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Chairman's Speak
The financial inclusion movement, of which the Microfinance Sector is a critical driver, has been passing through turbulent times. The legislative measures taken by the government of Andhra Pradesh have precipitated a situation where loan repayments in the state got stalled, fresh lending with concomitant impact on stoppage of fresh lending by banks, restructuring of loans to the MFIs etc.The turmoil, however, succeeded in focusing public attention on the question as to whether the investors in MFIs had been profiteering at the cost of the poor. The embarrassingly disproportionate ROAs of some of the MFIs and the relatively high rates of interests charged by them to the borrowers - especially the high effective rates (after taking into account interest free security deposits and other charges) - are telling indicators substantiating this belief. Further, there is reason to believe a number of practices prevailing within the sector such as multiple lending, over lending, ghost borrowers and unduly harsh methods of recovery indicate that in chasing volumes and numbers, some MFIs have resorted to excesses resulting in the current stalemate.

This is, therefore, a time for introspection for us and the first thing I would like to do is to get the lessons right :

First, as a lending institution we should be clear that our credit decisions should be taken only after due diligence. It is in the interests of both the lender and the borrower that credit availed should be capable of being serviced – in as much as there should either be additional income generation out of the activity financed through the loan or there should be savings in interest that would otherwise have gone to the money lender.

Second, how do we ensure that the total loans taken from all sources by a household are capable of being serviced? How do we find out about other loans availed of by such households?

How do we ensure that the additional cash flow generated on account of our loan, at least in typical cases, results in something being left over after the loan has been serviced?

What is the effective cost of a borrower taking a loan from us? Do we have a system of taking security deposits? What are the charges we levy? Are these charges transparent and do we educate the borrower on all aspects of interest and charges? Do we impart skills to our borrowers so as to improve their viability? Do we assess the impact of our assistance in this regard objectively and ask ourselves how we can make our rupee go further?

How well do we manage our risks? First we need to assess our risk. Thus, if our borrowers fall ill there is a risk; if our borrower’s livestock falls ill there is a risk; if there are damages to her property - both movable and immovable - there is a risk. This being the case, we need to debate how to offer affordable insurance products to our borrowers so as to minimize the risk to them and the risk to us? How well do we know our borrowers? How well does our MIS system capture the profile of borrowers? Does it throw up appropriate warning signals?

Do our borrowers get government benefits that are disbursed through bank accounts? Have we linked them to bank branches? Can we as a Business Facilitator provide that as a service to the banks from whom we borrow so that our customers can avail the benefits of no-frill accounts with them? Can any organization in our group act as a Business Correspondent?

Basically, responsible finance means responsible lending. We must seek to achieve such a system of responsible lending in order to ensure the protection of our consumers. The various issues that arise in this context are:

The cost of obtaining finance. The cost for small ticket transactions is high and unless costs are recovered, a program cannot be sustainable. At the same time, there is a need to ensure that economies of scale are translated into lower costs for the consumer and there are incentives for achieving such economies. Equally important are the transparency and disclosure issues. Hidden costs can be in the form of security deposits, fees and other charges including processing fees. Lending at very high interest rates also tends to add to the risk of the loan apart from leaving very little surplus with the consumer for improving his or her welfare.

Secondly, there is the issue of multiple lending for which the use of local persons as agents or business correspondents is one way out. More important is to put in a credible credit information system that preferably covers all loan providers so that total indebtedness is addressed.

Thirdly, there is the issue of over lending. There are two separate issues here. One is to ensure that incentives to intermediaries and the management are not distorted in favour of the numbers game viz. soliciting more clients and more loans. It is important to remember that large values, volumes and higher profits have inevitably led to huge fees, commissions and remunerations without any regard to the impact on the income levels of consumers, their welfare or their capacity to retain some surplus after repayment. A fourth issue in the context of consumer protection is to ensure fair recovery practices. This is far more easily said than done. Codes of conduct voluntarily adopted by industry Ombudsman related schemes etc. are some of the ways in which this issue has been handled. Responsible finance on the side of the consumer may be achieved through financial education and credit counseling. Various special target groups for education are school children, rural folk, urban slum dwellers, senior citizen, house wives, young professionals, migrant labour, defense personnel and so on. The education programs will need to be specially tailored for such groups. The use of the various media such as newspaper, radio, TV and other road shows or focus group meetings as also public outreach programs are found to be very effective. The messages need repetition and hence there has to be a consistent and constant effort. Counseling and debt management services are very important for those who are already indebted and who have got excluded because of their inability to repay. In simple words we should remember that :

The client is the main reason for our being in this endeavor. Unless we align the interest of our client with that of our organization there will be no sustainability in the long run. Commitment to fair practices and fair dealings has to be part of our DNA, not only in dealing with customers, but as a way of life. Our customers, though tough in surviving in their personal lives, are vulnerable financially and need an extra effort to make our initiative worthwhile. In the long run, our success will, and must, be gauged not merely on the basis of the financial numbers that we achieve but by the more important yardstick of having made a positive difference in the lives of those we have touched.

Dr. YSP Thorat
Chairman, Sahayog Microfinance