The Stranglehold Of Microfinance

Published in Peoples' Democracy, October 29th 2010

OF late microfinance is being viewed as a prime tool in achieving poverty reduction and inclusive growth. Particularly after Grameen Bank fame Mohammd Yunus was bestowed with Nobel Prize, this illusion became widespread resulting in a major spurt in microfinance institutions across the world. The proponents are focusing on turnovers, repayments and profits as the indicators of its success, neglecting the ramifications of microfinance institutions (MFIs) on poverty reduction or inclusive growth. Microfinance as a vehicle of poverty reduction mechanism has its own limitations. At best, it can play only a complimentary role rather than a key role, provided, it is governed under panchayati raj system and borrowers command ownership of resources of income generation.Realising this limitation, the Communist Party of India (Marxist) correctly assessed, “Conceptually, the government’s and the World Bank project of microfinancing and SHGs serve as an alternative to rural credit which has drastically declined after liberalisation. SHGs cannot be a substitute for institutional rural credit. Such an approach must be opposed.” [On Certain Policy Matters, Document adopted in CPI(M) 18th Congress in 2005]

Recent incidents in Andhra Pradesh come as a rude shock to the proponents of financial inclusion through microfinance. These incidents resulted in suicides of 57 people, out of which, 17 are the clients of the world’s largest MFI, SKS Microfinance. As more than 30 of them are women, the intensity of the shock is such that the government of Andhra Pradesh has been forced to proclaim an ordinance. The Reserve Bank of India constituted a sub committee to look into various aspects of these modern ‘merchants ofVenice’ who have converted MFI into an industry. Earlier in 2006 in Andhra Pradesh, 2007 in Maharashtra and 2008 in Karnataka, the role of MFIs brought several questions to the fore. These incidents force us to rethink the efficacy of MFIs as instruments of financial inclusion and of poverty reduction as well as its changing nature with the entry of finance capital through private equity route.

PHILOSOPHY &UTILITY OF ‘MICROFINANCE’

The concept of microfinance is having its roots in the neo-liberal project itself. As neo-liberalism gripped the minds of policy makers across the continents, the governments started retreating from the welfare state. Retreat of development finance from provisioning of services and financial access forced vulnerable sections of people to face financial exclusion. This resulted in widespread struggles questioning the legitimacy of neo-liberal project, such as in Bolivia, during 1986. This crisis of legitimacy forced the neo-liberal think-tanks to advocate structural adjustment programs with human face. As a way out from the crisis of legitimacy, neo-liberal policy makers devised ‘Emergency Services Fund’ in Bolivia directly targeting the households by eliminating the State intermediaries, which evolved into microfinance in due course. As the avenues for profit dried out, from 70s, the international financial capital is in search of new sources of profit. Both these efforts consolidated in the research results of the then neoliberal stalwarts such as Joseph Stiglitz who worked on reforming the small and micro lending structures across the countries and came up with revitalising the traditional financial intermediary systems by opening space for private capital and self financed efforts of people for financial inclusion. To carry out these policy directives in the interests of international finance capital, the World Bank-IMF along with their siblings such as ADB, IAB, DFID, USAID, JCB, formed into a Consultative Group to Assist the Poor (CAGP) as a global hub to oversee this effort. Thus, the origins of the concept of microfinance are rooted in ‘think globally and act locally’ attitude of the neo-liberal project. True to their nature, these development initiatives are centred around non-governmental organisations, as they are insulated from the limitations of political economy of the State.

Providing small loans to individuals, possibly within the groups as capital investment to enable income generating opportunities is the essence of microfinance. To be eligible under microfinance schemes, the potential beneficiaries were asked to form into groups by mobilising their initial thrifts within each village. In this way, the duration between the formation of group and their eligibility for loan helped private lending agencies to gauge their cohesiveness and also the saving culture.

