Microfinance Institutions

SKS Microfinance, started by Vikram Akula in 1997 definitely pioneered the concept of Microfinance in India. But recently, his company went public and after a highly succesful, there is some confusion as to what exactly is happening as their CEU Suresh Gurumani was asked to leave on Oct4 and the reply to SEBI's query on this issue has received an unsatisfactory reply.

Microfinance helps because the requirement is not need lakhs of rupees for long term, but merely few thousands of rupees for less than a year, mostly for purchase of inventory for retailers and for buying seeds, fertilizers etc for farmers or for an emergency. What trapped them were the moneylenders who charged exorbitant rates and ultimately ended up taking over the collateral land or property, not to mention the harassment that preceded. Microfinance was a revolutionary concept (Mohammed Yunus and his Grameen Bank was given the Nobel Peace Prize) and it provided loans to women who were seen as more responsible towards the family and society and also spend the money wisely. The return rates for these loans were 99% and Vikram Akula had aworked with Yunus, but Yunus himself has criticised Akula for going public because the debate arises between preserving the interests of the people who have taken loans and the investors and shareholders.

Microfinance is a tool for social change, rural development, self employment and fight against poverty. It is a social need and so any business that engages in this activity must also be aware of the social impact it has and also must keep in mind the interest of the customers. By going public, this aspect is getting diluted. One might argue that the purpose of an enterprise is to create profit, but a microfinance institution is different for its purpose is not profit but all those social needs I mentioned at the beginning of this para. But if the intention of the organisation was infact profit, there is nothing to differentiate it from any other financier, except perhaps in the scale of money given, but it is fast becoming just that- another moneylender.

Instances of harassment for money recovery (payments are to be made within a week), exploitation of the self help group as the other members of the group are also harassed who in turn have staged dharnas infront of the defaulters home and boycotting this individual has also happened along with extremely high interest rates on loan. Vikram Akula claims that 24% interest rate just about breaks even for them, but then how has SKS registered its high growth rates just by breaking even. He is also opposing a cap on interest rates but this is an important way of regulating a system which could revolutionise our rural areas, but one which is losing direction now.

If the company cannot find a commercial solution that works, it better not function. It is as simple as that, but simply to protect investor's interest, the government cannot and should not turn a blind eye to unrestricted working of this institution. Reducing operating costs by going local and hiring local, decentralisation of operations and inspite of claims to the opposite by Vikram Akula- small scale institutions with deep roots in the local area can operate better. This is the path that Microfinance institutions should follow. There should also be relaxation of loan acquiring procedures and restrictions and also a much stronger relation between the bank and the customer which will promote healthier loans. Ensuring that the loan is given to the right and not siphoned off from that individual and false documentations do not happen is also essential.

Around 33 people have committed suicide as microfinance institutions, for collection of money, have resorted to strongarm tactics which is exactly why there must be regulation.

The government must introduce an interest cap, introduce legislation on these institutions like those that exist for banks, start its own microfinance programme through post offices- we have the worlds biggest postal network and there are plans to promote postal banking in an even bigger way and microfinance should surely be a part of that. There is immense investor excitement in this field and also this is a tool for rural empowerment and powerty alleviation which makes it essential this budding idea is allowed to developed in the right way and not go wayward and collapse under its own greed.

Edit on December 10,2010
In light of the recent issues surrounding microfinance, which aim only at completely discrediting the concept rather focus on the actual problems in implementation, I would like to justify the concept.

The poor need start-up money for their work just like Google or Yahoo needed initial start-up money. They used to get that from money-lenders who imposed sky-high rates of interest, there were no extensions of deadlines and their property were seized without any sympathy. The other options are co-operative societies or government bank loans but recently, more agricultural loans have been given in Urban areas than in Rural areas (http://www.thehindu.com/opinion/op-ed/article566888.ece).

Farmers and small scale traders do not need huge investments, but money in a few thousands. Microfinance is a concept which can work if implemented properly and in a regulated market. The current imbroglio clearly shows what happens when greed and market forces are allowed to interfere with social change and upliftment.