Sunday, November 28, 2010

More on micro finance problems in Andhra Pradesh

This review of Portfolios of the Poor: How the World's Poor Live on $2 a Day says:
"Relative to their income, these poor households engaged in more financial intermediation than richer people do.
Portfolios explains this surprising result by focusing on an oft-neglected dimension of poverty. We sometimes think about poor people’s income as if the only problem is that there is not enough of it. This view misses another hugely burdensome dimension of poverty: income is variable and risky. But as the authors observe, “One of the least remarked-on problems of living on two dollars a day is that you don’t literally get that amount each day.” Because poor people live so close to the edge, they have to – and do – scramble more than the rest of us to avoid going hungry, or to scrape together the larger amounts that they occasionally need for life events or investment opportunities. Savings and loans are their principal tools for doing this, so the availability and quality of those tools were very important for the diary households.
Thus, “microfinance” as we know it is not delivering financial services to people who otherwise would have none. It is adding further tools to the ones that poor people already have at their disposal."

In Microfinance: What's wrong with it (also available at M.Rajshekhar explains how "easy money is altering the credit culture in villages" and the development of SHGs, MFIs in Andhra pradesh and the recent crackdown on MFIs by the state government. Excerpts:

"Over the last five years, the nature of microfinance delivery has changed. Says S Sivakumar, head of ITC’s eChoupal initiative: “Microfinance used to stand on two pillars: income generation and social capital.”

At one end, it was meant to create income-generating activities, which would enable women to repay loans of 30% interest without driving themselves into destitution. At the other end, MFIs had to forge a form of social capital that would encourage repayment, as SHGs did.

Both these pillars got undermined as MFIs chased growth. They defined their role as only of credit delivery, and focused on making processes idiot-proof and scalable. They left income generation and social-capital building to the groups and the government. ....

The easy money is altering the credit culture in villages. In Warangal district, employees of a large MFI say that, earlier, women had to be cajoled into taking loans. They would borrow nervously and repay fastidiously, out of not wanting to be locked out of a source of credit that lent quickly and without collateral.

Increasingly, the employees add, some women are getting blasé about borrowing. “When we warn women against defaulting, some of them retort, ‘we will borrow from someone else’.” Instances have been reported of women negotiating loans by pitting MFIs against each other.

Rural India, usually the elite among them, is beginning to exploit the microfinance model for private gain . For instance, in a village in Hanamakonda’s Palaveyipullah mandal, the centre leader and a group member took money from several MFIs in the name of 10 other women, paid interest for 10 weeks, and then stopped. That is one kind of a change.

At the lower reaches in the villages, as MFIs lend to households without regular cash flows, communities are changing in a different way. Women talk about the pressure to ensure weekly repayments. Some of this pressure comes from fellow group members.

If a member is unable to pay interest, the remaining group members have to make good the shortfall. They better, for a default means no loans for any of them in the future. In the process, an inversion has taken place. Says anti-caste writer Kancha Illiah: “Five years ago, SHG members used to beat up husbands who beat their wives. Now, they are beating up women who fail to repay.”"

Discussion by David Roodman When Indian Elephants Fight after a recent trip:
"Still, the true bottom line is this: credit, the poor, and business-like insistence on regular repayment are a dangerous combination. Pushed too hard, credit can easily become a buzz saw. Change any one those three elements, and it is safer: savings instead of credit (cf. Gates Foundation), the well-off instead of the poor, the flexible and somewhat subsidized communality of SHGs instead of the hard-nosed efficiency of MFIs. If microcredit is to safely serve the poor, it must soften its edges. There are many ways to do that. But probably all are harder with growth is rapid. Fast growth in credit to the poor is therefore dangerous, and often unworthy of the label “development.”"
P.S. There are several posts in the recent weeks in David Roodman's blog as well as CGAP Microfinance Blog, Candid Unheard Voice of Indian Microfinance and other places.

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