2010-02-11

Microfinance

Between 2003 and 2005, I was actively involved in Microfinance business - as a lender to MFIs. In fact, had put up the first loan from our bank. Since lending does involve getting to understand the industry, the borrowers, credit and later post-disbursal monitoring, I got a good idea about how the MFIs and the grameen model, particularly in India, operate. Had the opportunity to interact with officials from Women's World Banking and many other such institutions. And finally, was in the same room as Prof Yunus for over an hour and asked him questions about sustainability of Indian MFI model as most of the MFIs were (still are) promoter driven.

I was indeed convinced that Microfinance can change lives. Credit indeed was an important aspect of poverty management. Many of the loans were going to consumption. For slightly well-off from the poor (sorry, for the oxymoron), credit was required to increase their business. Market linkages then became important - what they produced had to get them a good price. Everyone and his uncle got interested to invest in the industry. Much capital flew in. Good people seemed to be getting into the industry. It was looking to get professional. Things looked like they were going well.

Recent reports from Centre for global development and the Boston Globe (link courtesy  the Undercover Economist) cast doubt that Microfinance does not help fight poverty and that defaults have gone up at the Grameen Bank. Not sure if these reports reflect the current position.

But am competent, based on my experience, to make a few observations, at least relevant to Indian market-

1. Over-lending is rampant. Many of the borrowers are over leveraged. They borrow to refinance existing loans. One incident in life - like illness or the death of the principal bread winner of a family - and a family can slide all the way back to BPL.
2. While interest rates were not as high as charged by the money-lender, they were in some instances as high as 50 % per annum. MFIs have very high operating costs. Their capital is risk capital. They need to charge such interests to sustain. Difficult for the poor to sustain paying such interest rates over longer periods.
3. There is some amount of siphoning off of money - by the promoters of MFIs - in the entire process.
4. There is political interference
5. Guess, the borrowers have now understood the system very well. They know where the links are weakest.
6. There is too much of currency handling in the process. Getting difficult to find people who will not get tempted to run away with the cash.
7. Market linkages are yet weak. The poor are not getting their price. MFIs cannot spend too much of money on this as it will erode their already smallish margins.
8. NGOs in India, good number of them, are fraudulent (this looks like a generalization, but that's the feeling I got after I saw some of them). While they ought to be working on the market linkages and suchlike, nothing much seem to be happening.
9. India does not have a robust and enabling regulatory framework for the industry.

There must be as many positive things happening in the industry, but the key stakeholders ought to watch out. If it gets proved that the poor are indeed not getting better off and if the defaults start going up - either of them is going to bad for everyone.

I wish all such reports are wrong and things are going very well.Amen!

4 comments:

Harikesh said...

Very true observations. Especially on the cost to customer. Have been working on deaks in thsi sector and noticed that only a few players focuss on operating costs and bring down cost to customer. Becasue the pricing gap against the next best option is so vast any inefficiency in the system can be passed on as a cost increase to the customer

itheabsolute said...

Hari
incentives - wrong ones - are driving many things in this industry.
good luck for your deals.
thanks.

Azhar Nadeem said...

Poverty Rising. What Does this tell

itheabsolute said...

Azhar
Do not think poverty is rising. But it is not going down as soon as it should. Microfinance is not doing as good as it can. Can't take away credit from Microfinance too, without really getting all the details.
Thanks for dropping by and your comments
Cheers

2010-02-11

Microfinance

Between 2003 and 2005, I was actively involved in Microfinance business - as a lender to MFIs. In fact, had put up the first loan from our bank. Since lending does involve getting to understand the industry, the borrowers, credit and later post-disbursal monitoring, I got a good idea about how the MFIs and the grameen model, particularly in India, operate. Had the opportunity to interact with officials from Women's World Banking and many other such institutions. And finally, was in the same room as Prof Yunus for over an hour and asked him questions about sustainability of Indian MFI model as most of the MFIs were (still are) promoter driven.

I was indeed convinced that Microfinance can change lives. Credit indeed was an important aspect of poverty management. Many of the loans were going to consumption. For slightly well-off from the poor (sorry, for the oxymoron), credit was required to increase their business. Market linkages then became important - what they produced had to get them a good price. Everyone and his uncle got interested to invest in the industry. Much capital flew in. Good people seemed to be getting into the industry. It was looking to get professional. Things looked like they were going well.

Recent reports from Centre for global development and the Boston Globe (link courtesy  the Undercover Economist) cast doubt that Microfinance does not help fight poverty and that defaults have gone up at the Grameen Bank. Not sure if these reports reflect the current position.

But am competent, based on my experience, to make a few observations, at least relevant to Indian market-

1. Over-lending is rampant. Many of the borrowers are over leveraged. They borrow to refinance existing loans. One incident in life - like illness or the death of the principal bread winner of a family - and a family can slide all the way back to BPL.
2. While interest rates were not as high as charged by the money-lender, they were in some instances as high as 50 % per annum. MFIs have very high operating costs. Their capital is risk capital. They need to charge such interests to sustain. Difficult for the poor to sustain paying such interest rates over longer periods.
3. There is some amount of siphoning off of money - by the promoters of MFIs - in the entire process.
4. There is political interference
5. Guess, the borrowers have now understood the system very well. They know where the links are weakest.
6. There is too much of currency handling in the process. Getting difficult to find people who will not get tempted to run away with the cash.
7. Market linkages are yet weak. The poor are not getting their price. MFIs cannot spend too much of money on this as it will erode their already smallish margins.
8. NGOs in India, good number of them, are fraudulent (this looks like a generalization, but that's the feeling I got after I saw some of them). While they ought to be working on the market linkages and suchlike, nothing much seem to be happening.
9. India does not have a robust and enabling regulatory framework for the industry.

There must be as many positive things happening in the industry, but the key stakeholders ought to watch out. If it gets proved that the poor are indeed not getting better off and if the defaults start going up - either of them is going to bad for everyone.

I wish all such reports are wrong and things are going very well.Amen!

4 comments:

Harikesh said...

Very true observations. Especially on the cost to customer. Have been working on deaks in thsi sector and noticed that only a few players focuss on operating costs and bring down cost to customer. Becasue the pricing gap against the next best option is so vast any inefficiency in the system can be passed on as a cost increase to the customer

itheabsolute said...

Hari
incentives - wrong ones - are driving many things in this industry.
good luck for your deals.
thanks.

Azhar Nadeem said...

Poverty Rising. What Does this tell

itheabsolute said...

Azhar
Do not think poverty is rising. But it is not going down as soon as it should. Microfinance is not doing as good as it can. Can't take away credit from Microfinance too, without really getting all the details.
Thanks for dropping by and your comments
Cheers