New Delhi: Microfinance institutions (MFIs) received unexpected support from a banker in a panel discussion on Tuesday that was supposed to be about financial products for the poor, but was for a large part dominated by SKS Microfinance Ltd chairman Vikram Akula’s defence of the company and the industry.
“MFIs do play a crucial role in extending credit facilities,” said Sunand K. Mitra, president, agriculture and rural banking, Axis Bank Ltd. “There could be complementarity between banks and MFIs.”
Mitra was the only banker participating in the panel discussion on “Beyond Credit: Balancing the Portfolios of the Poor” at the World Economic Forum’s India Economic Summit. MFIs, which give loans to the poor, have, in recent months, faced flak over issues ranging from overcharging borrowers to aggressive collection methods, prompting Andhra Pradesh to promulgate an ordinance reining them in.
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In the southern state, which accounts for the lion’s share of loans advanced by MFIs in India, the lenders were accused of using loan recovery methods that were so coercive that poor were being driven to suicide.
According to Mitra, Axis Bank does not break even on its financial inclusion business model. The intention is not to make money initially, he said.
Akula, whose SKS Microfinance became India’s first listed MFI in August, defended the for-profit business models of micro lenders and wondered if critics were treating poor borrowers as a clueless bunch who did not know what was good for them. “There is a very high cost in delivering very tiny loans,” Akula said, adding that the poor were aware of this reality. “Otherwise why would eight million customers come back to us year-after-year?”
Akula addressed three dimensions to the problem MFIs find themselves in in the wake of the Andhra Pradesh government’s ordinance, which would have to be eventually ratified by the state assembly through legislation.
Akula admitted there were “rogue” elements operating in the microfinance market and they needed to be checked. “Do not destroy the entire industry because of the actions of a few rogue players,” he said.
The Reserve Bank of India (RBI), which regulates MFIs such as SKS that house their operations in a non-banking financial company (NBFC), could do more to bring about financial inclusion. They could further financial inclusion by harnessing NBFCs, which have a widespread presence in unbanked areas, he said.
Picking on a specific instance, Akula argued it was not logical to exclude NBFCs from playing the role of business correspondents to banks. Business correspondents are the last-mile agents for banks in order to link banks to people in areas where they do not have a physical presence. RBI sees business correspondents as an important link in bringing about financial inclusion.
Akula disagreed with arguments that RBI excluded NBFCs as they may have a conflict of interest with banks. The absence of an easy solution could not be a good enough reason to keep out NBFCs, Akula argued.
“You (RBI) can’t abdicate your responsibility to the poor. That is nothing less than financial apartheid,” he said.
Akula argued SKS had brought down its interest rates in line with volume growth. Interest rates had come down over the last few years from 31% to current level of 24%, he said.
The cost components that go into 24% lending rate are: 9% towards cost of funds, 9% delivery cost to poor households, 3% corporate tax and 1.5% towards loan-loss provisions. “This, from microfinance perspective, is one of the lowest costs in the world,” Akula said. MFIs in Latin America charge 60% or more, he claimed.
When the discussion was thrown open to questions from the audience, Akula defended the business practices of SKS and its focus on profit.
“We don’t incentivize (staff) on collections,” Akula said—a reference to the allegedly coercive collection methods that have been blamed for suicides in Andhra Pradesh.
“If you treat customers well, that is the best way to create shareholder value,” Akula said.
Thomas Davenport, director, South Asia, International Finance Corporation, and Jon Fredrik Baksaas, president and chief executive officer, Telenor Group, who participated in the discussion, provided an international perspective on taking financial products to the poor.
According to Davenport, global experience showed that selling non-credit products such as insurance to the poor can be more profitable than just advancing credit. It makes business sense for an entity to sell a whole range of credit products to the poor as it allows for diversification of portfolios and engenders customer loyalty, he said.