Saved by the Bill?

SKS has shut down branches in Andhra Pradesh and according to Times of India article, “1200 people will lose jobs”- apart from millions of clients losing their credit source. My intention is not to argue on behalf of SKS by writing this post. I still remember SKS founder Mr. Vikram Akula debating with Prof. Yunus right before AP crisis in September 2010 by stating, “I see Yunus as a mentor and, like Grameen Bank, SKS gives microcredit for income-generating activity, collateral free.… [The question is] how do you design microfinance in a way so you don’t say no [to anyone who needs it]? You do it by accessing capital markets and yes, commercial microfinance is an important tool for inclusive access.” The same Mr. Akula after stepping down from SKS stated in March 2012 “Professor Yunus was right….bringing private capital into social enterprise was much harder than I anticipated……. The mistakes I’ve made can help the rest of you.”  Thus, in my opinion (and I might be wrong), it makes no sense for anyone to think what SKS did in the past is right or wrong or what is happening with SKS right now is justified or not. I would not even like to go there.

The bigger question, however, is what will happen to those clients in the absence of microfinance loan. Recently we interviewed 928 existing MFI clients from five states (UP, West Bengal, Karnataka, Tamil Nadu, Maharastra) to understand their financial behaviour. The preliminary data (still in the process of analysing) shows that even though 62% of these clients’ households had at least one bank account; only 11% of these HHs with bank accounts had ever received loans from banks. When asked why they never borrowed from banks despite having bank accounts, 30% mentioned that they did not require big credit from banks, 25% mentioned that they found bank forms or procedures too complicated and 8% mentioned that their loan applications were rejected by banks. When asked for the reason for not having a single bank account to those with no bank account, 22% mentioned that they found banks’ forms or procedures too complicated, 21% stated that they could not open bank accounts due to low income and/or no savings, 19% of these MFI clients with no bank accounts had no idea about banks or their products and 15% of this group of MFI clients mentioned that they tried opening bank accounts but their applications were rejected.
This has been discussed infinite number of times that microfinance industry has reached those clients which banks could not. If we look at Micro finance State of the Sector 2011 report, MFIs  have reached 31.4 million clients today. The report mentions that in terms of  “client outreach- borrowers with outstanding accounts” , there is a growth of 17.6% MFI clients and 4.9% of SHG-Bank clients in the year 2010-11, highlighting that both SHG and MFI models co-existed and flourished over the years. Yet- when a section of people from the development sector argue that SHG model is the ANSWER  to meet the financial needs of the poor in the absence of microfinance industry- it makes me wonder why in a state like AP where the state government made significant investments in subsidizing financial inclusion through SHG programme and is top ranked when it comes to SHG Bank Linkage , still the MFI penetration is the highest in the country… Do we have any authentic study that suggests that clients prefer SHG over MFI or maybe other way round? Have we ever put any effort to understand why poor opt for multiple sources to fulfill their financial needs? Maybe the poor need MFI loan as much as they need loan from other sources…
Today, Cabinet has cleared the microfinance bill and we can say that there is a new hope for the industry and the clients it serves.  Let us hope that the Government understands that it is its prime duty to protect poor households’ needs rather than cracking down MFIs, which is one of the vital sources of finance for the poor. In order to protect the interest of microfinance clients, we expect this bill will become an Act in the current session of Parliament. Hopefully we do not have to hear any other MFI shutting down its branches in the future. Let us hope they are saved by the BILL…!
(Special thanks to Amulya for his inputs)