It was only four years ago that I approached the editor of this paper, with a proposal to run a monthly column on micro finance. Like all editors wary of plugs, the editor too had asked me why the paper should provide column space to an industry that comprised companies (both for profit and not for profit) with total annual disbursements of not more than Rs 1,000 crore (Rs 10 billion). I had argued that although in the conventional sense the size of the industry was indeed small, in terms of its potential target market size (near 600 million urban and rural poor) the industry was huge. My powers of persuasion prevailed and the editor agreed to an initial run of three months to gauge reader reaction. Here I am four years later, still writing the column.
Within this time, however, "financial inclusion" became a buzzword and the provision of financial services to the poor attracted investments, both domestic and foreign. As for the size of the industry, disbursements by micro finance institutions in West Bengal alone will soon cross Rs 1,000 crore annually.
But as in any other industry, in the micro finance industry too increase in activity has implications for the behaviour of both suppliers and buyers of services. And a sudden spurt in the number of companies providing micro loans in a short span of time has led to increase in competition among players, resulting in sometimes indiscriminate expansion and staff poaching, and, most dangerous, created a situation where multiple providers of credit may be running after the same borrowers.
Unlike other industries, however, in fact, even unlike the mainstream financial services companies, MFIs are far more vulnerable to the environment they work in because the nature of their work requires them to function in cooperation with local government bodies to enhance outreach. Thus, any adversarial relationship with them can be a huge obstacle to achieving business targets. The head-on collision between district officials and MFIs which happened in Andhra Pradesh recently, and which resulted in the officials ordering the shutting down of MFI branches is a case in point. And it took the MFI industry in Andhra in particular and all of India in general months to recover.
Thankfully the MFIs, especially the new breed of NBFC MFIs, have realised the importance of self-regulation and are increasingly ensuring that they regularly meet to share information.
Earlier this month, nine MFIs headquartered in Karnataka announced the formation of the Association of Karnataka Microfinance Institutions. "This is the first time in India the microfinance institutions operating in a state have come together to form an association to further the growth of providing financial services to the urban and rural poor," said Mr Alysius P Fernandez, chairman, Sangamitra Rural Financial Services and also the newly elected chairman of AKMI. The objectives of AKMI would be to:
- Meet, share and exchange experiences, expertise and resources;
- Work towards promoting cooperation amongst members;
- Help build the capacity of members;
- Help build linkages between members and resource institutions;
- Make representations to central and state governments, the RBI and other policy making bodies.
While it is a fact that Sa-Dhan, an association of MFIs, already exists at national level and the Indian chapter of the International Network of Alternative Financial Institutions is also gaining members, the reason that MFIs in Karnataka felt the need to set up a state-level association was for greater focus on issues for the state. While a proliferation of associations is never good news, what is heartening is that AKMI is already in talks for a Sadhan affiliation.
As the competition among MFIs increases, there is a genuine need to share information on operating areas, employees and borrower frauds. Interaction with local government authorities and regulatory bodies will also ensure that disbursements by MFIs are increasingly acknowledged in the credit-deposit ratio of blocks, districts and states.
In fact, the Chennai-based Centre for Micro Finance (CMFR) is attempting (available on its website) a district-level mapping of MFI activity but much of the activity in many states remains under-reported. A state- level association of MFIs will greatly help in generating reliable national data. For, there is little doubt that this data will throw up the kind of outreach that MFIs essentially have and how it compares with the outreach of banks. And in order to do that again it would be imperative to weed out multiple borrowings by the same borrowers and for that too the need for local-level cooperation among MFIs hardly needs to be underscored.
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