8 Comments

1. December 17th, 2009 at 5:03 am, V.Rengarajan ()

   All said and done in the last three decades, on the various issues pertaining to irresponsible micro financing by MFI with ‘one size fits for all’ in their product design and recovery norms and its eventualities in poverty sector benefiting ultimately traditional money lenders more perceptibly in India- a belated realization, as a close observer in MF field I am provoked in all seriousness to raise a question “
   “Is MFI so indispensable institution for the given task in the context of presence of multi-agency approach in Indian rural financial landscape? Instead, why not we streamline the mainstream postal , banking and insurance institutions and traditional money lenders (socially inseparable entity) with an effective regulation, monitoring and supervision at the ground level and encourage NGO sector more as facilitators (certainly not as MFI ) for ensuring the needed both financial and non financial inputs for the vulnerable poor?

2. December 18th, 2009 at 6:21 am, ajit.grewal ()

   For Richard Rosenberg
   I think one has to look at money lending in its original form and the developments in money lending since the advent of microfinance.
   It is clear the poor have no acess to formal sources of finance. therefore there was/is in existence an informal source/s of finance.
   When there is a single source of finance (formal or informal) availabe, the lender is encouraged to charge what he considers an appropriate (and at times usurious) return. This return must take into account bad debts (which could be high).
   When the MFI steps in - at least in India there is a ROI benchmark of 25% put in and if one looks carefully possibly higher. This is not an inadequate return for the money lender who acknowledges the changing times. The money lender may also get higher returns in some cases, if the MFI do not (as is the case) cover the poorest of the poor. He does not necessarily have to exit the lending scene unless he obtains better returns in some other business and has the necessary acumen for the business.
   For Rangarajan
   The organized banking sector is not currently suited in meeting the needs of the poor on at least the following counts:
   They are too highly paid to conduct the MFI business (Grameen format),
   They will not be able to put in the hard work required to ensure the strong customer contact necessary
   They do not have the mental make up/desire to do such work
   I would argue the opposite - why does the government persist in providing low cost funding to the organized sector for microfinance purposes. The MFI can deal with this issue far better. With low cost financing one may actually be able to reduce the incentive for the moneylender to continue in business (save for the moneylenders unique ability to lend at any time).
   Ajit Grewal

3. December 18th, 2009 at 6:57 am, ajit.grewal ()

   For Richard Rosenberg
   I did not address the second part of the comment.
   I would agree that since the money lender is in some manner closest to the borrower (directly or indirectly) and he is the lender of last resort in the local environment, and because of his possible strong arm tactics he would be the first to get paid in a multiple lending/borrowing scenario going bad.
   The MFI getting together would reduce the game to a two person game <FI/moneylender) vs multiple person game, as also the uncertainties.
   Within the MFI it is a problem of incentives and their design (which encourages mindless lending) and so the process of MFI staff providing the MFI with wrong information. It is also the problem of the MFI trying to outgrow/outreach other MFI. Somewhat like greed but of a different kind.
   Since the MFI staff are usually linked to the borrowing community they have a very clear idea of the income and expense base of a family and their ability to service debt. Equally they have a very good idea of families indulging in multiple borrowing. It is just the manner in which a program of lending is implemented that is the problem.
   If the borrower had a free choice i am not so sure the money lender would get paid first. The borrower would balance group pressure (MFI) vs the money lender. The borrower would also evaluate the alternative of what would happen if one or the other was not repaid. It is in this situation that the policies of the MFI come into play. It is in this situation that Grameen probably introduced Grameen II. Under this process a defaulter was allowed to follow a different repayment path and encouraged to become up to date on payments in due course of time. Apart from which Bangladesh is prone to more than a fair share of natural disasters.
   Finally there is the issue of financial education of the populace. This is crucial to the degree to which the individual and group practice fiscal discipline. Tere will be aberrations and people/MFI will learn from the aberrations.
   This learning must contribute to the proper implementation of microfinance lending programs. Without this there will be a lack of understanding of the business and problems.
   Ajit Grewal

4. December 19th, 2009 at 11:35 am, Bhalchander Vishwanath ()

   The growth of money lenders is 56% over 11 years. The annual year on year growth comes to around 4% per annum. The GDP of India has roughly grown at around 8% annum. But number of money lenders added is only 4% per annum ( although growth in money lender portfolio in not clear).

   My understanding of the microcredit growth over those years is nearly 35 or 40% per annum. So overall it does not seem that too many new money lenders have come into the market.The relevant statistic is what is the growth of the portfolio of money lenders who cater to microfinance clients. That is unfortunately not available. Again the article mentions rural household debt and microfinance is just small portion of that.

