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size had actually come down during the year ending with the crisis. 9 Another interesting
consequence of intense competition for clients pointed out by the Krishna study was a
"softening" of practices, such as fines for late arrival.
The second enabling cause was the rapid expansion of bank lending to MFIs that took place
after 2003 with the introduction of ICICI's partnership model (discussed in Chapter 7A). With
the financial constraint on expansion lifted, the MFIs were free to grow as rapidly as they
could recruit and lend to new borrowers, or existing borrowers of Velugu or other MFIs.
While
extending the
depth and
breadth of
outreach is
clearly central
to
microfinance's
mission of
making an
impact on
poverty through
financial
inclusion, and
while
sustainability
is essential if
MFIs are to
attract lenders
and investors
in order to
grow, the crisis
serves as a
useful reminder
that there are
other just as
important
client-centred
consumer
protection
objectives such
as transparency
in dealings
with borrowers
and being
careful not to
saddle them
with more debt
than they can
handle
The third enabling or contextual cause was the political investment the state government had
made in cheap credit for the poor as an important part of its election platform, through the
"Pavla Vaddi" or literally "quarter interest" rate scheme which derives its name from the fact
that the state government stands committed to subsidise whatever excess of interest over 3
per cent the SHGs have to pay to the banks for linkage loans (currently about 12 per cent).
The subsidy is transparent, since it is financed out of the budget (and is not a cross-subsidy
like many other previous schemes such as the DRI which were borne by larger bank borrowers)
and is "collective", in the sense that it is deposited into the group's bank and that too after
completion of timely repayment (which is made a condition), although of course group funds
belong to members individually in proportion to their savings. Politically it must be jarring to
see MFI microfinance not only flourishing but growing rapidly in the state at much higher
cost-recovering interest rates. Fourth, there was and still is widespread lack of public awareness
of features of MFI microfinance such as doorstep disbursement and collection in weekly
installments which lead to the seemingly usurious interest rates they have to charge. This lack
of understanding is shared equally by the bureaucracy, 10 politicians and the media and was
clear on display in the exaggerations, misinformation, and screaming headlines 11 that followed
the crisis. Thus there was a massive external or public relations failure on the part of the
sector, and one of the major challenges before it is a public education programme.
Causes: underlying
The rush to grow at all cost
One of the longer term causes was clearly the "quest for numbers" relating to outreach and
profitability that is the main motivation of many MFIs. While extending the depth and breadth
of outreach is clearly central to microfinance's mission of making an impact on poverty through
financial inclusion, and while sustainability is essential if MFIs are to attract lenders and
investors in order to grow, the crisis serves as a useful reminder that there are other just as
important client-centred consumer protection objectives such as transparency in dealings
with borrowers and being careful not to saddle them with more debt than they can handle.
These are goals that apply equally to minimalist as well as more holistic microfinance. We are
all responsible for building up a climate of expectations (including perhaps the preceding
chapter!) that celebrates the interrelated achievements of rate of growth of outreach, efficiency,
field worker productivity, etc. without always remembering that they can (i) lead to shortcuts
in client selection and training, field worker training and sensitisation, and loan size
determination, (ii) be used as the only criteria for incentive payments to field workers and
(iii) put a degree of pressure on them that leaves no time for issues affecting client satisfaction,
other than loan turn-around time, and progression in loan size etc. 12
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