I am in India this week. The first purpose for coming was to present on my book at the Microfinance India Summit conference in New Delhi. The timing turned out to be extraordinary: after I made the plan to come, the largest crisis in the history of microcredit broke out in Andhra Pradesh. I have extended the trip to visit the state later this week.
As an outsider, I only half-understand the extraordinarily complex situation. I suppose it is analogous to the U.S. financial crisis in its byzantine nature. At one level, it might just be a bubble. But there are serious charges, which no one at the conference disputed, that some microfinance institutions (MFIs)---or their agents---have been harassing people for repayment, which specific allegations ranging from making women sit hours in the sun at weekly meetings until everyone has paid (which, realistically, is part of joint-liability lending ) to beatings and threats of rape. So it seems that the backlash is more than secondary, not just the thing that happened to prick a bubble. Meanwhile, the political counterattack is not merely precipitating out of a haze of popular indignation. It appears to have been planned and executed by people who are not only outraged by the behavior of MFIs as they perceive it, but want to defend an alternative way of bringing financial services to the poor, the self-help group (SHG). SHGs as group take loans from banks then divvy the credit among their members. Many are also platforms for other social services, such as delivery of fertilizer and training in farming techniques. MFIs are seen as picking off the best borrowers from SHGs and undermining their solidarity. There are also questions, and perhaps tensions, around whether state or national institutions should regulate MFIs. Intense political rivalries are at play too, such as between the Gandhi family faction of the Congress party and other factions. (Rahul Gandhi has been attacked for visiting Vikram Akula and SKS Microfinance some years ago; I think that just in the last few days he visited SHGs in Uttar Pradesh.) Meanwhile, the World Bank is a major financer of the self-help group program, but has also put money into MFIs through various channels.
Many of these actors are represented at the conference. What was most striking about the first day, yesterday, was the near unanimity that MFIs had done some wrong and that several may be walking dead now their loan officers are typically unable to even enter 50% of villages where they have loans. With the exception of one commenter in the audience after my presentation, who said that MFIs were not perfect but did not deserve such repudiation, almost no one defended for-profit MFIs with much passion:
- N. Srinivasan launched the Microfinance India: State of the Sector Report 2010 with sobering observations. Loan officers were not sticking to the code of conduct issued by the MFIN, the industry association. Center leaders---chosen from within the ranks of each "center" (a group of perhaps 8 5-member borrowing groups)---were emerging as power brokers in village economies. Ghost loans, a kind of fraud, were becoming a possibility. (It happened in Pakistan.) There were in Andhra Pradesh 9 clients of MFIs and SHGs for every 1 poor household, which suggests a combination of multiple borrowing by many households and borrowing by many that are not officially poor (which, it should be said, are yet poor by global standards).
- David Gibbons, who I believe was involved in the earliest replications of the Grameen model outside of Bangladesh, in the Philippines and Malaysia, and who founded India's largest non-profit MFI said that where once he had been proud to tell people he did microfinance---and happy to explain it---now “I feel embarrassed to be identified with the sector.” Citing Srinivasan's 9-to-1 figure, he described the up-market drift as massive, blamed it on the pursuit of profit, and wondered whether it even ought to be called microfinance any more.
- The Prime Minister's chief economic advisor, C Rangarajan, was damning in his faint praise: his vision for expanding financial access included self-help groups and banking correspondents, which are independent agents who cost effectively provide bank-based services to the masses, typically with an assist from communications technology.
- Vijay Mahajan, technically on stage to discuss my presentation, spoke firmly in his role as president of the microfinance industry association, MFIN, and father of commercial microfinance in India. Rather than defending the status quo ante, he spoke of the need to move beyond traditional microcredit, which in fact his own organization, BASIX, did long ago in response to a study showing that credit alone was helping some and hurting others. On a cue from the moderator, CGAP's Stephen Rasmussen, Mahajan spoke of his vision of what he called Microfinance 5.0. (Version 1 is moneylending; 2 is the co-ops introduced by the British a century ago; 3 is public, subsidized, targeted lending; and 4 is the financially sustainable approach embodied in microfinance.) Version 5 must adapt the best of each previous version---the flexibility of the moneylender, the "depth of outreach" (to the poorest) of the best public programs, the financial probity of microfinance. Perhaps it would come about with SHGs doubling as bank correspondents. That was as close as he came to defending the industry he represented, "the much-discredited recent microfinance model." That said, he did attack the attackers with passion. It was not realistic to call for 3% credit for all poor people without facing up to the massive subsidies that would require. The crisis-inducing Ordinance, which Greg Chen explained to me can stand for six months pending parliamentary approval, Mahajan described as a complete misuse of democratic process, a complete misuse of law and order, something that greatly concerned him as a citizen. With nary a vote, a state government had virtually felled several major bank-capitalized, nationally regulated institutions.
I left the conference for a while and caught a ride with Greg and Stephen of CGAP to the World Bank's compound. There I spoke with Parmesh Shah, a rural development specialist who is centrally involved in the Bank's support for SHGs. Naturally that role colors his perspective. But he told me something that sheds light on the charges of suicide that been leveled at MFIs. He told me about confidential research the Bank commissioned after smaller microcredit crises in Andhra Pradhesh about the causes of suicide. Apparently 300 cases were studied in depth. At least among debt-related suicides, the typical pattern was that the loan troubles would build up over years, as the people borrowed from whomever they could. Then, typically, some traumatic event would trigger the suicide---a public shaming by a creditor, a beating, a threat of rape. Thus when people end their lives they may owe only a small share of their debts to MFIs. Yet I can imagine that MFIs, because they insist on on-time repayment and because hypergrowth may have outrun the inculcation of appropriate procedures and norms, have been more prone than SHGs to provide these triggering events.
It really does make one pause, this combination of credit, the poor, and businesslike insistence on repayment. Change any one of those three and it become less scary: savings instead of credit, rich instead of poor, subsidy-induced flab in collection practices. If the three are to coexist, collection practices must be softened around the edges, lest they become a buzz saw, and credit levels must somehow be checked at moderate levels.