In Bangladesh, Mohammad Yunus, after bagging the Noble Prize became an international face of microfinance. He experimented successfully with the peer group based modules. Yunus summarised the philosophy of microfinance based on peer-groupings by saying, “(It) smooths out the erratic behaviour patterns of individual members, making each member more reliable in the process. Subtle and at time not so subtle peer pressure keeps each group member in line with the broader objectives of the credit program. Shifting the task of initial supervision to the group not only reduces the work of the bank but also increases the self-reliance of the individual borrowers”. This basically targeted women as its stakeholders. The success of microfinance is in mobilising women. Women have been historically marginalised and their marginalisation is more stark in the economic arena as well. They are easy to control morally and otherwise at the time of collections – the underlying cause of 95-99 percent of recoveries.

In the Beijing summit of Women’s empowerment (1995), the then World Bank president James Wolfenson presented this idea of incorporating women in thrift groups to economically empower them. In 1997 in Washington DC, the World Bank with the support of Citigroup, Mastercard, American Express Bank, organised another summit to structuralise the execution modules of microfinance. Finally in 2002, the Monterrey at the International Conference on Financing for Development explicitly recognised that microfinance and micro credit as well as national savings are important for enhancing social and economic impact of financial sector. The United Nations was also co-opted into this understanding when the then UN secretary general Kofi Annan announced 2005 as the Year of Microfinance.

Currently MFIs are having global assets worth $50 billion and are not damaged much by the ongoing crisis of financial capitalism. This proves the resilience of this industry. By the end of the 20th century, governments appropriated the conceptual utility of microfinance by making it as a centre piece in its developmental strategies focussing on women. This also helped the governments to manage the grassroots who are disgruntled with the consequences of structural reforms. This role of SHGs is nowhere more evident than in the state of Andhra Pradesh when Chandrababu Naidu used SHGs as powerful instrument to shift the tide towards TDP during the 1999 general elections.

Another important aspect of the MFI as a developmental tool is turning the non-governmental organisations into self-sustainable entities. With this, the whole concept of NGOs has undergone a major change as they shifted their orientation from service to market and also from deemed agencies of transformation into potential counter hegemonic social forces through microcredit. They are gradually adopted into the circuits of international finance capital through the generous funding from international agencies. As neo-liberal project progresses, the popularity of NGOs as vehicles of development also has gone up. This also led to a standardisation of NGO pattern from group of social workers to CEO headed line department with technocratic professionals heading various departments. We can see this shift in all the NGOs active in MFI business.

Once NGOs were co-opted by finance capital, gradually they are transforming themselves into banks, a phenomenon that began with the Grameen Bank. In India, Swayam Krishi Sangam, popularly known as SKS, was enlisted first as an NGO, then re-registered itself into non-banking financial company and finally ended as a private limited company. In the ever increasing tying up of micro-credit organisations to circuits of international finance capital, which is evident in Indian context, the external factors and needs are bound to reflect on the internal structures of MFIs as well. Thus, the active collaboration of NGOs with donor agencies driven by finance capital and tacit role played by the state, resulted in establishment of unholy trinity which is trying to subvert the democratically elected agencies, through which credit is channelised till now, at the ground level.

INDIAN

CONTEXT

The institutionalised origins of rural credit in particular and credit in general goes back to the 1970s when the welfare state took initiative in expanding the outreach and intensity of credit as a source of rural development. In continuation, in the post nationalisation period, Indian banking system’s depth as well as outreach increased enormously. This growth is reflected in its commitment to increase the bank presence in rural areas and in its efforts to reach the most vulnerable sections of the society. A mandate for all nationalised banks to expand their operations at least by 25 per cent in rural areas helped to meet the first characteristic where as devising the concept of priority sector helped banking industry to mould their orientations into social banking. Priority sector includes emphasis on directed lending to sectors such as agriculture and small scale industries and also members of historically disadvantaged sections of society. Put together, nationalised banks are mandated to lend 40 per cent of their total lending to these sections/sectors and out of that 25 per cent must be disbursed to individuals belonging to weaker sections. The newly conceived program of Integrated Rural Development Program (IRDP) became the policy vehicle to redirect the credit to priority sector. Out of total bank lending, priority sector lending reached nearest to its target only in 1987 and from then onwards witnessed gradual decline. Particularly with the beginning of restructuring of Indian economy, total lending to priority sectors came down to nearly half of the ’87 peak.

