Fault lines of microfinance

The brief euphoria generated by the private MFIs withered away with the collapse of their doubtfully structured model. Its representative face in India, Vikram Akula’s high rise and bottom low with SKS microfinance initially leveraged the market’s attention towards this nascent industry and later made it synonymous with degenerated “business class”. Business wise, private MFIs like mutual funds have always underperformed its peer in financial sector and both were hyped up and then saturated, leading to the slide towards underperformance under the unquiet regulatory treatments.

The idea of microfinance was presented as altruistic, which was the fatal error. Had it started with the aim of optimising operational costs and its final lending rates to the end users, surely it would have never got the tag of “non performing heaven”! Broadly, the managements of MFIs have missed the business mission as direct lender to the petty customers and instead they got accustomed to play as unethical lending brokers to the severely needy customers. Hence, they have been and still playing a mean role between blood sucking moneylenders and organised financial institutions and surprisingly feeling not bad doing this.

They charge almost 20% more than banks and less than moneylenders. Question arises in present scenario; do MFIs need a major revamping or simply shut down? So far, their managements have failed to realise the essential evils, foremost among them is to acting in capacity of brokers on the money of banks instead sustaining in lending market with alternative cheap funds. As private equity players are never going to spend their shrewd pennies in Indian MFIs without inserting unviable conditions and MFIs can also no longer survive on the bank’s money, so chances are very thin that they would remain relevant to low scale financing. After Kingfisher Airways, it would hardly be a surprise if SBI will lose its many thousands crores of rupees as NPA on the MFIs ventures.

The bright performance of microfinance has only witnessed in inglorious Regional Rural Banks (RRBs), which truly acted as the financer of poor rural folks on very just lending rates set by the RBI. Despite that, they always remained ignored and never got the attention it deserved. With cooperative banks reduced to a tool of political patronage and commercial/private banks lukewarm in lending microfinance portfolios, RRBs are the institutions that stand out as a beacon of hope. For revamping microfinance in rural and semi-urban areas, integration of RRBs into a single fold would be a revolutionary step besides giving it the all service/operational benefits as like of Scheduled Commercial Banks.

RBI and finance ministry have to act fast to make Priority Sector Lendings completely stringent, and under this regulatory changes banks would be liable to lend atleast 1/3 of their genuine funds under the welfare measures. Prospects of microfinance would be boosted with it. Second regulatory change immediately required is to capping the MFIs lending rates on par with the banks and if they found business tepid there should be no looking back. In present scenario, RBI can’t and shouldn’t afford the luxury of artificially keeping the solvency of beleaguered MFIs alive, the best it can do to give them fair chance to run in the Indian market.

The efficient and organised microfinance could be channelised well through the existing public/private sector banks under the consistent regulatory monitoring of RBI. Private MFIs have to learn raising the seed capital for running a profit making business, and not only under the hippocratic guise of false idealism. Once they will learn to compete with banks, their business model would become credible. Unbanked sections are big opportunity and that must not be taken as granted…end of policy hassles would make microfinance a truly vibrant area under the institutional finances. India may be the nation of poors but it’s not poor itself, so chances are not yet dim for a better time ahead!

Atul Kumar Thakur
February 28, 2012, Tuesday, New Delhi
Email: summertickets@gmail.com