“Financial Vandalism” in India, and a Way Forward

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August 15, 2012 by Alex Counts

Alex Counts is president, CEO and founder of Grameen Foundation, and author of several books, including Small Loans, Big Dreams: How Nobel Prize Winner Muhammad Yunus and Microfinance are Changing the World.

I was invited to give one of the closing keynote addresses to the Sa-Dhan conference, something I had been preparing for at least since I travelled to India in early July to work on an upcoming book about the latest trends in microfinance.  I had intended to arrive in time for the inaugural session on August 7, but travel delays prevented that.  (Word to the wise: when travelling to India on the non-stop flights from Newark, plan to arrive in Newark long before your onward flight is due to depart.) Upon arrival, I was told that the conference’s mood on the first day alternated between “somber” and “angry.”  Just a few days earlier, the Reserve Bank of India (RBI) had announced new regulations affecting microfinance.  Though these policies rolled back some harmful policies announced a few months back and helpfully clarified others, they also introduced a controversial new rule saying that microfinance institutions over a certain size would be subject to smaller margins than they were currently allowed between the rates they borrowed and lent at.  The whipsaw nature of Indian microfinance policy at the national level, coming on the heels of the debilitating and draconian law passed in the state of Andhra Pradesh in late 2010, had justifiably enraged many of the practitioners in attendance – particularly as there had been no warning or explanation for many of the policies announced over the last 12 months.

Grameen Foundation President and CEO Alex Counts (lefts) speaks about the Indian microfinance sector at the Sa-Dhan Conference held earlier this month in that country. With him on stage are Jayshree Vyas (center), Managing Director of SEWA Bank, who served as the moderator, and Sujata Lamba of the World Bank. Grameen Foundation President and CEO Alex Counts (left) speaks about the Indian microfinance sector at the Sa-Dhan Conference held earlier this month in that country. With him on stage are Jayshree Vyas (center), Managing Director of SEWA Bank, who served as the moderator, and Sujata Lamba of the World Bank.

 

The second day did not get off to a good start.  Sa-Dhan executive director Mathew Titus announced that a senior government official had canceled his opening address.  However, as the day got going, the overall mood improved.  Royston Braganza, CEO of Grameen Capital India, organized and moderated an excellent panel on “Overcoming the Barriers to Resource Flows” to the sector.  (Grameen Capital India is a joint venture between Grameen Foundation and affiliates of two major banks operating in India.) I attended Royston’s panel and then caught the end of a concurrent panel on “business correspondent” (BC) models for MFIs working in partnership with, and essentially as agents of, fully licensed banks.  Though some recent policies about the BC model have cast doubt on the viability of MFIs being able to work effectively with banks, it was an invigorating discussion.  Mukul Jaisal, Managing Director of Indian microfinance institution (MFI) Cashpor, talked about his experience pioneering this model for providing savings services (which the MFI has been able to implement with support from Grameen Foundation).

The second-to-last panel included Archana Mangalagiri of the RBI, calling in from Mumbai.  She was evasive at times but was encouraging when she said that the government was willing to listen to arguments for reversing or at least refining recently announced policies if they proved to be impractical.  The most compelling speaker was Vijay Mahajan, the founder and CEO of BASIX.  He had three main points:

  • First, there were mistakes made by some MFIs, and India’s federal government was going to “micromanage” them for a time, but people should be confident that, if performance improved, policies would be adjusted favorably.
  • Second, the Andhra Pradesh government’s microfinance finance program should not be condemned, because it is a reasonably good one, even though with each passing election the interest rate subsidy is increased – so that the effective rate now stands at 0% after having been cut to 9%, 6% and 3% in recent years.
  • Third, the Andhra Pradesh (AP) government’s ordinance (and its enforcement, which at times went beyond the mandate of the law), passed to protect the government’s Self-Help Group programs from private competition, should be called out for what it is: “financial vandalism,” in his words.  (In fact, he said that he had suggested that the term be enshrined in the new microfinance legislation being considered by the federal Parliament – which would have provoked guffaws from the crowd had it not come from such a respected person.)