This deterioration is linked to the change in RBI outlook about social banking as a result of the government accepting Narasimham Committee recommendations. In policy terms, it implied that the government agreed to direct lending initiatives based on need, business prospects, profitability and financial viability, minimising operations cost. In post-1991 period, National Sample Survey Organisation surveys in two rounds, 1993 and in 1999 shows that in rural areas 72 per cent of households are indebted to informal sources of lending. Out of that 72 per cent, loans raised through informal money lenders stood at 22 per cent and pawn brokers stood at 21 per cent. The credit is redirected from weaker sections and sectors of society to capital markets and consumer credit. This resulted in excluding the vast sections of people both vulnerable and not so vulnerable people from accessing the financial services thus leaving the field open for the entry of private financial intermediaries. Exactly this was the time when Chit fund companies flourished across the country. Chits like Margadarshi in Andhra Pradesh and Sriram, Sundaram Finance in Tamilnadu became an all India phenomena. These are concentrated on individual clients rather than groups. In Andhra Pradesh itself, thousands of chitfund companies became operational in 1990s. Some of them took even the shape of private banks which collected thousands of crores in deposits and disappeared overnight.

At the same time, influenced by the changes in international policy scenario, governments both at the centre and in states adopted the concept of micro-credit modelling around Self-help Groups (SHGs). NABARD championed this concept in India. The implementation is more or less fashioned along the lines of Grameen Bank in Bangladesh. Gradually the central government stepped into promote DWACRA groups under Women and Child Welfare ministry. In certain parts, they roped in NGOs and in some others they roped in political field workers as it had happened in Andhra Pradesh to form DWACRA groups. They were told that in due course, these groups, after reaching certain levels of savings, will be linked to banks through loans to empower them. In all these efforts, women stand out as key focused section. Crores of people were mobilised in these structures across the country with more than 6 million self help groups (each group contains 10-20 members) with 54.47 billion worth deposits as on 2009 March. The current process is riddled with low levels of lending and perceived reluctance of banks to deal with SHGs as they are not cost worthy. Even then governments such as in AP promoted SHGs with a promise of getting them 25 paise interest with which SHGs swelled till recently. Thus the ground is well prepared for the entry of first the NGOs and then the commercial MFIs to poach this client base.

At this juncture, institutionalised money lending in the form of MFIs entered the scene after realising the potential of this sector. They replaced SHGs with joint lending groups (JLGs). In case of SHGs, there is no need of collaterals but they have to run around the banks for loans. In case of MFIs, different types of collaterals starting with ration cards, gas connections to valuable items at home are initiated. As MFIs are in the business of advancing capital for profit, they hunt around the needy JLGs. Thus, in India currently two streams of microcredit structures are under operation. As on August 2010, India is abuzz with 3000 MFIs lending Rs 20,000 crores to 28 million borrowers experiencing 105 per cent of compound annual growth rate. The returns on equity in MFIs increased from 5.1 per cent in 2008 to 18.3 per cent in 2009 in MFIs. With assured interest rates varied from minimum of 30 per cent to maximum of 60 per cent with which profit is certain, private equity portfolios are eager to enter into this sector. The market’s response to SKS’ script confirms this trend. MFIs, by mobilising capital from market sources through equity and other market oriented instruments, became vehicles for the circulation of finance capital. This is substantiated by the fact that by July 2010, more than 200 billion USD is pumped into MFI industry. Once they enter, they drive the industry according to their own interests. Currently Spandana negotiated for 60 million equity from Teamlease of Singapore. The World Bank and its MFI arm, IFC are active in lending to the corporate MFIs in India. The IFC even announced microfinance initiative for Asia in collaboration with Kreditanstalt fur Wideraufbau to lend to MFIs in India. The DFID is coming up with a new poverty initiative strategy focusing on states where MFI penetration is less. Thus, the entry of international finance capital and the profit oriented MFIs in lieu of SHGs which thrive on bank linkages vitiated the market resulting in suicides by the borrowers, who fail to repay in time and withstand the pressure from the MFIs. This is what is happening in Andhra Pradesh and what happened in some other states in recent years.OF late microfinance is being viewed as a prime tool in achieving poverty reduction and inclusive growth. Particularly after Grameen Bank fame Mohammd Yunus was bestowed with Nobel Prize, this illusion became widespread resulting in a major spurt in microfinance institutions across the world. The proponents are focusing on turnovers, repayments and profits as the indicators of its success, neglecting the ramifications of microfinance institutions (MFIs) on poverty reduction or inclusive growth. Microfinance as a vehicle of poverty reduction mechanism has its own limitations. At best, it can play only a complimentary role rather than a key role, provided, it is governed under panchayati raj system and borrowers command ownership of resources of income generation.Realising this limitation, the Communist Party of India (Marxist) correctly assessed, “Conceptually, the government’s and the World Bank project of microfinancing and SHGs serve as an alternative to rural credit which has drastically declined after liberalisation. SHGs cannot be a substitute for institutional rural credit. Such an approach must be opposed.” [On Certain Policy Matters, Document adopted in CPI(M) 18th Congress in 2005]

