Atonement: Indian Microfinance Looks Inward — My article in this week’s Sunday Guardian

I recently gave my two cents on the microfinance industry in India, with reference to Microfinance India: State of the Sector Report 2012 by Venugopalan Puhazhendhi and The Social Performance Report 2012 by Girija Srinivasan, released by ACCESS Development Services. The piece is the cover story for The Sunday Guardian to be published tomorrow:

Atonement: Indian Microfinance Looks Inward

“The good stories of ‘Doing Good and Doing Well’ of a model that was touted as a miraculous mechanism of reaching the poor, seemingly have started to dry out and are replaced by scathing details of wrongdoings by MFIs, client abuse, high profiteering, investor greed, manipulations within Board Rooms and are grabbing headlines.” Vipin Sharma of ACCESS Development Services sets the tone for Microfinance India: State of the Sector Report 2012, or the SOS, as it is often referred to with an element of poetic justice. The SOS, now in its seventh edition, is seen as a valuable reference document not only for practitioners and researchers in the field, but for informing and influencing policy as well.

The first few SOS Reports published had a radically different tale to narrate. In 2006, by the time Prof. Muhammad Yunus and Grameen Bank were jointly awarded the Nobel Peace Prize, microcredit was already touted to be the frontrunner in the race to eliminate global poverty. Yunus, who has been regarded as the Henry Ford of microfinance, built a bank with thousands of employees delivering useful services to millions of customers over the course of nearly 30 years, and in the process, inspired imitation beyond the borders of Bangladesh, especially the neighbouring India, now hailed as the world’s largest market for microfinance.

However, the Grameen model was based on microfinance institutions (MFIs) being domestically funded, self-sufficient institutions owned mostly by the very poor they serve, and while being a “business” in the sense of being financially sustainable, the Grameen Bank only sought to earn enough to fund its own expansion without relying on philanthropic means, and never aimed to release rich dividends to investors.

Outside the Bangladesh borders, the microfinance story developed rather differently, with its own mythology around the idea of being a silver bullet to “cure” poverty in a “profitable” manner, attracting not only public investors, but private ones seeking a “double bottom line” of socially responsible returns. Intermediaries including major investment banks like Citigroup and J.P. Morgan jumped in, finding investors and indulging in bonds, IPOs, ratings and such.

In India, absurd rates of growth were observed, and the achievements of this industry were exaggerated for want of good publicity. Many MFIs reported annual growth rates of more than 100% for 5-10 consecutive years, and this boom culminated in SKS microfinance, India’s largest MFI, growing to nearly a billion dollars and debuting at the Bombay Stock Exchange in 2010. This both excited and worried the industry at large, since a public company is first obliged to make profits for shareholders, and thus may lose sight of its original aim — reducing poverty. This is uniquely true for Indian microfinance because unlike its counterparts in Bangladesh and most of the world, Indian MFIs are not issued banking licenses, and thus cannot be sustained on deposits collected from the public.

In the same year, the sector was rudely awakened from its state of “complacent arrogance,” as SOS describes it, by the Andhra Pradesh government. The microfinance industry was being seen with an increasing amount of scepticism; reports of coercive tactics used for loan recovery began to surface, and were linked to apparent suicides as well. Some of these narratives may have been exaggerated, but most Indian microfinance success stories had been anecdotal in nature as well, and field studies based on randomised trials discredited the microcredit industry’s claims regarding poverty alleviation. The pressure on employees to maintain a 99%+ repayment rate did not add well to the mix.

As a couple of other large MFIs were planning for their own IPOs, something unthinkable happened in Andhra Pradesh, India’s biggest market for microcredit. In a populist move by politicians, the state government stepped in with an ordinance that took this sector by the neck, effectively allowing borrowers not to repay their loans, and curbing any further microlending. While the overheated AP turf could always have imploded by itself, the government shut down the industry overnight, bringing down repayments from 99% to 15-20%. Lending institutions started defaulting on their own loans from mainstream banks, and millions of poor borrowers who were accorded the status of “defaulters” by microfinance credit bureaus shall face unfavourable terms and possibly rejection when applying for loans in the future. A problem that needed to be treated with a scalpel was attacked with an axe.

The Andhra shakeup, tyrannical as it was, did lead to a churning effect in the sector. The past two years have seen the sector take a hard look within itself and attempt to restore some of the lost respect. This is reflected in the fact that the SOS only carried a single chapter on the mission of microfinance and social performance management (SPM) until last year. SOS 2011 was accompanied by a completely new publication from ACCESS, The Social Performance Report, which examined corrective measures by the microfinance industry in a post-AP-ordinance India, and attempted to bolster its public image.