   Overall the statistics presented by WSJ are pretty inconclusive and perhaps incomplete to draw any firm conclusions.

   Bhalchander

5. December 19th, 2009 at 11:58 am, Dr.S Santhanam, Consultant-Development Finance ()

   I would like to place two sets of analysis.
   Analysis 1:
   Expecting reduction in dependency of poor on moneylenders where MFIs have also got substantial number of their clients, is a mirage. Exploitation, High interest rate, cohercive methods are all relative terms which can be interpreted to the advantage of both the parties. For example, for an MFI, a money lender is an exploiter and for a commercial banker, the MFI is also an exploiter. Similar interpretations can be attributed for various such terms. If you ask a money lender, he will come out with justification for the interest rate being charged by him. It will be convincing too. So also an MFI and a banker. One reason for the growth of all is the ever increasing demand for cash by the poor be it for consumption, investment or any purposes. None of the three can or has schemes / resources to provide the entire credit needs of the poor. So long as this demand exists, all the three will have business opportunities increasing for all of them. In fact in the early 1960s, it was told that State Bank of India operated a loan facility for the money lenders called ‘Multani Loans’ wherein the the money lenders were financed against repledging the assets with the bank (something similar to financing book debts). But, this was withdrawn after certain policy changes.
   Analysis 2:
   In Indian context, banking history is replete with a number of examples of measures taken to remove the middlemen. Most popular ones are weavers /artisans cooperatives. Weavers / artisans Cooperatives were formed to remove the weavers and artisans from the clutches of Master Weavers/ Master Craftsmen who were considered as middle men. Policies supporting the movement came from RBI, NABARD, banks and governments. But, after 60 years, though these functional cooperatives are functioning (most of them in bad shape, not a single master weaver or master craftsman has gone out of business. Nowadays, these institutions have also stopped accusing the master weavers / master craftsmen as one of the reasons for the problem of weavers/ artisan cooperatives. In fact, they have started using the talents of master weavers and master craftsmen to make the lives of weavers and craftsmen better. In the real life situation, efforts to remove a middleman will be futile. In the financial market, he forms part of a particular business model which still has relevance. So long as this model has relevance, middleman also will have his business. So long as the middleman is not an evil to the scheme of things, he should not be shunned. One can try to by-pass him. But a new one is waiting to take his support. Let all of us live in harmony along with middlemen.

6. December 23rd, 2009 at 4:38 pm, uberVU - social comments ()

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7. December 23rd, 2009 at 9:50 pm, V.Rengarajan ()

   Thanks Ajit for your response. The points, put forward for declaring unsuitability of organized sector in meeting the needs of the poor, are debatable ones. Despite these facts which are not found uncommon in any development institutions, one cannot ignore the fact that Indian banking sector has been the pioneer in introducing many pro poor micro credit products ever since nationalization of banks in 1969 (even before MF concept surfaced) under their mandatory social lending programme called ‘Priority and . weaker sector programmes accounting 40% and 10% respectively of their total outstanding advances every year. The uniqueness of these micro credit products include formulation of potential based service area credit plans, its pro poor product diversification and norms ( loan size, ROI , repayment schedule with holiday period etc) , and linking with micro savings , micro insurance (crop insurance, livestock insurance etc., ), capability building (training) and marketing.( tie up with cooperative marketing organizations ) .
   The focus of designing diversified micro credit products is for enabling the poor for proper end use of the credit ,sustainable income generation easy repayment out of surplus and livelihood development at Poor HH level. However, I assert the need for effective implementation collectively and monitoring at the lower levels with given wide network of bank branches (CB,RRB, Co-op )and human resources in India. Currently NABARD’s SHG –bank linkage and JLG system for micro financing offer good scope for the organized sector. Where as MFI confines to only micro credit for commercial money lending business with the main focus on 100 % recovery (thanks to money lenders )and not much botheration on its impact on the welfare of the poor at clients’ level.
   In the context of multiple lending and multiple borrowing , poor HH economy has already been overheated with the enough credit and debt trap, and enough is enough. In Indian SHG microfinancing system recuring dropout syndrome causes serious conern.In the MF market, it is the time therefore,for focusing on provision of other MF products viz., micro saving , micro insurance and capacity building services either singly or jointly for the poor clients for their survival and protection from the perpetual debt trap.

8. January 25th, 2010 at 12:07 pm, Richard Rosenberg ()

   The first volume of Marguerite Robinson’s THE MICROFINANCE REVOLUTION has a useful survey of evidence about moneylenders. PORTFOLIOS OF THE POOR (Collins et al) reports some interesting findings about moneylenders based on hundreds of financial diaries in three countries.

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