on rumours that the Reserve Bank ordinance would waive all MFI loans', says Amin.
Amin says the future prospects for MFIs however looks positive.
Paul Thomas, founder and managing director of Kerala’s Thrissur-based Evangelical Social Action Forum (ESAF) Microfinance which operates in six Indian States, says already public sector banks are relenting from their post-October 2010 refusal to even process sanctioned loans. Since April to September 2011, six top government and private banks have collectively sanctioned 65 crore rupees to ESAF MF (State Bank of India, Punjab National Bank, Central Bank, Industrial Development Bank of India, DCB and private bank ICICI )
Both Paul Thomas and Amin says that though MFIs with a social background like theirs, hold only around 30 percent of microcredit portfolio while for-profits, some with private equity player as partners, hold the larger proportion and brought about this situation, 'yet we too have learnt lessons from this sectoral shake-up', they say.
Thomas says Microfinance Institutions Network (MFIN) with 45 members and SADHAN with 230 members instituted, late 2010, self regulatory unified codes of conduct. Not only will members have to adopt the code formally and train staff in proper handling of poor clients, State-level member groups will check compliance.
With MFIs hand tied without funds, the poor people are now back in the strangle-hold of money lenders and petty politicians, who vilified MFIs last year because they helped the poor escape their clutches.'
Activists say some of the steps that can be introduced to salvage the MFI sector and make it successful- is ban multiple lending, bring about greater transparency, slash interest rates and monitor the end-use of loans. Monthly instead of the weekly loan scheduled are advocated by some.
'The final regulations must take cognizance of the extraordinarily high cost of doing microfinance in the door-step weekly repayment model. If the margin is too thin, MFIs cannot innovate on models to address diverse requirements of poorest of poor groups', says Amin.
As an example of this diversification, ESAF has recently moved into pension schemes and health insurance for the poor in tie-ups with government organizations.
'Uptill now 90 percent of the loans given to the poor were to help their business or livelihood. We need to increase the 10 percent who availed loans to build toilets, send their children to school,' says Amin. 'Even those given loan to buy cattle were asked to repay from the very next week when income could only come in months later,' he introspects.
Paruchuri however insists, 'poor women do not need the MFIs'. She says the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Ordinance, 2010 and the Andhra Pradesh Microfinance Reulation Act 2011 that followed were brought in to protect borrowers like Savitri Edulu from avaricious MFIs who would continue their profiteering if allowed.
Forty-years-old Savitri Edulu who used to rolls traditional cigarettes, for a living in Lachapet village of Medak district. An agent asked her to sign papers and offered her 25 dollars as commission. Savitri signed lured by the easy money, not knowing that the agent went and borrowed loans worth 2,500 dollars from five different lenders in her name. When confronted, the agent shrugged off all responsibility retorting instead that Savitri could go 'sell her body till such time the loans were repaid'.
'It would be a shame is The New Microfinance Institutions Bill 2011 is passed in the Parliament without major changes', says Paruchuri.
© Inter Press Service (2011) — All Rights ReservedOriginal source: Inter Press Service