Saturday, January 22, 2011

Microcredit Miscarriage

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 :)

Sunday, January 9, 2011

Carry On 2011

It is never easy to connect the dots in various socio-political and economic trends in the world around us; and least as it limps back post massive upheavals a couple of seasons ago. On the balance, at the dawn of 2011, the mood in India is sombre: the scars from a slew of high profile scams last year yet to start to heal. At the same time, we are much better off globally than end 2009 (and most certainly 2008): World economy appears to have allayed double-dip recession concerns, with recovery on track even if not fully out of the woods.

What would this year be like? I can stick my neck out to venture it may be more difficult than the one gone by, with initial momentum from a rebound mostly dissipated. Deleveraging of the global economy is clearly a long haul - only a shift from private to public debt has been achieved as we speak. Global recovery too is multi-speed, with stars in Emerging Markets but concerns in parts of the West. In the QE2 context, this implies that fiscal stimulus shall stay a while, notably in the EU and US. Equally (though this may not impinge the Indian story much), the highly correlated rates of change in economic growth trends (even if actual values vary) demonstrates the intertwined nature of modern markets. Given the massive relative size of the First World economies, this means national fortunes remain inextricably tied together.

There are other concerns too. The most critical is commodities: oil should already be giving sleepless nights to all energy-deficit governments. It is the tip of an iceberg: most essential items, notably foodstuff, have high-strung demand supply equations that can poop the 2011 party. Worrisome too is inflation and possible asset bubbles that can derail the EM script. Last but not least, EU has to manage a mismatched fiscal belt-tightening (austerity measures in Greece etc that actually need monetary elbow room; and absence of any in Germany, France - economies that can afford tighter policy!) and the Euro’s Draupadi-like nature. Obviously (an outside chance, nevertheless) a sovereign debt default will set the cat among the pigeons.

Not unlike 2010, the key remains a coherent, calibrated and effective policy response. This is also my biggest concern. In a multi-speed recovery world, domestic political pressures can easily upset the current global consensus. Such a breakdown is not unimaginable. It can come via protectionism due to the First World’s persistent structural unemployment, or even rampant Chinese assertiveness. In fact, how the world manages an unavoidable rebalancing of global power would be this decade’s most significant megatrend, apart from the transnational commodity supply crisis and the ogre of terrorism or localized discontent.

No doubt we will watch these trends unfurl going forward. In my first post in 2011, I sign-off on a happy note though: a tribute to Mankind's achievement on two basic metrics: average income and life expectancy, in the last two centuries. Go watch!