Even as financial inclusion emerges as one of the top goals of government and RBI, Microfinance Institutions (MFIs), which are the pioneers of financial inclusion, are finding themselves in a bit of soup, strangely enough for fats growth and for big profits.
Last month, the Reserve Bank of India summoned some of the representatives of microfinance institutions and warned them that the microfinance institutions could be taken off the priority sector lending of banks, if they failed to improve governance standards. So are MFIs doing too much too fast? Ramesh Ramanathan, Chairman, Janalakshmi Financial Services, answers.
Here is a verbatim transcript of the exclusive interview with Ramesh Ramanathan on CNBC-TV18.
Q: You are one of the pioneers in these sectors, one who has set out some of the goals and standards for MFIs, what is your own opinion of what is happening? Do you think the worries of the regulator are justified that there seem to be too much of lending too fast and too much of recklessness?
A: I am certainly not one of the pioneers and that should go to stalwarts like Vijay Mahajan and Aloysius Fernandes and some of the more recent large microfinance organizations that have proven that this is indeed scalable, sustainable proposition. But the question that the regulator has raised is an important one. I would say that the responses we can think of are broadly in two buckets. Is the micro finance fraternity having an impact on the issues of financial inclusion? The answer to that clearly is yes. Over the last 6-7 years the numbers prove that, over Rs 10,000 crore of lending and so on.
The second question, ‘is it responsive?’ Any sector that grows the way microfinance has grown is bound to have some of these growth pangs. Yes, there are concerns, but the question to ask is, ‘is there a self correcting component in how the sector is growing?’ And if you see the developments over the last few months, whether it’s on the Sa-Dhan side or whether it is on the new structure that is being created which is Microfinance Institutions Network (MFIN), the answers are yes, there is a response. There is lot of self regulation that is going on. There is lot of corrective introspection that has been taking place which are addressing the challenges that the sector faces.
I would, therefore, say that the signals are very positive, that the sector is responsive to the questions and the concerns of the regulator. Within that there will be multiple variants and that is part of the power of the sector, that there is not single model, there are number of different models that are being tried out.
Q: But one of the things that MFIN said is that that those who are members of that network, will give in all their members to a database, do you think that is good enough because MFIs like you said are proliferating all over the country and is it always possible for MFIs or for this database to come up so quickly and to be so foolproof?
A: One part is the database. The other part is lots of customer friendly practices which are about over lending, about ensuring that they were not over burdening customers with debt, with ensuring that there is no duplication of lending. There are number of these and I think going to a common database is one aspect of it, but it’s not the exclusive aspect of it. There is also a committee that is being created on code of conduct, there is committee that is being created on reducing interest rates. So a multi-pronged approach that is being taken by some of the leaders in the sector and those leaders are clearly committed to the longer-term viability of the sector.
Q: There is certainly a section of people whose commitment cannot be questioned at all, but it’s also true that a large number of NBFC and private equity funded institutions which are behaving very much like for profit organizations and are perhaps getting a bit reckless. The commission based agents who work on commission may not be able to be in a position to exercise so much know your customer norms, is not that one of the biggest problems, this commission based and kind of reckless lending that is happening ?
A: I wouldn't call it a reckless lending. I think that certainly the industry has grown at such a pace that there are bound to be some questions that get raised and those questions are getting addressed. There are different models being tried, are all of them couture? Probably not. That's the nature of the beast and for the most part what is being adapted by many of the big players is within the boundaries of good behavior which is doing the due diligence on KYC making sure that the customers are aware on interest rates. So there are a lot of positive things, but it doesn't mean and I don't want to sound like all is hunky dory and there are challenges. But the question is, ‘are those being addressed in a serious systematic way? The answer is yes.
Q: Would you worry that there are a lot of private equity funds and now money sought to be raised even through the IPO market, is there not a sense that this is becoming just a business and that social entrepreneurship spirit that still propels a lot of MFI is not there in all the cases and these few bad eggs might lead to too much of regulation or maybe even resistance from the borrower and therefore destroy the industry altogether?
A: That's a legitimate question to ask, which is, ‘how do we thread the needle in terms of ensuring that while we embrace the power of the market that we don't fall victim to the ruthless logic of the market because at the end of the day the power of the market is a double edged sword? The original intent of microfinance was driven by both embracing market based approaches, but also pursuing a social objective. I think every institution that is operating in the microfinance space must come up with a credible answer to the question, ‘how do we balance the two needs and not led the force of the market, create a mission-drift on the social side?’ The fact that we are accessing more and more market based capital raises the question about this and I think it's a legitimate question and it's a question that the sector must ponder about and each institutions must come up with their solutions.