His point was that the AP government, which has resisted many appeals to backtrack to a more realistic policy, basically destroyed dozens of institutions built up over years by social entrepreneurs like Vijay while restricting the poor’s access to credit (at least at reasonable rates), thereby empowering local moneylenders and, in fact, attracting loan sharks from neighboring states. Once Vijay’s panel moved off the stage, my closing panel – titled “Responsible Lending and Way Forward” – was called up.  This prompted the crowd of 500 to take an unscheduled tea break – this is India, after all! – but within a few minutes we got going.  With one government representative absent, the people who remained were Sujata Lamba, an official from the World Bank who had been recently transferred to India; Jayshree Vyas, the Managing Director of SEWA Bank, who served as the moderator; and me.  I spoke last.  The essence of my speech, which can be downloaded in its entirety, was four-fold:

  1. Indian microfinance has much to be proud of, and these strengths can be built upon.
  2. A handful of wrong assumptions led the sector astray, and they should be discarded.
  3. There are lessons to be learned from the experiences of microfinance institutions in Bolivia, Bangladesh and Haiti.
  4. Eight principles can be taken as guideposts for reinventing the sector.

I welcome comments and input by professional colleagues and the public on this speech.  I have been encouraged by the interest shown by Sa-Dhan and some leading microfinance networks and institutions to distribute it.  I hope it spurs action-oriented discussions in the months ahead.

Comments

Thanks a lot for reporting this Mr Alex , I was also a part of the seminar at New Delhi. I am surprised that you did not mention about the verbal vandalism that was unleashed against the AP govt by the speaker and owner of the NBFC !; I felt it was indecent to say the least, especially when they were not present to state their point of view. Another aspect which I am surprised that you missed out is the exclusive panel of poor women (SHG) members ( surprisingly not the mFI clients), who spoke how proud they were about their savings, while the world cried credit and credit, they sang and the house gave them a standing ovation !…it was a great feeling.

Mr Alex, that was worth a sentence in your report …….atleast as a one liner ! Let me add, having been in the mF space and attending such conferences, I have improved my vocabulary, with new terminology being unleashed every time. Govt is the perpetual whipping boy, you never mentioned why the govt could not come; as the parliament session just beginning that day …did sadhan time it wrongly is also a moot Q. I have some Q’s for the mF vandalism subject …….. all the institutions which you mentioned about central banks regulations , are regulated even before – in fact the regulation was mere prudential which many of these institutions took benefit of. Should they be blaming AP govt for all ills

1.Did they not foresee the risks of business?
2.Did they believe that all the poor in the country live in AP? Was AP the only state where poverty existed; what prompted them to stay away from states that needed these services… there are another 30 odd other states in this huge country.
3.Were they not aware of the microfinance crowding that were happening in AP? Was he not aware of the perils of overcrowding?
4. What happened to his due diligence abilities of the business side?
5.As an industry, why did not learn from the earlier lessons when the first signs were out in 2006?
6.Was their Code of conduct drafted in 2007-8 for mere printing and lip service during conferences? Why was not it put in place to avoid such mishaps?
Have a dozen more Q’s, let me limit to six. Now i am inclined to "Stand for something or you'll fall for everything".....
Cheers
Suran

Very good article and the suming up is really useful...only thing is that even a person like Alex Counts with inputs fromnGrameen Foundation India and Grameen Capital are not able to plain speak and hence end up giving wrong analysis...

Can Alex state that he is Not aware that BASIX was operating at 45% + while claiming that Mr.Mahajan as an ethical leader...it is the sins created by so called ethical leaders are the genesis of the problems....

The companies operate in 40%-50% were Janalakshmi,Ujjivan, Bandhan, Spandhana as well....and Grameen Capital does business with many of these!

educative article

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