Now that recoveries of microfinance institutions in AP have virtually ground to a halt, what happens to bank exposure to MFIs of some Rs 27,000 crore? I am surprised that the question has not been posed thus far. Under the agreement between the financial services secretary and MFIs, not only MFIs cap their interest rate at 24%, they will now only have monthly repayment with repayments to be made at an approved panchayat council office. The slightest hint of harassment means the recovery agent could end up in jail.
What sort of recovery is possible in these conditions? Certainly not the 100% claimed by MFIs thus far. I would be very surprised if banks did not end up taking a substantial hit. This should prompt some introspection among banks. How did they fall over each other to lend to entitities that were mostly one-person affairs and whose governance left much to be desired? Did they keep track of cumulative bank exposure to a given MFI?
On a broader note, the MFI model itself will have to be revisited. MFIs should now be brought under stringent regulation, of course, but also on-lending of bank funds through MFIs cannot continue as before. Let MFIs garner their own funds either as equity or as deposits (with deposits being linked to net worth). More on this in my ET column, Five myths about microfinance.
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Dear Sir,
I read your article in ET,am really surprised to read that most loans made by MFIs are for consumption. Had this been the premise, the repayments would not have been at 99%.
I am glad to learn of the initiative of NABARD,the 23 K crores disbursed. However, given 6 lakh villages with 70% of them being with population below 2000, its impossible for the Indian banking system to reach the masses.
I appreciate the point highlighted by you regarding penetration of credit in AP,MFIs taking a short cut to get easy access to potential customers. This they should not have done and what is happening in micro lending is exactly the same as what has happened in retail credit. It was greed of some institutions & some aggressive CEOs that lead to the credit crises in Indian retail financial services. Absence of credit bureaus accentuated the problem. If you look at the people who are managing most of the large MFIs, their track records are not very clean. They have been aggressive lenders seeking market shares and profitability in short run, to get large salary hikes and bonuses. They are people who dont have their hearts in the right place & have misplaced interest.
I firmly believe that MFIs have a place in the financial system.There are gaps in banking that need to get addressed. MFIs have the ability to fill these gaps but have not done so entirely. Some have done more than others, but none have done enough. Profitability, IPOs, valuations etc. have become parameters of success. The whole purpose of MFIs has got cheapened by a few people. We should not let their acts sully the overall merit of MFIs.
Your views do not seem to be balanced on the benefits from MFIs. The misdemeanor of a few institutions in MFI space seems to be causing you a lot of grief.
MFIs cannot run with purely altruistic motives. They need to be "for profit" to ensure they have steady flow of funds. Deposit seeking is something which RBI has not allowed, and i think the regulator needs to take a mature view and see how this issue can be addressed.
MFIs need to seek a balance, CEOs of big MFIs need to not project themselves as demi Gods. People working with MFIs cannot work purely for social cause. There has to be a balance between quality of work, remuneration for themselves, returns for shareholders & the good of the people with genuine poverty alleviation efforts. Multiple lending will only lead to disaster.This needs to be controlled.
I have gone through the AP Ordinance - this too is a nightmare. Non implementable and smells of red tape from start to end. It is not practical and hence it saddens me to see that you are lauding it. A lot of what is happening is politically motivated.All they want to do is seek power and amass wealth.
Knowledgeable & influential people like yourselves and many other in the industry,need to give constructive inputs on how the MFI business can be nurtured, grown and evenly distributed across the country. Three states today account for over 55% of the total MFI business.
I fail to understand as to how there is no requirement for micro regions other than South.
MFIs have clearly taken the easy route initially - this will only come to haunt them now due to over lending. I have been working in retail banking & financial services for last 18 years. The current trend in lending by MFIs is going to blow up in their faces in terms of high default rates and crises.
MFIs need to be there to build a constructive financial inclusion plan and work along with the rest of the banking system. It only needs to be guided rightly, one area with AP ordinance works well is that each SHG can access loans from only one MFI or from bank linkage, similarly, if given their scale MFIs want to restrict their geographical spread, then there may be some merit in capping the total number of MFIs that can operate in a particular state/region/ district & this could be dependent on the population census.
Thanks & regards
Vikas Bagga
9820176153
Dear Sir,
I read your article in ET,am really surprised to read that most loans made by MFIs are for consumption. Had this been the premise, the repayments would not have been at 99%.
I am glad to learn of the initiative of NABARD,the 23 K crores disbursed. However, given 6 lakh villages with 70% of them being with population below 2000, its impossible for the Indian banking system to reach the masses.
I appreciate the point highlighted by you regarding penetration of credit in AP,MFIs taking a short cut to get easy access to potential customers. This they should not have done and what is happening in micro lending is exactly the same as what has happened in retail credit. It was greed of some institutions & some aggressive CEOs that lead to the credit crises in Indian retail financial services. Absence of credit bureaus accentuated the problem. If you look at the people who are managing most of the large MFIs, their track records are not very clean. They have been aggressive lenders seeking market shares and profitability in short run, to get large salary hikes and bonuses. They are people who dont have their hearts in the right place & have misplaced interest.
I firmly believe that MFIs have a place in the financial system.There are gaps in banking that need to get addressed. MFIs have the ability to fill these gaps but have not done so entirely. Some have done more than others, but none have done enough. Profitability, IPOs, valuations etc. have become parameters of success. The whole purpose of MFIs has got cheapened by a few people. We should not let their acts sully the overall merit of MFIs.
Your views do not seem to be balanced on the benefits from MFIs. The misdemeanor of a few institutions in MFI space seems to be causing you a lot of grief.
MFIs cannot run with purely altruistic motives. They need to be "for profit" to ensure they have steady flow of funds. Deposit seeking is something which RBI has not allowed, and i think the regulator needs to take a mature view and see how this issue can be addressed.
MFIs need to seek a balance, CEOs of big MFIs need to not project themselves as demi Gods. People working with MFIs cannot work purely for social cause. There has to be a balance between quality of work, remuneration for themselves, returns for shareholders & the good of the people with genuine poverty alleviation efforts. Multiple lending will only lead to disaster.This needs to be controlled.
I have gone through the AP Ordinance - this too is a nightmare. Non implementable and smells of red tape from start to end. It is not practical and hence it saddens me to see that you are lauding it. A lot of what is happening is politically motivated.All they want to do is seek power and amass wealth.
Knowledgeable & influential people like yourselves and many other in the industry,need to give constructive inputs on how the MFI business can be nurtured, grown and evenly distributed across the country. Three states today account for over 55% of the total MFI business.
I fail to understand as to how there is no requirement for micro regions other than South.
MFIs have clearly taken the easy route initially - this will only come to haunt them now due to over lending. I have been working in retail banking & financial services for last 18 years. The current trend in lending by MFIs is going to blow up in their faces in terms of high default rates and crises.
MFIs need to be there to build a constructive financial inclusion plan and work along with the rest of the banking system. It only needs to be guided rightly, one area with AP ordinance works well is that each SHG can access loans from only one MFI or from bank linkage, similarly, if given their scale MFIs want to restrict their geographical spread, then there may be some merit in capping the total number of MFIs that can operate in a particular state/region/ district & this could be dependent on the population census.
Thanks & regards
Vikas Bagga
9820176153
Best blog on intraday trades
http://intradayt.blogspot.com/
Where's the Microfinance Coercion? Here's the Proof! A Client Perspective by MFI Consultant Ramesh Arunachalam
Read more: http://devconsultgroup.blogspot.com/2010/11/wheres-coercion-heres-proof.html
Thank you, nice job! This was the stuff I had to have.
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