Last week, following a rather spirited discussion on the economics and politics of interest rate ceilings (albeit in a Malegam context) I was sent a recent NYT article by Prof Muhammad Yunus (Sacrificing Microcredit for Megaprofits). In it, the Nobel laureate and visionary-founder of Grameen Bank lamented recent trends in Microfinance, calling special attention to developments in India to highlight the sector’s wrong turns.
The good Prof's premise is summarized thus: the model evolved in the 70s' in poverty-stricken Bangladesh as an alternative to the usurious stranglehold of moneylenders. Over the years, its success spawned emulators beyond its birthplace. However, last decade’s structural shift in many parts of the world from nonprofit to commercial lenders (he notably mentioned IPO-famous SKS Microfinance) has resulted in 'a new breed of loan sharks', striking at the sector's very raison d’être.
As arguments go, there is clear merit in what Prof Yunus postulates. It is not merely Mother India buffs who would be familiar with shenanigans of the Friendly Neighbourhood Lala – he was the ogre-of-choice till Hindi Cinema discovered the hate potential of the political class. Replace it with a faceless corporation and supposed implications are shareholder avarice, dubious fund sources and rising operating expenses. All told, this image doesn’t sit well with poverty alleviation shibboleths.
Equally, the issue of lender profitability, the ostensible driver for the 'mission drift', is hardly resolved. An impersonal intermediary like a corporate may be worse suited to understand the borrower’s lifecycle. As such, wrong placement of credit increases risk of default. Worse, absence of community relationships may reduce ability to manage delinquency, further skewing the risk equation. The cascading impact on interest rates is a vicious cycle, potentially leading to lender collapse.
It is a grim picture. At the very least, this model shift requires all stakeholders to tread with utmost care, given impact on the entire ecosystem (certainly the last needed is sundry politicos fishing in troubled waters - a la AP). Prof Yunus recommends an interest rate cap; plus a microcredit regulatory authority to manage administration, accreditation of specialized microfin banks and ensure transparency in lending and collection practices. These make sense in my limited view, with one major caveat: that overzealous governments not go overboard as is their wont, or misuse increased oversight to dole out favours to chosen few.
Subject to these key conditions, there is the not-entirely-theoretical question of whether the intermediary being necessarily nonprofit. Here lies the rub. The Indian experience has been most unfortunate: one where simple, straightforward products (or agencies) get twisted into something completely antithetical, hopelessly losing their original purpose in a web of intrigue and shortcuts (for instance, the Money Matters fiasco where Housing loans metamorphosed into a tool for highly-leveraged speculation; or entire industries hijacked – Insurance digressing into ridiculously-priced ULIP's instead of addressing the opportunity in inadequate cover for the average Indian etc).
At the heart of these BFSI snafus is information asymmetry between the buyer and seller. This is mostly a deliberate design to ensure low buyer appreciation of what he or she is buying. Microcredit has merely followed this trend. January is too early to be cynical though. Instead, hope shines bright with other examples: the Mutual Fund industry, forced to focus back on channelizing retail investment into stocks instead of short-term corporate business or skewed load based easy pickings. Needed, it seems, are a few gentle regulatory nudges – keep the chin up, folks :)
The good Prof's premise is summarized thus: the model evolved in the 70s' in poverty-stricken Bangladesh as an alternative to the usurious stranglehold of moneylenders. Over the years, its success spawned emulators beyond its birthplace. However, last decade’s structural shift in many parts of the world from nonprofit to commercial lenders (he notably mentioned IPO-famous SKS Microfinance) has resulted in 'a new breed of loan sharks', striking at the sector's very raison d’être.
As arguments go, there is clear merit in what Prof Yunus postulates. It is not merely Mother India buffs who would be familiar with shenanigans of the Friendly Neighbourhood Lala – he was the ogre-of-choice till Hindi Cinema discovered the hate potential of the political class. Replace it with a faceless corporation and supposed implications are shareholder avarice, dubious fund sources and rising operating expenses. All told, this image doesn’t sit well with poverty alleviation shibboleths.
Equally, the issue of lender profitability, the ostensible driver for the 'mission drift', is hardly resolved. An impersonal intermediary like a corporate may be worse suited to understand the borrower’s lifecycle. As such, wrong placement of credit increases risk of default. Worse, absence of community relationships may reduce ability to manage delinquency, further skewing the risk equation. The cascading impact on interest rates is a vicious cycle, potentially leading to lender collapse.
It is a grim picture. At the very least, this model shift requires all stakeholders to tread with utmost care, given impact on the entire ecosystem (certainly the last needed is sundry politicos fishing in troubled waters - a la AP). Prof Yunus recommends an interest rate cap; plus a microcredit regulatory authority to manage administration, accreditation of specialized microfin banks and ensure transparency in lending and collection practices. These make sense in my limited view, with one major caveat: that overzealous governments not go overboard as is their wont, or misuse increased oversight to dole out favours to chosen few.
Subject to these key conditions, there is the not-entirely-theoretical question of whether the intermediary being necessarily nonprofit. Here lies the rub. The Indian experience has been most unfortunate: one where simple, straightforward products (or agencies) get twisted into something completely antithetical, hopelessly losing their original purpose in a web of intrigue and shortcuts (for instance, the Money Matters fiasco where Housing loans metamorphosed into a tool for highly-leveraged speculation; or entire industries hijacked – Insurance digressing into ridiculously-priced ULIP's instead of addressing the opportunity in inadequate cover for the average Indian etc).
At the heart of these BFSI snafus is information asymmetry between the buyer and seller. This is mostly a deliberate design to ensure low buyer appreciation of what he or she is buying. Microcredit has merely followed this trend. January is too early to be cynical though. Instead, hope shines bright with other examples: the Mutual Fund industry, forced to focus back on channelizing retail investment into stocks instead of short-term corporate business or skewed load based easy pickings. Needed, it seems, are a few gentle regulatory nudges – keep the chin up, folks :)
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2 comments:
I agree with you. From the original ideas and practice of microcredit/microfinance, there was a movement into a new world where poverty alleviation/wealth creation at grassroots had taken backseat to profit maximization, at any cost. आए थे हरि भजन को, ओटन लगे कपास. The important thing for Microfinance movement is to retrace its steps, and start focussing on its original values again. Those values were good, and true.
Ah our diehard laissez faire votary argues for regulation vs free market -- not bad -- Suresh would have been proud of you, from suit to beedi and chappal :)
I am with you and Learner overall except that somewhere this whole finance piece needs to become deeper -- the role of venture capital in building America sort of thing -- microfinance may not but leaving it to the big banks is not enough either -- a weekend thought?
BTW, reminders help -- though have not got to that one -- I'll be back!
-A
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