It is important for all economies to implement financial inclusion as a fundamental right. Through the provision of loans, savings, and insurance to small businesses and entrepreneurs, microfinance emerged as a panacea for poverty. Over the decades, the roots of microfinance have spread from Bangladesh to several developing and developed nations. In India, two microfinance models exist, one administered by the government and another led by private organizations. The emergence of microfinance has established the path to developmental strategy.
However, while the initial aim of microfinance was to enable the poor to climb out of poverty, many microfinance institutions have shifted their focus to profit maximization. Therefore, in many areas, microfinance institutions have not only failed to alleviate poverty, they have also increased the levels of distress among the poor. For this reason, careful insights into the pros and cons of microfinance must be considered when understanding the operations of microfinance.
The Andhra Pradesh Crisis – 2010
The beginning of the previous decade witnessed a dramatic failure of the microfinance institution in the southern state of Andhra Pradesh. 57 microcredit clients committed suicide due to outstanding debt and harassment by microfinance organizations. Having taken place in the Krishna district of Andhra Pradesh, this crisis is often also termed as the Krishna Crisis.
The crisis occurred when abusive practices by private agents of the MFI were reported. This lead to the shutdown of multiple branches of two prominent MFIs- Share and Spandana by the state government. These organizations allegedly charged excessive interest rates from its clients and also followed abusive recovery practices. There was also a lack of control in the lending process. Instead of focusing on the pro-poor strategy of microfinance, these organizations shifted their focus to the market.
However, while there is plenty of blame on the inefficient functioning of the Microfinance Institutions for allowing the market to saturate and promoting hasty growth to support investments, there is also considerable blame on the government itself. It is the responsibility of the government to create a banking sector that can accurately meet the needs of the poorer population while also regulating the functioning of the established institutions. However, this incident portrayed otherwise.
This crisis led to the Andhra Pradesh Microfinance Institutions ( Regulation of Money Lending) Ordinance, 2010. Post this, lending and recovery practices were temporarily stopped. Clients who did not repay their loans were deemed ineligible for future loans. This decreased the validity of MFIs and also caused individuals to return to moneylenders for financial assistance. Therefore, this incident highlighted the malfunction of the government and the MFIs.
The Assam Crisis – 2020
The microfinance industry in Assam is currently witnessing a series of turmoil. There have been increasing reports of death, disappearances, and distress among the borrowers due to rising debts. Reports have mentioned that the microfinance clients in Assam have a debt that is double the national average of 3%. The debt is even higher at 11% in the districts of Dibrugarh, Glaghat, Jorhat, Sivasagar, and Tinsukia.
This crisis in Assam is believed to be yet another consequence of rural distress in the country. According to the norms laid out by the Reserve Bank of India, not more than two MFIs are allowed to provide a microloan to a single client. However, 24% of the borrowers in Assam have borrowed from more than 3 MFIs. This has also increased their indebtedness to a figure above Rs. 1 lakh.
Individuals often demand additional loans to repay their existing debts. However, it is the duty of the regulatory bodies to follow the norms and restrict this practice. Unfortunately, the microfinance bodies in Assam followed a profit and greed-driven motive when providing loans. These MFIs also collected huge interests on a weekly basis. The indebted individuals helplessly parted with basic amenities including cooking gas cylinders, cycles, etc. to meet their personal crisis.
Many female borrowers admitted that they were lured into the easy availability of loans which often lead to no direct benefits. Now, these indebted and distressed women are joining together and persuading the government authorities to ban the microfinance institutions from functioning in Assam. According to them, the sort of torture they have witnessed has been “dehumanizing”. However, others believe that tighter regulations and stricter penalties would provide efficient intervention.
The Step Forward
Microfinance provided a solution to the lack of financial resources available to the poor when the public sector failed to do the same. Its primary focus has been poverty alleviation and financial inclusion. However, many MFIs are now shifting their focus to more profit-driven approaches. Therefore, it must be the responsibility of the government to regularly inspect and monitor the functioning of these institutions to ensure their practices are in line with their goals.
Secondly, there must exist a central regulating body that monitors the activities of the lenders and the borrowers. This would bring discipline and ensure the smooth functioning of the sector. It is also important for private MFIs to follow the code of conduct provided by the Sa-Dhan and the MFIN while conducting their operations. Governments can also penalize misconduct and incentivize ethical behaviour.
Besides this, the microfinance industry also has certain expectations from the upcoming budget that would help in better functioning of the industry. “MFIs (microfinance institutions) offer different services to the microfinance clients and we request the Government of India that Goods and Services Tax (GST) should be done away (on the services) with since it is a service to the low-income segment of the population”, highlighted P Satish, Executive Director of microfinance body Sadhan. It is believed that mandating taxes on the lower-income groups is conflicting with the aim of financial inclusion. There has also been a request for increased budgetary allocation for SIDBI, NABARD and their subsidiary units. These authorities also expect access to Rs. 2000 crore financial inclusion fund. It is important for the government to address these requirements to allow the effective functioning of the microfinance sector.
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