Microfinance is thriving, but...

Indian microfinance organisations are coming into big global funding, at a time when global credit is seizing up. This month, two leading names -- SKS Microfinance, the biggest in the country, and Ujjivan, a pioneer in working among the urban poor – have, between them, raised close to $100 million of private equity. This underlines a sea change sweeping the sector, signalling it has come of age. As much as this is a cause for celebration, it is also necessary to ask if all is well with the sector, which way it is going and, most importantly, which way it ought to go.

The first positive is the growth. According to the 2008 Microfinance India by N Srinivasan (this competent annual study is itself a feather in the cap of the industry), last year microfinance's client base grew 25 per cent to reach 54.8 million. This is defining microfinance narrowly. If you also add up the small loans of commercial banks, primary cooperative societies and self-help groups, the total client base at end-2007-08 comes to 115 million. Thus microfinance now reaches over 20 per cent (even allowing for those who get loans from more than one organisation) of the country's 600 million working poor.

Most importantly, in a country riven by poor governance, this is not money down the drain. Repayment to banks is 90 per cent and microfinance organisations following the Grameen Bank model over 98 per cent! What this has established, says Samit Ghosh, founder of Ujjivan, is "microfinance is an eminently viable commercial proposition." Viability plus rapid growth induced hunger for capital is attracting the private equity.

But the picture changes somewhat when you look at the quality of growth. As Srinivasan points out in his report, the growth has been horizontal, and not gone deep. The three southern states which lead in microfinance (Andhra Pradesh, Tamil Nadu and Karnataka) account for 52 per cent of clients, whereas six major states and all those in the northeast account for only 1 per cent of clients. The truth is, the hardcore poor and remote areas of the country are left out of the microfinance story.

As for depth, a microfinance loan is typically for Rs 3,500-5,000 and returned in or under a year. You can't do much with that kind of a loan, it only eases liquidity problems. Naturally, microfinance is yet to deliver on its primary objective -- take people out of poverty. Only half of its clients have escaped poverty.

The report quotes one of the pioneers of the microfinance movement, Vijay Mahajan, as saying, '…MFs want nearly 100 per cent repayment and they are getting it because poor people are paying out of cash flows from other activities. To say that the MFI has got 99 per cent repayment is not by itself any great virtue, because if the people are engaged in several activities, they have been given a loan and lost the asset (such as livestock death or crop failure) and are now paying you out of wage work, that is not the purpose of founding microfinance.'

A corollary to the coming in of risk capital is the exit of the social or 'transformational capital' which the promoters had brought in because they wanted to change the world. This new predominantly profit oriented capital is low on social objectives, marking a dilution of the original mission.

There are pluses from this development too. The buying out of individual investors is creating a market for microfinance institutions and the private equity players bring in a lot of business discipline. What is more, not every equity fund is equally driven by profit. So it is a variegated scene with examples of original investors existing entirely, or remaining in part, and importantly, not all equity players being equally profit driven, with some having only a partial profit motive. The most important plus is of course the chance for the poor to escape from the clutches of the moneylender.

Health security and educational opportunity are two other key elements that, along with sustained means of livelihood, make up the composite offering that allows deliverance from poverty. (One out of five loans is taken for a major family illness and urban maids frequently take loans to put their children in English medium schools.) This is why totally social oriented organisations are pursuing a different model, or starting a separate foundation to deliver a composite package.

The report highlights Sarvodaya Nano Finance, which operates in the heartland of India's poverty -- Bihar, Jharkhand, Madhya Pradesh, Rajasthan -- and also Maharashtra and in a big way in Tamil Nadu. It offers capacity building support services, with emphasis on dairying. It also runs health centres and organises community marriages so that families can escape the financial burden of dowry. Its recovery performance is 'exceptional.'

A particularly innovative organisation is Institute for Rural Credit and Entrepreneurship Development, Sangli. It has been working on grain banks in tribal areas successfully for over a decade. From a food security model it has become a microfinance model. Women's groups from rural areas take grain loans and repay in 10 instalments. The grain and other produce are sold to groups in urban areas. Through a notion of share capital, groups get grain loans six times their capital. With retained margins their share values go up every year. "There is tremendous demand for this product," says Kiran Kulkarni. To reach the goal of removing poverty you have to undertake a long journey. Microfinance is a vital early step.