By now, I'm sure you've read all about the controversies over suicides attributed to microlending in Andra Pradesh state in India and government attempts to regulate such lending. Now, a bigwig has waded into the controversy, claiming that many commercial lenders there have not really been faithful to the original vision of microlending. Any number of issues have cropped up that negatively affect a microborrower's ability to pay:
- lenders offering more loans to microborrowers who already have existing ones with other lenders;
- microborrowers taking on a multiplicity of loans given fast growth in this area (or even from loan sharks);
- commercially-oriented borrowers charging "what the market will bear" as opposed to having any overt social mission that bears on setting interest rates.
Yunus says he’s not against making a profit. But he denounces firms that seek windfalls and pervert the original intent of microfinance: helping the poor. The rule of thumb for a loan should be the cost of funds plus 10 percent, he says [my emphasis].
“Commercialization is the wrong direction,” Yunus says, speaking in a telephone interview from Bangladesh’s capital of Dhaka. “An initial public offering is the triggering point for making a lot of money personally as well as for the company and shareholders.”
There is a case to be made that Indian microlenders infringe on the Yunus rule, charging well over 10 percent over the cost of funding:
Indian microlenders themselves borrow from banks at 13 percent or more on average and extend credit to the poor. They charge interest rates that can rise to 36 percent, says Alok Prasad, chief executive officer of the Microfinance Institutions Network, which represents 44 microlenders. He says all 44 firms are registered with the Reserve Bank. SKS Microfinance gets funds at about 12 percent interest and lends at 24.52 percent in Andhra Pradesh, spokesman Atul Takle says.
In Bangladesh, Grameen Bank got a banking license in 1983, which allowed it to take deposits. It charges 5 percent for education loans and 8 percent for housing loans. Beggars can borrow for free, and interest on major loans is capped at 20 percent, Yunus says. “Microfinance has been abused and distorted,” he says. “I feel so sad because that’s not the microcredit I have created.”
Andra Pradesh will be a litmus test for microfinance in India. These are probably the three main issues to look at: MFIs overlending to those who already have many microloans; overextended borrowers who borrow from many sources to create "macroloans" if you will; and setting appropriate ceilings to borrowing costs.
MFIs need to take a closer look at their funding sources and how to rationalize their lending rates in light of growing corporate social responsibility questions. Grameen-style self-help groups were meant to be exclusive so that participants could focus on the activities of their peers (and help alleviate "moral hazard" in the process) instead of having multiple groups to deal with that are loosely affiliated as what is often happening now in Andra Pradesh when multiple loans are taken out.