Profiteering on the Rural Palate: The Microfinance Way

by Rajarshi Mitra

When Md. Yunus won the Nobel Peace prize in 2006, microfinance was a relatively new terminology in Indian public domain.

Today, within a span of four years it has become a part of a new corporate and business identity. SKS Microfinance Ltd. (a private limited microfinance company, as is evident from the name), made an Initial Public Offering of its shares in the open market; the IPO was hugely oversubscribed with allotment at the upper end of the indicative price band and the shares got listed with a huge premium. The performative logic of corporate world, and the celebratory vocabulary of rising (fast recovering) India would have considered the SKS fairytale a continuum of the success of Yunus’s Grameen Bank, had it not been for a press notice of the Andhra Pradesh Govt. stating its intent to rein in the unrestricted pasture of microfinance institutions.

In the meantime, the unrelenting rise in the share price of SKS has been undone by a corporate feud between the founder Vikram Akula, and the present CEO of SKS.

Microfinancing, as a concept however is as old as the shrenis, or guilds which operated in ancient India, advancing working loans to craftsmen working under the guilds. It operated on a communitarian concept. They were rich contributors of India’s cultural fashioning. Today’s microfinancing organisations try to bridge the gap between organised credit and unorganised labour. They advance loans to rural entrepreneurs who are too poor to qualify for traditional bank loans.

Perceiving the situational gap between organised credit and unorganised labour, the policymakers of our country tried to resolve the crisis through formation of NABARD, Grameen Banks (misleadingly similar in name to Dr. Yunus’s effort) partly financed by the respective state governments, and refinanced of course by the Union Govt through the RBI. Another laudable effort has been the idea of forming SHG’s (Self Help Groups), sometimes financed by the state governments, and sometimes by the Union government through variously named schemes like the Swaviman and Swabalamban.

The SHG’s could be thought of as relics of the ancient shrenis because of the communitarian nature of its operation; a closely bonded group of individuals/entrepreneurs with minimal capital of their own are advanced working credit depending on the merit of their enterprise by the local Grameen Banks. Perfected though experience and adjustments, and solely governed through the logic of its operationability, SHG’s could have been marvel of the Third world.

However, because of operational inefficiencies and the intrinsic time consuming nature of SHG’s (since each SHG is unique with unique business models and propositions requiring unique credit advancements) the whole turned out to be requiring huge gestation periods before the true empowerment came by.

It is here that the privately funded microfinance organisations, many of which were incidentally NGO’s and Non Profit Organisations earlier, chiped in, being lured by the business prospect of the model. Private capital automatically streamlined the process of credit advancement. This streamlining involved packaging the credit advancement into standardised products, depending on the cultural, geographical, and sometimes economical location of the recipient.

Nonetheless, what is less perceived and understood is that this process of packaging involved the corporate guru’s understanding of the cultural, geographical and economical ethos of India. Therefore even as generalisation and standardisation smoothened credit delivery, and therefore lent a streamlined operationability to MFI’s (Micro Financing Institutions) over a considerable geographical expanse, it made credit dictate the nature of entrepreneurship. This is retrograde logic; it is like posing a problem to suit its given answer.

Another, more evident and more dangerous side to market forces dictating the logic of microfinancing is credit recovery. Technically speaking, microfinance loans are termed ‘bad loans’ in banking parlance. Private microfinance institutions, in their zeal to cut NPA’s (Non Performing Assets) risk destabilising the structure of microfinance itself. One is indeed reminded of a by now famous (I assume!!) dialogue from the movie Avatar, “there is one thing the investors hate more than bad publicity, and that is bad quarterly results”; it is indeed the axiom of corporate logic. In the corporate logic of market economies of money dependency, inability to repay loans is inevitable understood as reluctance and disinclination, which is hardly the case every time.

Also because of the structural problems faced by a MFI to reach a rural clientele spread over a huge geographical arena, and the exorbitant cost of funds because of the risks involved, the rates of interest are invariably high, ranging between 21 and 28 per cent. Naturally, in an uneven struggle between corporate social responsibility and profitability, the later is unquestionably the governing principle of such an organisation.

The recent spate of farmer suicides in Andhra Pradesh brought the issue into highlight, setting the AP government into action in reining in the MFI’s, and the RBI into contemplating a cap/ceiling of rates.

In such a scenario, it is indeed hard to conjure an exonerative logic for MFI’s. The solution therefore lies in restructuring public credit delivery system especially when the situation has been engendered by the absentee and migratory nature of the ‘bird’ called NABARD. In more than 25 years of its existence it has only been characterised though absenteeism. Today, in ways more than one, it can take the challenge back to the MFI’s.

The Grameen Banks on the other hand seems more interested in lending to qualified investors and entrepreneurs in order to cut down their risky portfolios and gross NPA’s. (Indeed, I was perturbed to find the Sagar Grameen Bank, which operates mainly in south Bengal advance loans to fund the JNNURM buses, many of them belonging to CSTC and SBSTC!!)

There is a theoretical and operative divide between a pan India corporate and PSU bank, and a Grameen Bank which needs to be maintained. The logic of their existence needs to demarcated and understood; while the former are inextricably tied to market forces operating in a capital market, the later is intended to cater to the non-monetised and unorganised rural sector.

The SHG initiative could be revived, however time consuming it might be. Once the SHG’s as a ‘culture’ (understood essentially as a verb) attains self sustainability, their monetary gains could be utilised to set up local Cooperative banks, which could in turn finance future SHG initiatives in the locality. The SHG model therefore offers extreme spin offs in terms of possibilities.

The operations of NABARD could be remodelled after the MFI’s while preserving its core financial and cultural ethics. The reach of NABARD could be extended manifold by recruiting NABARD rural agents, (much like our para LIC agents) who would have a commission on the loans advanced.

The 2010 census and recent UID initiatives could be exploited to ‘locate’ non-monetised and unorganised labour which in turn could be trained by schools modelled after Krishi Vijnan Kendra’s (which have been training agricultural labourers and farmers in their craft for more than 40 years.) and financed either through NABARD, or Grameen Banks, or cooperative lending systems.

Infact, the recent recession provided us with the unique opportunity to monetise the non-monetised sector of Indian economy. Since the problem originated with organised banking sector operating under the forces of global capital market, the government could well have taken the opportunity to fashion out a unique insulation by pumping money into the non-monetised locales.

Cognition and recognition of a missed opportunity provides us with possibility of finding just other opportunities which are manifold considering the diversity of our economic geography. Opportunities are, and will be manifold. Only, we need to work on them.

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Rajarshi Mitra thinks rhetoric without responsibility can only lead him to scholastic obscurantism, and therefore keeps open ways which can turn the skeptic in him into a believer. He is also at Pantopticon