Post-Andhra is a different world indeed, for MFIs as well as borrowers, who would have numbered beyond 100 million by now had the pre-Andhra momentum been sustained. While SOS 2011 was all about the crisis and its impact, the 2012 report talks about promising developments for the clients beyond lip service. Microfinance in India is finally moving beyond core microcredit and now provides a variety of products and services in new areas such as savings, healthcare and sanitation, microinsurance, and even housing, and financial literacy efforts are gaining ground as well.

The report also tries to make a strong link with the public policy environment in India and provides inputs for an in-depth understanding of the operational climate for microfinance and its relation with the government’s flagship schemes and efforts for poverty alleviation, hinting that the Reserve Bank of India may be considering microfinance as an integral part of its mechanisms for financial inclusion. Besides well-researched and well-analysed commentary on the industry, the report also reviews various research studies and writings by microfinance experts and stakeholders globally, most notably the Banana Skin Survey 2012. SOS also identifies existing knowledge gaps that require further research, statistical efforts, and empirical backing

The Social Performance Report (SPR) thus picks up on one of these gaps. While many Indian MFIs had publicly claimed having a double bottom line, they had never really been held accountable on an objective basis. SPR thus documents the sector’s rediscovered emphasis on social impact, client protection, and is an account of the cleansing effort by Indian microfinance to go back to its roots in eliminating poverty and empowerment of low-income clients.

The Report rejoices in announcing “Finally customers at the core,” and tries to justify this using impact data. MFIs have participated by painstakingly collecting and sharing client data, partly to defend investors and funders, and partly due to pressure from RBI. That said, only about 23% Indian MFIs registered with the Micro Finance Information Exchange (MIX) submitted the required data, possibly due to a lack of robust Management Information Systems. This data is fed into frameworks and tools which spit out indices and measures of social performance. For example, the Grameen Foundation’s Progress out of Poverty Index (PPI) uses ten non-financial indicators such as family size, the number of children attending school, the type of housing, and access to drinking water and serves as a baseline from which client movement out of poverty is measured.

Nevertheless, social metrics still remain poorly defined, and even if frameworks like PPI become ubiquitous and see vast improvements, the benchmarks still remain contentious. When a metric as simple as the Poverty Line has been defined by various groups with astronomically differing magnitudes, doing the same in the presence of profiteering opportunities and vested interests is a challenging exercise.

In any case, MFIs are finally moving beyond the business of finance to improving the quality of life and wellbeing for the poor. A prominent funder now refuses to support institutions where the CEO earns more than 20 times as much as a field officer. Discussions around SPM are leading to scrutiny of the social promise made by MFI founders and promoters in objective terms.

Both the reports point to the maturity of the sector, as evidenced by a scientific and rigorous approach replacing the hoopla of yesterday and an increased emphasis on accountability. Gaps in technology still need to be covered, and the sector will have to grapple with issues regarding balance in social responsibility and profit-making for a long time. Girija Srinivasan ends the Social Performance Report with a quote by the father of modern economics himself, reminding the sector of its roots at the confluence of business and social welfare.

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.

Adam Smith

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You can also read the story as the issue hits the stands tomorrow morning, or on The Sunday Guardian website at Atonement: Indian Microfinance Looks Inward.

Nobel Peace Prize Ceremony, Oslo, Dec 2006
Muhammad Yunus and Mosammat Taslima Begum with Crown Princess Mette-Marit and Crown Prince Haakon of Norway at the Nobel Peace Prize Ceremony at Oslo in Dec 2006

Bonus Trivia: The article carries a photograph of Prof.Yunus and Mosammat Taslima Begum at a performance in Oslo in December 2006. Taslima Begum was one of the initial borrowers from Grameen, who used the €16 (US$20) loan in 1992 to buy a goat and subsequently became a successful entrepreneur. She later became one of the elected board members of the institution, and accepted the Nobel Prize on behalf of Grameen Bank’s investors and borrowers at the prize awarding ceremony held at Oslo City Hall.

About the Sunday Guardian

A weekly newspaper for the discerning readers. Based in Delhi, it is also published simultaneously in London- under the name ‘India on Sunday’. The Sunday Guardian is now available in Chandigarh too.

The newspaper is a brainchild of leading Indian journalist and author, MJ Akbar— who has donned many attires in his four-decade-long career and has been part of many innovations in the Indian media industry.

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