Recent incidents in Andhra Pradesh come as a rude shock to the proponents of financial inclusion through microfinance. These incidents resulted in suicides of 57 people, out of which, 17 are the clients of the world’s largest MFI, SKS Microfinance. As more than 30 of them are women, the intensity of the shock is such that the government of Andhra Pradesh has been forced to proclaim an ordinance. The Reserve Bank of India constituted a sub committee to look into various aspects of these modern ‘merchants ofVenice’ who have converted MFI into an industry. Earlier in 2006 in Andhra Pradesh, 2007 in Maharashtra and 2008 in Karnataka, the role of MFIs brought several questions to the fore. These incidents force us to rethink the efficacy of MFIs as instruments of financial inclusion and of poverty reduction as well as its changing nature with the entry of finance capital through private equity route.

PHILOSOPHY &UTILITY OF ‘MICROFINANCE’

The concept of microfinance is having its roots in the neo-liberal project itself. As neo-liberalism gripped the minds of policy makers across the continents, the governments started retreating from the welfare state. Retreat of development finance from provisioning of services and financial access forced vulnerable sections of people to face financial exclusion. This resulted in widespread struggles questioning the legitimacy of neo-liberal project, such as in Bolivia, during 1986. This crisis of legitimacy forced the neo-liberal think-tanks to advocate structural adjustment programs with human face. As a way out from the crisis of legitimacy, neo-liberal policy makers devised ‘Emergency Services Fund’ in Bolivia directly targeting the households by eliminating the State intermediaries, which evolved into microfinance in due course. As the avenues for profit dried out, from 70s, the international financial capital is in search of new sources of profit. Both these efforts consolidated in the research results of the then neoliberal stalwarts such as Joseph Stiglitz who worked on reforming the small and micro lending structures across the countries and came up with revitalising the traditional financial intermediary systems by opening space for private capital and self financed efforts of people for financial inclusion. To carry out these policy directives in the interests of international finance capital, the World Bank-IMF along with their siblings such as ADB, IAB, DFID, USAID, JCB, formed into a Consultative Group to Assist the Poor (CAGP) as a global hub to oversee this effort. Thus, the origins of the concept of microfinance are rooted in ‘think globally and act locally’ attitude of the neo-liberal project. True to their nature, these development initiatives are centred around non-governmental organisations, as they are insulated from the limitations of political economy of the State.

Providing small loans to individuals, possibly within the groups as capital investment to enable income generating opportunities is the essence of microfinance. To be eligible under microfinance schemes, the potential beneficiaries were asked to form into groups by mobilising their initial thrifts within each village. In this way, the duration between the formation of group and their eligibility for loan helped private lending agencies to gauge their cohesiveness and also the saving culture.

