Why microfinance is an ugly word in India's villages
It is now becoming a potential site of an emerging repayment crisis.
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Vidarbha, the cotton bowl of India - which has been periodically witnessing the spectre of suicide with farmers plagued by unmanageable debts taking their lives - is now back in news for almost similar reasons. This time, in the centre of the storm are microfinance institutions. Borrowers in four districts - Nagpur, Amravati Yavatmal and Wardha - have started defaulting on their loans, egged on by politicians.
The elections in 164 municipal councils across 25 districts of Maharashtra in November 2016 were liberally used by politicians to promise loan waivers.
Several rallies are being organised, mostly by women, and representations are being submitted to district collectors against microfinance institutions (MFIs) alleging coercive recovery practices. Agents are drafting representations for individual borrowers for submission to district administration for the waiver of their loans, making an income of Rs 200 for each representation.
The issue started after the RBI's revised instructions for MFI on classification of NPAs following demonetisation. The RBI has relaxed the income recognition norms by 60 days. A loan turns bad when a borrower does not pay for 90 days, but the RBI has extended this period to 150 days for loans to be repaid in November and December.Demonetisation has been a setback for the microfinance industry, which was in a revival trajectory. Credit: Reuters
In fact, this circular was meant for MFIs to enable them to manage their portfolios which were being affected by temporary defaults on account of the currency crisis. But political leaders issued statements saying that RBI had given a repayment holiday and finally rumours started circulating that loans were being waived by the government. Pamphlets, circulars and the portrayal of MFIs in negative colour by the local media compounded problems for MFIs.
However, the two self regulating bodies in microfinance sector, MFIN and Sa-Dhan undertook an intensive awareness building drive and lobbied strongly with the State officials at Mumbai as also with the concerned district administration. The government came with a sobering response. The district administrations publicly clarified that these were private loans and could not be waived. The political activists who had instigated the borrower also cooled down.
MFIN is an association of MFIs operating as non-banking financial companies (NBFCs). Sa-Dhan has members across the NBFC-MFI category as well trusts, so-called section 25 companies that plough back any profits they make back into the business, and not-for-profit organisations. Maharashtra leads the list of states with the highest number of microfinance institutions at 36, followed by Madhya Pradesh at 28, Uttar Pradesh at 20 and Kerala at 10.
These states accounted for one-third of the Rs 60,165 crore micro loan portfolio at the end of June. The MFIs had disbursed Rs 2,024 crores during April-June in Maharashtra which is 11 per cent of total of the total disbursements of the sector during that period.
Demonetisation has been a setback for the microfinance industry, which was in a revival trajectory. After years of subdued growth, the Indian microfinance (MFI) industry expanded more than 60 per cent to Rs 54,329 crore in 2015-16 compared to the previous year, according to a report prepared by Sa-Dhan, the self regulatory organisation of MFIs.
The MFI client base expanded by 2.8 million in the year, taking the total number of clients to 39.9 million, said the report. This growth was despite the fact that Bandhan, which was the largest MFI, moved out of the space to become a full-fledged bank.
But observers acknowledge that, demonetisation aside, not everything is well with the sector. Microfinance is now becoming a potential site of an emerging repayment crisis. It has much to do with the broader issue of excessive credit and over-indebtedness.
Ranjana Shelke, who has been heading Navvidya Bahudhesiya Sanstha - an NGO that works with several banks and MFIs as a local business partner in Pusad tehsil in Yavatmal district - feels that over-indebtedness is on a sharp rise, and foresees impending problems in the future. "Loans have been given to people without checking whether they had the capacity to repay," say observers.
If you visit villages in Pandharkawda, the epicentre of the agrarian crisis, you will find that an average borrower has four loans: two microfinance loans, one bank loan and one loan from housing companies.
In several cases, 60 per cent of the fragile, uncertain income is spent by borrowers to pay off loans. In the quest to meet their growth targets, loan officers often sell loans to clients already indebted to other organisations. And in the regions where there is more than one microlender competing for clients, observers are concerned that the poor are being encouraged to take on more debt than they can bear.
