Monday, August 1, 2011


Before going in to the possible solution to the problem faced by our MFIs, one should examine what led to the present situation. Greed, greed and greed. MFIs are aware that they are dealing with the oppressed, downtrodden, poorest of the poor and vulnerable sections of the society.

The ultimate goal of micro finance is to enable the poor to build assets, increase incomes, reduce vulnerability to shocks and economic stress and improve quality of life by enabling better access to education and healthcare. The micro finance industry has grown at a rapid pace across the world and has created a positive impact in the lives of millions of poor people.

Instead of doing this MFIs started to create value for their share holders, PE investors. You can not create value for share holders at the cost of the poorest of the poor. Helping poor and value creation for share holders are two boats which are moving in OPPOSITE directions. Either you can be here or there, but not in both the boats, at the same time.

The Micro Finance Institutions, instead of providing credit at affordable interest rate, exploiting the situation and looking for a return on investments in excess of 30% p.a. The borrowers pay exorbitant rate of interest. Most of their income goes for servicing the debt with no savings. This kind of situation is no better than the one the poor borrowers had experienced with the traditional moneylenders. They also defeat the very purpose of establishing the Micro Finance Institutions.

There were reports that MFIs were charging as high as 60% p.a. They were into forcible recovery, distributing unsolicited financial products on the clients, multiple lending, strong arm tactics and other unwarranted things. Andhra government did the right thing in bringing the regulation. There was nothing wrong in it.

BFSL collapse is its own making. Being head of the MFI body, Mr Mahajan did nothing to ensure discipline among members, particularly in the area of interest rate.

Micro finance should not be viewed as a business venture where one can expect very high return on investments.