Sunday, 5 December 2010


Earlier this week, when President of MFIN Vijay Mahajan tipped off that "some MFIs may have to shut shop as early as 1st Jan 2011, as Banks refuse to lend", of all things, Karna from Mahabharata came to my mind...

Bankers may only be proving the stereotypical notion that they are, after all, fair weather friends; or may be right in their judgment in not putting any more good money behind bad. But, much like the Karna's story, many factors beyond the new loans from Banks may have contributed to the death of such MFIs.

Here is my take on what some of those factors are:

1. While the interest rates of MFIs are lower than what a local money lender charges, the fact that the rates hardly came down in so many years of MFI existence implies that the sector hasn't innovated enough. Whoever survived without innovation for long?

2. Actually, at the heart of MFI value proposition are two other complementary services viz. (a) improving income generating capability of the borrowers - beyond their cost of borrowing - through several Business Development Services, including collectives for scales of economy and (b) social mobilisation for improving credit repayment culture and taking up activities that benefit the community as a whole, eg anti-liquor campaigns. Along the way, as MFIs proliferated many of them focused on transaction efficiency, and lost sight of these two pillars that defined the original business logic.

3. That politicians cutting across party lines are egging the borrowers not to repay their loans, likening the MFIs to Loan Sharks, suggests that the industry hasn't built any political capital either, in all these years! A wide range of motivations were attributed though, such as opportunistic political gains and selfish interest of some politicians who are money lenders themselves hence anti-MFI.

4. What's even more surprising is the lack of overt support (in this hour of crisis) from the very beneficiaries themselves - the borrowers - even after knowing fully well that the MFIs would close and they may have to resort to higher cost borrowings again. The absence of social capital in the operations of many MFIs (described in 2 above) meant that the borrowers didn't see the long term benefits of continued engagement with those MFIs, instead were happy extracting the short term transactional benefits (escape from repaying their loans). In contrast, when the middlemen struck work at mandis in 2004 to stop ITC eChoupal from making the agri markets transparent, thousands of farmers came on to the streets spontaneously to support eChoupal.

5. Appropriate regulations did not evolve along with the growth of the MF sector.

6. The MF market got distorted, with Government also acting as a lender through SHGs in many States. In fact, competition with Government (who is also a regulator) in a distorted market, is a big threat for the sustainability of many social enterprises. People at BoP are the common target, by definition.

7. Wrong choices of scaling models by many MFIs is another factor. Any organisation can choose from four scaling models - scaling up, scaling deep, scaling out or scaling through. Up requires standardisation of processes for efficient replication of a demonstrated unit. Prerequisite of deep is a capability to orchestrate an ecosystem to deliver multiple products & services to the same customer group. Out is replication of the same model in a different domain. And, through is a typical franchising approach with the attendant conditions. Some MFIs attempted crossing from one model to the other or even blending different models without building the requisite capabilities, obviously leading to trouble.

8. Large sums of money was pumped in through Private Equity, IPO etc. before the sector geared itself for scaling. These sources of money demanded rapid growth, which in turn meant diluted quality of execution (multiple loans to the same borrower, coercion in recovery etc). Coupled with 7 above, this is a recipe for disaster.

9. Not enough manpower was trained in conjunction with the growth of the sector, unlike what was done in other manpower intensive large scale businesses, such as Software, Green Revolution and Operation Flood. It is estimated that some 100,000 people are employed in MFIs. Again, whoever succeeded without quality manpower.

10. In many places, the group leaders (of borrower groups) started their own bridge loan businesses, thus "ever-greening" the loans, making the ground reality opaque to MFI staff.

11. Many people question the ethics of some MFI promoters for using the growth & profits from the highly leveraged soft loans (originally given for a social cause) for private gain. In businesses at BoP, it is important for the lead players not to lose the strength of morality to be able to push Government towards reform.

What Next?

Notwithstanding all the above factors, the business case for MFIs still exists. By virtue of the crisis wrought by the Ordinance in Andhra Pradesh, good MFIs are suffering as badly as the bad.

