Milking it!

After what seems to be an eternity; I decided to write a post. The excuse for the hiatus was literary constipation brought about by anxiety, uncertainty and depression.  The insidious pleasure that a writer derives from pain and suffering to bring about incredulous manifestations are rather contrary to my modus operandi. By god’s grace it came to an end by Bangalore Stock Exchange making a mistake of hiring me.

It’s’ Microfinance’ that has caught my attention this time. Muhammed Yunus, the economist who started it all, remarked at an UN meeting, “We created microcredit to fight the loan sharks; we didn’t create microcredit to encourage new loan sharks”. I believe this statement says it all.  Microcredit, the darling of economists and celebrities alike was viewed as the solution to reduce abject poverty and to bring about financial inclusion, and it did with aplomb.

It all changed in 2007, the Mexican firm ‘Compartamos’ which started as a tiny non-profit organisation went public to amass $458million. Investors suddenly realised the immense potential of Microcredit, which is corroborated, as politicians have started to invest in such ventures through surrogates. The business model is quite sturdy. Money is taken from donations and banks at very low interest rates and given to Self Help Groups (SHG) which by design ensures that the risk is reduced to the minimum. The risk is further mitigated by imposing higher interest rates.

The world average interest rate charged by MFIs (Micro Finance Institutions) is a whopping 37%. This figure is highly dubious as actual figures are not available due to unaccountability of non-profit organisations. In some countries like Mexico, the average is 70% while some companies like Te Creemos charges up to 125%.

The problem of over lending also comes into the picture. Recent figures from Andhra Pradesh and Karnataka show that their coverage in some areas is 200 to 300%, that is, people have multiple loans at such high rates, often taken to repay previous loans. This could to lead to a debt spiral which defeats the whole purpose.

Legislation and governing bodies should be put in place to check such atrocities. In India, RBI does have a watchful eye, but the existing policies needed to be revised and adapted to bring MFIs under its more stricter purview and also to increase transparency.