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MFIs: Learning from the
AP Crisis
MFIs have a social as well as financial mission. Unfortunately social performance is not as easy
to measure as financial performance, although a welcome development is that new social
rating tools are being developed by M-CRIL and others to measure social performance as the
"effective translation of mission into practice, in line with accepted social values" 13 . These
may involve surveys to obtain feedback on client protection issues, client satisfaction, reasons
for dropping out, and other variables. Interestingly, mission drift in the literature usually
refers to moving up-market to increase breadth of outreach at the cost of depth of outreach.
This has not been an issue at all in the present crisis, and it is generally accepted that MFIs
have a poorer clientele than SHGs. Rather, the mission drift here was to ignore the rest of the
social mission at the expense of the financial mission.
MFI practices
Interest rates
A second underlying cause clearly relates to the operational practices of the MFIs concerned,
some of which were the outcome of the rush to grow and be profitiable. These practices were
probably no worse than those of many other (although by no means all) MFIs growing rapidly
in other areas, but since they received extensive publicity there is more information on them,
allowing us to use them to discuss the issues arising that apply to the sector as a whole. While
they were not the real reason for the state government's action, "usurious interest rates and
hidden costs", or what are referred to as "deceptive" interest rates in the literature (CGAP
2004) were given prominence in the early days after the closure, before many state government
officials realized that NBFCs are free to set their own rates. Indeed they do not seem to have
been aware that the state moneylenders act was no longer valid 14 so that non-NBFCs were
likewise legally free to do so.
Spandana's and SHARE's effective interest rates before the crisis are reported to have been 31
and 28 per cent respectively from 2002-03 to 2005-06, when they were reduced to 28 and 24
per cent. These rates are not very different from the modal rate of 2 per cent a month rate
charged by SHGs, and below half that of the informal sector (for girigiri bankers 6.7 per cent
a month). They include the loan processing fee, but not a one-time membership fee. The MFIs
also required borrowers to make a security deposit as cash collateral. 15 Third, Spandana deducted
1 per cent of the loan amount or Rs 50 towards a life insurance premium in which the
borrower's spouse received the loan amount, less the outstanding balance if she died, on
which Spandana made a surplus (see Roth et al 2005). However this too does not increase the
effective interest rate, whether one agrees or not with the widespread presumption that the
surplus from the scheme should have been distributed to borrowers. It is true though that
borrowers lacked a clear understanding of their entitlements under the scheme, which is
unfortunately generally the case with insurance products (see Chapter 5A) and indeed of the
effective interest rate.
While they were
not the real
reason for the
state
government's
action,
"usurious
interest rates
and hidden
costs", or what
are referred to
as "deceptive"
interest rates
in the literature
(CGAP 2004)
were given
prominence in
the early days
after the
closure, before
many state
government
officials
realized that
NBFCs are free
to set their own
rates
A practice that has raised some eyebrows was charging borrowers who wanted to prepay their
current loan in order to avail of a larger one, interest on the entire period remaining on the
current loan. This can be a rather high penalty, depending on the period in case. As with many
other questionable practices the MFIs were accused of, there is no data on how frequently it
was resorted to. The MFIs, like most others in India and Bangladesh, were also using flat rates.
Transparency demands MFIs should prominently disclose the effective rate of interest as an
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