Instead of trying in vain to revive the sector after it is dead, all the stakeholders need to kick-off a consultation process to determine the right way forward in each of these and such other factors, with the future of the borrower in mind. Karna did die due to many curses, but mythology tells us that every curse can be lifted too!


  1. Shiv, that was a very good post.

    An IE article last week had this interesting piece of statistics:

    "A recent survey by the Centre for Microfinance has revealed that a staggering 93 per cent of the households in AP have a loan outstanding. Of these the vast majority, 82 per cent, were from informal sources (57 per cent borrowed from friends with interest, 17 per cent from a moneylender), and only 11 per cent had a loan from an MFI. Moreover, multiple borrowing from the same source is most prominent among those who borrowed from informal sources: only 30 per cent of active MFI borrowers had more than one loan outstanding, compared to 85 per cent of rural households who were active borrowers from informal sources".

    With formal banking beyond their reach, MFI offers the only hope for people to move away from informal sources/moneylenders. Is there some way,nationalised banks can be roped into the MFI framework?

  2. Excellent in-depth analysis. Karna's example beautifully exemplifies. Abhi Kya Karna?!

    May be the MFIs should have taken on board (or as advisors) persons like you i.e., Experts in rural domain. Seriously.

    May be that would have given them a road map which would have shown them the pitfalls to be avoided as well as the "right" route to be taken.

  3. Very well said, sir.

    Especially what next section.
    There is an immediate need to revive the sector now.
    Otherwise it would be impossible to put life into a dead thing.

  4. The problem with the larger MFIs is that they have ultimately only been able to replace the money lender... they have not been able to replace or pose a threat to the formal financial institutions. They have also fallen for the profit... whereas they should have gradually reduced the rates of interest, they have not done that , instead the pay packets of the CEO)s has got fatter... and that has made the eyebrows been raised... And this will cause death to the new institutions coming up in the underserved areas, because the new institution is forced to charge higher rate, because of intial higher costs.

  5. Sir,

    Excellent analysis.. cannot agree with you more on each of the point highlighted.

    I remember reading your views few weeks ago on the absence of Social Pillar in the MFI's approach. Probably they became another piece in the value chain..without value addition barring charging few percentage points less.

    Taking a leaf out of Mahabharata, the system has to cleanse itself from the wrong doings that has accumulated over the years... so it would be good to see if Darwin's theory can be applied to the situation on hand.. any kind of support or intervention without a direction and a strong regulation (with biting ability) would result in a similar situation few years down.

    My views.

    Thanks for sharing.


  6. Dear Shiv
    The complexity of the business is evident from the number of stakeholders with whom capital has to be built, especially when motives are at times devious.
    It is true as you have said when referring to the pillars that the key to growth is enhancing the repaying capacity of the poor borrower. This will reduce risk and enable them to enjoy ultimately the normal rates enjoyed by the well off. Else how will the process be viable?
    Having heard some of the eminenet MFI chiefs making no bones about their money lending focus, this is a good time to realise that there is no free lunch
    S Nandakumar

  7. Dear Shiv,

    Interesting perspective and thanks for highlighting issues beyond the obvious. I guess the 'debacle' would have happened sooner or later... it just got precipitated by our 'fair-weather' friends - the banks (and govt). However, I wish we would have let market forces take their toll, rather than the knee jerk reaction of the government. There is no better regulator than a scenario of intense competition.
    Now there is still a nagging doubt that if the flow of funds had not been suddenly turned off, the picture would have been different. (One cannot deny the importance of free flow of funds in such a business) A possibility we will never be able to find out!
    Naimish Dave

  8. Niranjan Sheelavant7 December 2010 at 08:45

    Excellent piece of write up on current state of the sector. True to Karna's story. The Mahabharat of Microfinance will continue till a strong regulation is placed. We are all used to policing! A mf policeman can bring that discipline. But this is not the end. The sector needs a social-policing mechanism (through self-regulation and social performance ranking).

  9. Ramesh S Arunachalam5 March 2015 at 22:59

    Very nice summary of the key issues and very objective. Thanks for this