Thursday, July 8, 2010


MFIs is exactly practicing the converse of their objective

Micro finance has been one of the most revolutionary economic concepts of our generation. The beauty of the concept is in its simplicity and the far reaching impact that it has already created in the lives of poor! And no amount of appreciation is enough for what people like Mohammed Yunus has given to this mankind!!

As far as India is concerned, with so much of poverty around, India has always been such a potential market. So much so that despite 30 years of aiding tens of thousands of destitute; the market seems to be ever growing. In India, micro-finance is currently serving 86.2 million people and its portfolio has reached a staggering Rs 351 billion. MFIs have successfully covered over 70 per cent of the 331 of the poorest districts of India. Such is the appetite that till date most of the established MFIs have remained regional players and none of them could evolve as a national player. Not that the potential within the region is high on account of just poverty, even MFIs have bundled lot of products and services along with financing options, which has further deepened the markets. Starting from mobile phones, to insurance products to consumer durables, MFIs are selling everything under the sun and bundling them with flexible repayment options!

No doubt, MFIs are on a roll which is also evident from the fact that investments are flowing in from all corners because of attractive returns. But then this also raises couple of concerns. First being that of increasing consumerism within the poor households. If the entire objective of micro-finance was to enhance income opportunities, it is getting increasingly sidelined. The consumer durable loans are not only drifting away poor consumers from investing their income in expansion of business, and securing their future income but also is encouraging consumerism, especially when it is imperative to invest more on health and education! The loans on consumer durables are just not increasing unwarranted consumerism but at the same time, it is also encouraging defaulter rate. And this is happening more so because the prevailing interest rates charged by the MFIs, which is another concern! Th e reports in the Micro-Banking Bulletin 2006 reveal that MFIs are charging interest rates that ranges around 30 per cent per annum. Yunus, the chief craft sman of the concept, in his latest book - Creating a World without Poverty: Social Business and The Future of Capitalism – has raised a similar concern and has written that “…microfinance institutions that charge more than 15 per cent above their longterm operating costs should face penalties...” No wonder the high interest rate is increasing defaulter rate. It is still not evident in India, and even if it is, it is still not reported, but MFIs in Nicaragua, Morocco and Pakistan are already struggling with defaulter levels that are more than 10 per cent. The defaulter rates used to be close to ZERO in most of the cases during the early years of operations.

Micro-finance was a great recourse for the poor who are not credit worthy enough to reach out to banks and are left to the mercy of the private money lenders! And as far as private money lenders are concerned the least said the better. But then the recent developments, which are more bottom-line focused is eroding the very essence of the MFIs. With more than 600 million people living on less than $1.50 a day, the market is large. It is so unfortunate to see them digressing from their objective! Rather than focussing on economies of scope, the MFIs should focus on scale, first!! Once the scale is established, scope is imminent!!


1 comment:

  1. A fine article Mr.Mazumdar.

    MFIs have been in the line of fire for a variety of reasons.Apart from promoting consumerism, which is inevitable with rising incomes, there are other concerns like common customers for most MFIs (which indirectly makes them more vulnerable to defaults).

    The recent decision of Govt. regarding regulation of MFIs by NABARD is also a retrograde step.