In Bangladesh, Mohammad Yunus, after bagging the Noble Prize became an international face of microfinance. He experimented successfully with the peer group based modules. Yunus summarised the philosophy of microfinance based on peer-groupings by saying, “(It) smooths out the erratic behaviour patterns of individual members, making each member more reliable in the process. Subtle and at time not so subtle peer pressure keeps each group member in line with the broader objectives of the credit program. Shifting the task of initial supervision to the group not only reduces the work of the bank but also increases the self-reliance of the individual borrowers”. This basically targeted women as its stakeholders. The success of microfinance is in mobilising women. Women have been historically marginalised and their marginalisation is more stark in the economic arena as well. They are easy to control morally and otherwise at the time of collections – the underlying cause of 95-99 percent of recoveries.

In the Beijing summit of Women’s empowerment (1995), the then World Bank president James Wolfenson presented this idea of incorporating women in thrift groups to economically empower them. In 1997 in Washington DC, the World Bank with the support of Citigroup, Mastercard, American Express Bank, organised another summit to structuralise the execution modules of microfinance. Finally in 2002, the Monterrey at the International Conference on Financing for Development explicitly recognised that microfinance and micro credit as well as national savings are important for enhancing social and economic impact of financial sector. The United Nations was also co-opted into this understanding when the then UN secretary general Kofi Annan announced 2005 as the Year of Microfinance.

Currently MFIs are having global assets worth $50 billion and are not damaged much by the ongoing crisis of financial capitalism. This proves the resilience of this industry. By the end of the 20th century, governments appropriated the conceptual utility of microfinance by making it as a centre piece in its developmental strategies focussing on women. This also helped the governments to manage the grassroots who are disgruntled with the consequences of structural reforms. This role of SHGs is nowhere more evident than in the state of Andhra Pradesh when Chandrababu Naidu used SHGs as powerful instrument to shift the tide towards TDP during the 1999 general elections.

Another important aspect of the MFI as a developmental tool is turning the non-governmental organisations into self-sustainable entities. With this, the whole concept of NGOs has undergone a major change as they shifted their orientation from service to market and also from deemed agencies of transformation into potential counter hegemonic social forces through microcredit. They are gradually adopted into the circuits of international finance capital through the generous funding from international agencies. As neo-liberal project progresses, the popularity of NGOs as vehicles of development also has gone up. This also led to a standardisation of NGO pattern from group of social workers to CEO headed line department with technocratic professionals heading various departments. We can see this shift in all the NGOs active in MFI business.

Once NGOs were co-opted by finance capital, gradually they are transforming themselves into banks, a phenomenon that began with the Grameen Bank. In India, Swayam Krishi Sangam, popularly known as SKS, was enlisted first as an NGO, then re-registered itself into non-banking financial company and finally ended as a private limited company. In the ever increasing tying up of micro-credit organisations to circuits of international finance capital, which is evident in Indian context, the external factors and needs are bound to reflect on the internal structures of MFIs as well. Thus, the active collaboration of NGOs with donor agencies driven by finance capital and tacit role played by the state, resulted in establishment of unholy trinity which is trying to subvert the democratically elected agencies, through which credit is channelised till now, at the ground level.

INDIAN

CONTEXT

The institutionalised origins of rural credit in particular and credit in general goes back to the 1970s when the welfare state took initiative in expanding the outreach and intensity of credit as a source of rural development. In continuation, in the post nationalisation period, Indian banking system’s depth as well as outreach increased enormously. This growth is reflected in its commitment to increase the bank presence in rural areas and in its efforts to reach the most vulnerable sections of the society. A mandate for all nationalised banks to expand their operations at least by 25 per cent in rural areas helped to meet the first characteristic where as devising the concept of priority sector helped banking industry to mould their orientations into social banking. Priority sector includes emphasis on directed lending to sectors such as agriculture and small scale industries and also members of historically disadvantaged sections of society. Put together, nationalised banks are mandated to lend 40 per cent of their total lending to these sections/sectors and out of that 25 per cent must be disbursed to individuals belonging to weaker sections. The newly conceived program of Integrated Rural Development Program (IRDP) became the policy vehicle to redirect the credit to priority sector. Out of total bank lending, priority sector lending reached nearest to its target only in 1987 and from then onwards witnessed gradual decline. Particularly with the beginning of restructuring of Indian economy, total lending to priority sectors came down to nearly half of the ’87 peak.

