Going it alone?

Microfinance in India has come under significant scrutiny in recent months, causing a number of challenges for all involved – microfinance institutions, banks and the government. But where do the poor sit in all of this?

 

Towards the end of 2010, microfinance was in the spotlight in the Indian state of Andhra Pradesh, with concerns raised over the treatment of microfinance borrowers and the levels of interest rates being charged. Many commentators accused commercial microfinance institutions (those organisations whose primary motive is making a profit, as opposed to Opportunity’s partners who aim to help people out of poverty) of behaving irresponsibly, pursuing growth and commercial returns as they allow clients to build up excessive levels of debt. The controversy is also suggested to be, in no small part, a backlash towards the recent initial public offering by SKS Microfinance, India’s largest for-profit microlender, headquartered in the state capital.

In late 2010, local politicians urged microfinance borrowers in Andhra Pradesh to stop making loan repayments until microfinance institutions met certain regulatory requirements. Recommendations have followed with the release of the Malegam Report and a policy document from the Reserve Bank of India. For Opportunity and our partners, these recommendations reflect our existing practices – client-focused principles have been a key component of Opportunity’s India Program since its inception. But a lack of repayment in Andhra Pradesh has recently put at risk the sustainability of all microfinance institutions in the state – with social microfinance providers (like Opportunity’s partners) being affected as well as commercial. Approximately 15% of Opportunity’s India Program portfolio operates in Andhra Pradesh, and Portfolio At Risk (PAR) for these partners has been affected. While client repayment rates have not been impacted outside Andhra Pradesh, the situation has certainly had an effect on the sector as a whole.

But how will this ultimately affect the poor in India?

While we welcome reform that encourages the sector – in particular commercial players – to refocus on the needs of people in poverty and put the interests of the poor as paramount, the repercussions of the current climate can, in some ways, have the opposite effect. Our concern? The cautiousness of banks in the current climate to lend to microfinance institutions in all states, not just Andhra Pradesh. By adopting a ‘wait-and-see’ approach, banks in India limited the funding of microfinance institutions reaching out to the poor.

Bank funding is an important element of microfinance – microfinance institutions leverage the donor money we send to them, effectively multiplying the impact we can have on poverty. Reduced funding available as leverage affects a microfinance institution’s ability to provide loans, putting poor families’ businesses, livelihoods and futures at risk. Thankfully, the recent recommendations from the Reserve Bank of India have provided some clarity to the sector and will encourage bank lending to continue. However, with the banks expected to show an increased level of cautiousness in their lending, this is the time when donations are vital to help those living in poverty.

But with all this backlash, do the poor still even want these microloans?

The short answer is yes, most definitely. For the poor over the last few decades, microloans have offered a means of escaping poverty – growing businesses, earning regular incomes and affording proper meals, safe shelter, healthcare, sanitation and schooling. Without these loans, many would still be living in situations we can barely even imagine.

It is deeply saddening to hear stories of the recent conduct of some commercial microfinance providers in India. This has no place in a sector that was established to empower people. But it is important to distinguish this behaviour from social microfinance providers – those who aim to help families out of poverty, not make a commercial return.

For 40 years, we have heard stories from our clients about how the loans they have received have helped them turn their lives around. Clients have sent children to school, built proper houses to live in, employed others in their businesses and repaid their loans again and again, with many going on to get larger subsequent loans to grow their businesses even further.

Opportunity’s partners have a strong track record of serving poor communities with their social mission. They remain capable of meeting the needs of the poor in India now and in the future. The need is still massive.

While microfinance in India has grown to serve millions of households in recent years, the country still has more than 75% of its population living in poverty. Unless funding for small loans comes, families in poverty in India will be forced to go it alone.

The answer? Our support of microfinance in India is now more crucial than ever.

Recently, our partner Saadhana in Andhra Pradesh had to cease lending to more than 12,800 clients – it simply did not have the funds to keep up with demand for loans. While the recommendations from the Reserve Bank of India offered some clarity in May (following what has been an uncertain time), we expect banks in India to remain cautious about funding a sector in transition. As a result, it is up to us to step in and help any way we can. If we don’t, many families in poverty will be on their own. We cannot ignore their need.

If you would like to help support microfinance programs, click here to donate today.