Micro financing started as a social cause enterprise is turning out to be blood sucking organizations of the poorest of the poor and hapless sections of the society. More and more entrepreneurs and PE funds are eager to do business in this segment.
Micro-finance has been celebrated for bringing institutional credit to the poor who have no security or collateral to offer. The model’s success lies in extremely high loan recovery rates of 98 per cent or more. This is why micro-finance is now considered mainstream and is attracting private equity funding from all over the world. Founders of some of the MFIs who started as philanthropists are exiting at phenomenal profit and giving MFIs hitherto undreamed of valuations.
Micro finance is the provision of financial services to low income clients, including consumers and the self employed that traditionally lack access to banking and related services. It is a movement whose object is to create a platform, for as many poor and near poor as possible, to have permanent access to an appropriate range of high quality financial services, including savings, insurance and fund transfers, at an affordable cost. Those who promote micro-finance generally believe that such access will help poor people out of poverty. Micro-finance is one of the tools that can reduce the suffering of people by financial services that enable the poor to use the existing knowledge and experiences.
The interest rate applicable to loans given by the micro-credit organizations to Self Help Groups/member beneficiaries is deregulated. The advances to MFIs, by banks are classified as priority sector advances, the applicable interest rate is around 15%p.a. However, the MFIs are charging interest between 24% to 36% p.a. from the hapless borrowers. The Micro Finance Institutions, instead of providing credit at affordable interest rate, exploiting the situation and looking for a return on investments in excess of 30% p.a. Thus, there is a danger of micro finance not only being unable to remove poverty but end up as debt enlarging institutions.
Micro finance should not be viewed as a business venture where one can expect very high return on investments. RBI should put a cap on the interest to be charged on the end users, as most of their income goes for servicing the debt with no savings. This kind of situation is no better than the one the poor borrowers had experienced with the traditional moneylenders. They also defeat the very purpose of establishing the Micro Finance Institutions.
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