Given the current vitiated atmosphere for microfinance institutions (MFIs), there was a need for some credible voice based on solid data and research to bring to the fore the debate on the legitimate role of MFIs in the economy. Basically on how they could be one choice in a continuum of alternatives that could be offered to the poor, including self-help groups (SHGs), post offices, cooperatives, rural banks, commercial banks and other financial sector institutions.
In this context, a report by the National Council of Applied Economic Research, Assessing the Effectiveness of Small Borrowing in India, should have been an important piece of work. It reconfirms that poor across the country need access to formal financial services; they are not an attractive segment for the market-based systems because of small ticket sizes and high transaction costs; and that MFIs have emerged as an alternative in the formal space and have cracked the issue. They have shown the potential to deliver, grow, operate on market principles and attract investments like no other programme targeted at the poor.
However, the report falls short of its objectives because of three aspects:
One: The study was funded by theMicrofinance Institutions Network (MFIN), an industry body representing only commercial MFIs. MFIN is an interested party and has been defending the “deeds” and “misdeeds” of the members through the crisis, and would be interested in whitewashing MFIs.
Two: The study was conducted in the urban centres of Jaipur, Lucknow, Chennai, Kolkata and Hyderabad. While the report claims that 70% of the respondents were “rural”, the sampling plan indicates that the “rural” areas were at a maximum distance of 14km from the urban settlement. This is not an inclusive study—it is a study on small borrowing in urban India. While the report refers to “a raging controversy over the role and anti-poor activities of MFIs in India, especially those operating in Andhra Pradesh (AP)” and the three contentious issues namely “usurious interest rates, strong-arm collection tactics, multiple lending and compensation received by top management” as a background for the study, the sample selection is not representative of the problem geographies—Telangana and coastal districts of AP from where reports of borrower suicides were reported. Thus, the findings of the study that there were few instances of multiple borrowing—and where found, it was associated with informal finance and not MFIs—and indicating that there were no strong-arm tactics do not cut much ice. The findings do not come from the same area where the problems existed. Moreover, Jaipur and Lucknow are not great centres of microfinance. The choice of these centres could be justified for an exploratory study and not an evaluative one. These two locations distort the numbers and the conclusions significantly in justifying the role and behaviour of MFIs.
Three: The vehemence with which the report defends MFIs is problematic, as the objective of the study was to assess the effectiveness of small borrowing. While there are the usual disclaimers that conclusions are drawn on the basis of data from the five clusters, this disclaimer is weak because each time a conclusion is drawn, it is placed along with the problems identified in AP.
If we disregard these three elements of integrity and examine the data dispassionately, we conclude that in spite of the hype around microfinance, there is scope for more players. The formal institutions still fall short of delivering the services—notwithstanding the hype around financial inclusion. The pipeline transaction costs remain high—both out-of-pocket speed money paid and opportunity costs in accessing the formal institutions. A surprising finding is that commissions/bribes are paid even in SHGs, as they are small mutual-benefit groups managed by the women themselves.
It is also a bit intriguing that MFIN has gone to town with this report claiming that all is well with microfinance, while it is shying away from releasing another important study that it had commissioned in AP. This report on the suicides of microfinance clients was done by a credible researcher. Possibly, the findings are not convenient for MFIN to make the report public?
M.S. Sriram is an independent researcher and consultant and a former professor at the Indian Institute of Management, Ahmedabad.
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