Following a rather spirited discussion last week on the economics and politics of interest rate ceilings — albeit in a Malegam Committee context — I was directed to a recent NYT piece by Prof Muhammad Yunus (Sacrificing Microcredit for Megaprofits). In it, Yunus, Grameen Bank founder and Nobel laureate, lamented recent trends in microfinance, calling special attention to developments in India to highlight the sector’s missteps.
The Prof's premise is summarized thus: the model evolved in the 1970s in poverty-stricken Bangladesh as an alternative to the usurious stranglehold of moneylenders. Over the years, its success spawned emulators beyond its birthplace. However, the past decade’s structural shift in many parts of the world from non-profit to commercial lenders — he notably cited SKS Microfinance and its famous IPO — has resulted in "a new breed of loan sharks", striking at the sector's very raison d’être.
As arguments go, there is some merit in what Yunus postulates. One doesn't need to be a Mother India buff to be familiar with the shenanigans of the Friendly Neighbourhood Lala – he was the ogre of choice till Hindi Cinema discovered the hate potential of the political class. Replace him with a faceless corporation and supposed implications are shareholder avarice, dubious sources of funds, 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 corporation may not intuitivels understand the borrower’s financial lifecycle. Such compromised credit decisioning inherently increases risk of default. Worse, the absence of community relationships impairs the ability to manage delinquency, further skewing the risk equation. The cascading impact on interest rates creates 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 extreme care, given its impact on the wider ecosystem. Certainly the last we need is sundry politicians fishing in troubled waters, à la AP. Yunus recommends an interest rate cap alongside a dedicated microcredit regulatory authority to oversee administration, accredit specialized microfinance institutions, and enforce] transparency in lending and collection practices. These sound sensible, in my view, but one major caveat: overzealous governments do not overreach, as is their wont, or misuse increased oversight to dole out favours to a chosen few.
Beyond these conditions lies the not-entirely-theoretical question of whether the intermediary must necessarily operate as a non-profit. Here lies the rub — the Indian experience has been most unfortunate. Simple, straightforward products (or agencies) have gotten twisted into something completely antithetical, hopelessly losing their purpose in a web of intrigue and shortcuts. Consider, for instance, the Money Matters fiasco where housing loans were subverted into a tool for highly leveraged speculation; or how the entire insurance industry got sidetracked into ridiculously-priced ULIPs instead of addressing the core opportunity in inadequate cover for the average Indian etc.
At the heart of these BFSI snafus is the buyer-seller information asymmetry — so designed less by accident and more by intent to keep the buyer in the dark. Microcredit has merely followed this trend. January, however, is too early to give in to cynicism wholly. Indeed, hope shines bright through the mutual fund example — an industry forced to pivot to retail equity investment instead of short-term corporate paper or load-driven easy pickings. Needed, it seems, are a few regulatory nudges. Keep the chin up, folks.
The Prof's premise is summarized thus: the model evolved in the 1970s in poverty-stricken Bangladesh as an alternative to the usurious stranglehold of moneylenders. Over the years, its success spawned emulators beyond its birthplace. However, the past decade’s structural shift in many parts of the world from non-profit to commercial lenders — he notably cited SKS Microfinance and its famous IPO — has resulted in "a new breed of loan sharks", striking at the sector's very raison d’être.
As arguments go, there is some merit in what Yunus postulates. One doesn't need to be a Mother India buff to be familiar with the shenanigans of the Friendly Neighbourhood Lala – he was the ogre of choice till Hindi Cinema discovered the hate potential of the political class. Replace him with a faceless corporation and supposed implications are shareholder avarice, dubious sources of funds, 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 corporation may not intuitivels understand the borrower’s financial lifecycle. Such compromised credit decisioning inherently increases risk of default. Worse, the absence of community relationships impairs the ability to manage delinquency, further skewing the risk equation. The cascading impact on interest rates creates 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 extreme care, given its impact on the wider ecosystem. Certainly the last we need is sundry politicians fishing in troubled waters, à la AP. Yunus recommends an interest rate cap alongside a dedicated microcredit regulatory authority to oversee administration, accredit specialized microfinance institutions, and enforce] transparency in lending and collection practices. These sound sensible, in my view, but one major caveat: overzealous governments do not overreach, as is their wont, or misuse increased oversight to dole out favours to a chosen few.
Beyond these conditions lies the not-entirely-theoretical question of whether the intermediary must necessarily operate as a non-profit. Here lies the rub — the Indian experience has been most unfortunate. Simple, straightforward products (or agencies) have gotten twisted into something completely antithetical, hopelessly losing their purpose in a web of intrigue and shortcuts. Consider, for instance, the Money Matters fiasco where housing loans were subverted into a tool for highly leveraged speculation; or how the entire insurance industry got sidetracked into ridiculously-priced ULIPs instead of addressing the core opportunity in inadequate cover for the average Indian etc.
At the heart of these BFSI snafus is the buyer-seller information asymmetry — so designed less by accident and more by intent to keep the buyer in the dark. Microcredit has merely followed this trend. January, however, is too early to give in to cynicism wholly. Indeed, hope shines bright through the mutual fund example — an industry forced to pivot to retail equity investment instead of short-term corporate paper or load-driven easy pickings. Needed, it seems, are a few regulatory nudges. Keep the chin up, folks.
Posts
