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Microfinance: A Fairy Tale Turns into a Nightmare
It was inevitable that the commercial model of microfinance in India, with its minimalist and standardised model of lending, would grow into a bubble and run into trouble. Many microfinance commercial organisations have entered the market in search of profits and are competing to lend to the poor. In the process they have put the "understanding" of the needs of the poor aside and have started chasing targets and numbers. For these institutions, the poor are not seen as human beings having individual identities and needs. Instead they are seen as data points that add up in their profit statements. The anxiety for growth is dictated by the fact that the investors in the market-based models are impatient and look for high returns - and then exit!
There is a new intensity in the discussion on microfinance – about multiple lending, interest rates and on whether a bubble is being built around lending to the poor. There is a heated debate about the interest rates of microfinance institutions (MFIs) and whether they could be termed usurious. There has also been a boardroom fracas at SKS M icrofinance – an event unrelated to the larger one about the delicate relationship between MFIs and their clients, but it is nevertheless hogging equal headline space in the press. The commercial section of the industry has reacted with the industry association – the Microfinance Institutions Network (MFIN) – coming out with a code of conduct. The State has indicated its displeasure about the level of i nterest rates and it has sent an advisory to the commercial banks. The Government of Andhra Pradesh, facing a lot of flak from the local press and the opposition parties, has promulgated an ordinance in order to “rein in” MFIs.
There is indeed a sense of déjà vu to the entire episode – of a crisis following heady success. The success had culminated in the oversubscription of the SKS Microfinance initial public offering, allotment of shares at the upper end of the indicative price band, listing of the scrip at a premium, and its continuous rise thereafter. As this was sinking into the minds of the players in the microfinance market – and with the next rung of institutions ready to harvest the gold rush – the same SKS Microfinance was in the news for all the wrong reasons.
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