Many MFIs (microfinance institutions) started financing the poor but somewhere they lost the customer focus and along with that the mission too, rues N. Srinivasan in ‘Microfinance India: State of the Sector Report 2009’ (www.sagepublications.com). The goals do not any more seem to be making credit access affordable, or accompanying the livelihoods of people, he adds.

“It is no more about improving income generation in the hands of the customers. Book value multiples, price to earning ratios and enterprise valuations dominate the discussion. High interest rates are justified as necessary to find more mainstream funds for further growth.”

The author cautions that the initial problems seen in Karnataka, UP and in some other states, despite being small, are strongly indicative of customer resistance to the model of microfinance in practice.

Bemoaning the fact that the increasing profitability of operations do not lead to reduced interest rates for the customers but fuel greater expansion, he warns that the pursuit of expansion as the only goal and high enterprise valuation as the mission can invite heavy-handed regulation and political intervention.

To policymakers, the author suggests that the implementation of subsidy programmes should be done through banks and MFIs alike without discrimination. Also, the centre should take steps to counsel the states on the role and space given to MFIs and highlight the legitimacy of their operations.

Calling, therefore, for discouraging vexatious state action, Srinivasan notes that the use of moneylenders’ legislation and Usury Acts against MFIs do not serve the poor. “It should be realised that if formal institutions are shackled by the state, the informal credit markets gain space to work at their vicious best.”

Towards conclusion, the report frets that there is still no clarity on what the government and RBI (Reserve Bank of India) have in mind for rural and microfinance in terms of an architecture. Srinivasan recommends that any plan and strategy in this regard should encompass an assessment of the market demand, the requirement of service providers to meet the demands, inventory of resources, identification of most appropriate institutional reforms, and the role of technology.

In the absence of a clear architecture, the growing sector would present a fait accompli that might prove difficult to deal with, he advises. For, the costs of resetting an already big and grown sector would be high and painful. “No more can the sector ask for forbearance from customers and other stakeholders on account of being young and weak.”

Instructive read.

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