This deterioration is linked to the change in RBI outlook about social banking as a result of the government accepting Narasimham Committee recommendations. In policy terms, it implied that the government agreed to direct lending initiatives based on need, business prospects, profitability and financial viability, minimising operations cost. In post-1991 period, National Sample Survey Organisation surveys in two rounds, 1993 and in 1999 shows that in rural areas 72 per cent of households are indebted to informal sources of lending. Out of that 72 per cent, loans raised through informal money lenders stood at 22 per cent and pawn brokers stood at 21 per cent. The credit is redirected from weaker sections and sectors of society to capital markets and consumer credit. This resulted in excluding the vast sections of people both vulnerable and not so vulnerable people from accessing the financial services thus leaving the field open for the entry of private financial intermediaries. Exactly this was the time when Chit fund companies flourished across the country. Chits like Margadarshi in Andhra Pradesh and Sriram, Sundaram Finance in Tamilnadu became an all India phenomena. These are concentrated on individual clients rather than groups. In Andhra Pradesh itself, thousands of chitfund companies became operational in 1990s. Some of them took even the shape of private banks which collected thousands of crores in deposits and disappeared overnight.

At the same time, influenced by the changes in international policy scenario, governments both at the centre and in states adopted the concept of micro-credit modelling around Self-help Groups (SHGs). NABARD championed this concept in India. The implementation is more or less fashioned along the lines of Grameen Bank in Bangladesh. Gradually the central government stepped into promote DWACRA groups under Women and Child Welfare ministry. In certain parts, they roped in NGOs and in some others they roped in political field workers as it had happened in Andhra Pradesh to form DWACRA groups. They were told that in due course, these groups, after reaching certain levels of savings, will be linked to banks through loans to empower them. In all these efforts, women stand out as key focused section. Crores of people were mobilised in these structures across the country with more than 6 million self help groups (each group contains 10-20 members) with 54.47 billion worth deposits as on 2009 March. The current process is riddled with low levels of lending and perceived reluctance of banks to deal with SHGs as they are not cost worthy. Even then governments such as in AP promoted SHGs with a promise of getting them 25 paise interest with which SHGs swelled till recently. Thus the ground is well prepared for the entry of first the NGOs and then the commercial MFIs to poach this client base.

At this juncture, institutionalised money lending in the form of MFIs entered the scene after realising the potential of this sector. They replaced SHGs with joint lending groups (JLGs). In case of SHGs, there is no need of collaterals but they have to run around the banks for loans. In case of MFIs, different types of collaterals starting with ration cards, gas connections to valuable items at home are initiated. As MFIs are in the business of advancing capital for profit, they hunt around the needy JLGs. Thus, in India currently two streams of microcredit structures are under operation. As on August 2010, India is abuzz with 3000 MFIs lending Rs 20,000 crores to 28 million borrowers experiencing 105 per cent of compound annual growth rate. The returns on equity in MFIs increased from 5.1 per cent in 2008 to 18.3 per cent in 2009 in MFIs. With assured interest rates varied from minimum of 30 per cent to maximum of 60 per cent with which profit is certain, private equity portfolios are eager to enter into this sector. The market’s response to SKS’ script confirms this trend. MFIs, by mobilising capital from market sources through equity and other market oriented instruments, became vehicles for the circulation of finance capital. This is substantiated by the fact that by July 2010, more than 200 billion USD is pumped into MFI industry. Once they enter, they drive the industry according to their own interests. Currently Spandana negotiated for 60 million equity from Teamlease of Singapore. The World Bank and its MFI arm, IFC are active in lending to the corporate MFIs in India. The IFC even announced microfinance initiative for Asia in collaboration with Kreditanstalt fur Wideraufbau to lend to MFIs in India. The DFID is coming up with a new poverty initiative strategy focusing on states where MFI penetration is less. Thus, the entry of international finance capital and the profit oriented MFIs in lieu of SHGs which thrive on bank linkages vitiated the market resulting in suicides by the borrowers, who fail to repay in time and withstand the pressure from the MFIs. This is what is happening in Andhra Pradesh and what happened in some other states in recent years.