A study on indebtedness in microfinance by Institute for Financial Management and Research (IFMR) a not for profit research organisation, has found that 23 per cent of the MFI clients in its sample were over indebted.
The study also found that the drivers of over-indebtedness include low of unstable income, multiple borrowings, high-loan sizes, poverty levels, use of loans and cross borrowings.
Dr Alok Misra, author or the Responsible Finance India report has, however, said: "The analysis of data suggested that the problem of over indebtedness is not universal but was concentrated in certain pockets."
Both these reports were presented at the Inclusive Finance Summit held in New Delhi last week.
There are two credit bureaus now, Equifax Credit Information Services Pvt Ltd and CRIF High Mark Credit Information Services Pvt Ltd, to check the credit worthiness of clients and arrest multiple lending. They check more than 100 million loan records.
But the credit bureaus have not been able to plug the malaise of multiple lending. Under the present RBI dispensation, individuals are entitled for loans from two MFIs. However, the borrowers use different IDs for each MFI and are able to beat the system. The identity documents recognise by credit bureaus are, voter ID, Aadhaar card and PAN card.
Another serous deficiency is that these microfinance clients also avail individual loans as well as group loans from banks who report their credit data to CIBIL, which works as a credit bureau for banks.
Microfinance clients are drawn from Joint Liability Groups (JLGs) or Self Help Groups (SHGs). JLGs are purely credit groups comprising usually five members who cross-guarantee each other's loans. Self Help Groups (SHGs) are savings and credit groups consisting of 10-20 members whose primary objective is promotion of savings. MFIs use the JLG route whereas SHGs are financed by banks and the cooperative sector, cooperative banks, cooperative societies et al.
Thus, MFIs are not in a position to get a correct assessment of the entire loan obligations of an individual borrower. The assessment of indebtedness for a microfinance borrower is incomplete without the evaluation of the borrower's exposure to individual and SHG loans.
In association with PlaNet Finance (now Positive Planet), Sa-Dhan has rolled out a project on building an Inclusive Credit Information Bureau (ICIB) that aims at capturing data sets of individual level SHG members. The project aims at building credit history and strengthening creditworthiness of the clients, reduction in NPAs and building transparency in the system. One of the positive outcomes of the project was that RBI came out with its notification on including SHG data on credit bureaus in two phases.
The RBI has advised all banks to capture and share borrower level data for SHG loans, this data has just started flowing into the credit bureau database. CRIF High Mark already provides information to lenders about indebtedness of borrower on JLG loans and Individual loans. CRIF High Mark is working with many smaller cooperative banks and NBFCs also to include their entire data into the bureau database; this will help in getting a more accurate picture of the borrowers' indebtedness.
The new initiative to have comprehensive credit data would further help in screening borrowers and reducing multiple lending. While all these initiatives are laudatory, MFIs need to pause and get back to some of the basic lessons that loan officers and collecting agents may have overlooked in pursuit of ambitious targets.
Several MFIs endorse smart microfinance being espoused by the Smart Campaign, but it is important that it is practised on the ground. What is smart microfinance? Microfinance industry leaders from around the world came together in 2008 to launch a campaign to establish the Client Protection Principles. These principles are: appropriate product design and delivery, prevention of over-indebtedness, transparency, responsible pricing, fair and respectful treatment of clients, privacy of client data, mechanisms for complaint resolution.
To put the principles into action, the Smart Campaign was launched in October 2009. Today, it is a global effort with over 4,000 signatories, a wealth of tools and resources, and an ambitious action agenda. One of the campaign's fundamental mantras is: "Protecting clients is not only the right thing to do; it's the smart thing to do."
The principles of smart microfinance are globally recognised as the basis of safe microfinance. They build strong, lasting relationships with clients, increase client retention, and reduce financial risk. When they deliver transparent, respectful, and prudent financial services, financial institutions ensure that their clients use financial services well and build a foundation for healthy operation for years to come.
Let us get back to our fundamentals once again.