Published on Global Research.ca, by Kavaljit Singh, December 23, 2010.
The recent suicides by over 60 poor borrowers in the Indian state of Andhra Pradesh have brought the operations of microfinance institutions (MFIs) under public scrutiny. It is well documented by both print and electronic media that these debt-driven suicides were due to coercive methods of loan recovery used by commercial MFIs. The commercial MFIs operate as profit-making non-banking financial corporations (NBFCs) in India.
The majority of suicides took place in Warangal district of Andhra Pradesh and as many as 17 borrowers of SKS Microfinance were among those who reportedly committed suicide. For the past few months, the SKS Microfinance (the largest commercial MFI in India) has been in the news. In August 2010, it raised nearly $380 million in an Initial Public Offering (IPO) – the first from an Indian MFI. Thanks to the IPO, promoters and private equity investors of SKS Microfinance became instant millionaires while their borrowers remain desperately poor. In October, the sudden sacking of SKS’s CEO, Suresh Gurumani, raised concern about the bigger problems at the company.
The Ordinance: … //
… Rethinking the Business Model:
Until and unless commercial MFIs revisit their pure market-driven business model aimed at generating super profits for their investors, their operations will remain questionable and unjustifiable in India where 77 percent of population survives on less than Rs.20 per day.
In contrast, there are plenty of self-help groups (SHGs) and microlenders in India who follow a balanced approach between financial sustainability and social objectives. The SHG model serves many more poor households in India than the MFI model. The microfinance interventions by SHGs and similar groups have produced better results than MFIs because of their integrated approach towards building sustainable livelihoods.
As rightly pointed out by Dr. Y.V. Reddy (former Governor of RBI), commercial MFIs are leveraged moneylenders and borrow huge amount of money from banks and other financial institutions for on-lending. Besides, commercial MFIs operate on a mass scale serving millions of customers in the country. Therefore, it is high time that big commercial players realize that the “Wild West” period of microfinance is over. (full long text).