recent crisis in the micro-finance industry, brought about by some
incidents in Andhra Pradesh, has led to the development of a new concept
in the Indian thinking on development — that of “responsible finance”.
Responsible finance is supposed to mean financial activities by
companies that make just about enough returns to stay in business and
charge rates of interest on loans to the poor that are only marginally
higher than what the banks charge their prime customers. Many of the
people pushing for this approach are the very same ones who had at one
time firmly believed that micro-finance institutions will be the panacea
for all those households that are financially excluded.
The success of the
Grameen Bank in Bangladesh convinced Indian policy-makers, politicians,
intellectuals and almost everyone else that this was the way to go for
India. With similar micro-finance institutions, India would solve the
problem of financial exclusion faced by poorer households. Consequently,
such institutions mushroomed all over India and poor households started
getting loans they had never been able to get from anyone but the local
moneylenders. India was proud of its micro-finance movement and waited
for great things to happen. Given the romance with micro-finance, few,
apart from the “financial inclusion” enthusiasts, asked why banks never
lent to the poor. The reason, of course, lay in the fact that the cost
of such lending to a commercial bank is much more than what banks could
charge as interest rate. In other words, it was irrational to think that
any and everyone could set up micro-finance institutions and charge
commercially viable interest rates that were not too high. Micro-finance
institutions working with committed NGOs can reach a large group of
excluded households. From this it does not follow that anyone who sets
up such an institution will do it to help the poor; on the contrary,
opportunists will use the euphoria to rake in as much as they can.
Markets develop where
profits can be made. That was what the moneylenders did and that is
what micro-finance institutions will do. Indian policy sought to
discourage moneylenders and now everyone is baying for the blood of
micro-finance institutions. The unhappiness with moneylenders took banks
to rural India, and the unhappiness with banks encouraged authorities
to permit the mushrooming of micro-finance. Now, the unhappiness with
these institutions is making policy-makers look for “responsible
financiers” in the name of financial inclusion. The real issue is one of
reducing costs of lending to poor borrowers, rather than of identifying
good Samaritans who will act responsibly. Worse, there is an assumption
that good Samaritans can be created with ad hoc rules and policies. The
romantic approach to micro-finance led us to unreal expectations. The
idea of “responsible finance” is also a romantic one that will
disappoint policy-makers. Problems relating to delivering low cost and
affordable finance in a sustainable way are better solved with the mind,
rather than the heart.