microfinance muddle

A few weeks ago they were saviours of the poor, reaching where no bank had reached before, providing credit to the unbankable and changing the rules of the game. Today they are reverse Robin Hoods who steal from the poor to incredibly enrich themselves. All it took was a successful IPO, a CEOs sacking, a scorned wife and a few probably unrelated suicides to reverse public opinion about Indias micro finance industry so dramatically.

Everything that went before, 70 million customers, almost 5 billion dollars in loans to the poor, high profitability, near zero debt defaults and of course 100% + growth rates, attracted a huge amount of professional institutional capital to this industry. The management which was initially fired by the social impact they could make, got carried away by commercial motivations and what we now have is a real threat of a regulatory response which can kill the industry.

It is useful to understand that the Government of India and various State Governments (notably in Andhra Pradesh, which is considered the micro finance capital of India) have been attempting various versions of microfinance with very limited success for many years. In fact the earliest attempts at financial inclusion for the poor in India predates even Prof. Mohammed Yunus's efforts with Grameen Bank in Bangladesh. Sadly, as is the case with most well meaning but poorly executed policies of the State, they failed to make any significant impact anywhere.
It took the private sector micro finance industry less than 10 years to grow to its present size and in the process help millions of poor families out of abject poverty.

How did that happen? State sloth is squarely responsible for its inability to capitalize on the opportunity that the private micro finance industry has successfully demonstrated in a few years. Early social sensitivity, access to serious capital and talent all helped the industry to grow the way it did. They developed relatively sophisticated systems and implemented a vision with a passion that the State can never muster.

And now the same State which failed miserably, despite a three decade head start, continues to be a competitor, but is now taking on the role of judge, jury and executioner. With the press fishing in muddy waters, the muddle can kill the industry and simultaneously kill the hopes of millions of the urban and rural poor to find a route out of poverty.

The intention here is not to make a case for apathy towards the sensitive issue of financial inclusion. Market practices will evolve, and competition will ensure that the weak and expensive players will be acquired by stronger players or eliminated by customer choice. But for the State to presume it knows best, especially when they blew their own chance at doing what the micro finance industry did, is questionable if not downright dangerous.