A Quartet of Two-pagers from MicroSave

The India office of MicroSave, which I blogged about before, has just released four new two-pagers on the Andhra Pradesh situation (free with registration). The first looks backward ("The Andhra Pradesh Crisis: Three Dress Rehearsals … and then the Full Drama") but the rest look forward.All are readable and worth reading. I found the last particularly interesting, in the novelty and nuance of its policy recommendations. In contrast to my broad-brush call to end the eligibility of microcreditors for "priority sector" lending from big banks, Manoj Sharma and Graham Wright argue:

Providing artisans and farmers access to appropriate, and cost-effective credit products should be made eligible for priority sector lending. The challenge, of course, will be to have appropriate audit/end-use verification measures in place. In terms of recovery practices, strong arm tactics cannot be tolerated; however, action should be taken against errant microfinance institutions, and not against the industry as a collective. An Ombudsman-like institution should be created for MFI [microfinance institution] clients to be able to provide a forum for redress. Another means of fixing responsibility on banks extending credit to MFIs could be to adopt an area approach in bank lending to MFIs. Banks should extend credit to MFIs on the basis of portfolio of a certain number of branches. These banks could be held accountable for errors of omission and commission at these branches of MFIs. Such an approach would encourage banks to take greater responsibility and exercise greater care in the operations of MFIs.

The microfinance industry collectives have also been struggling to maintain focus in a sector experiencing such rapid growth. Industry associations go into overdrive at the time of crisis, but lose their pre-eminence once the crisis is resolved. A clearer and more proactive role has to emerge for industry associations---or probably an industry association, singular. Coming up with codes of conduct, which remain voluntary, on paper and not adhered to by members in practice is clearly inadequate. The microfinance sector, (and the industry association collectives), has long known the black sheep within its fold---the question that arises is why were efforts not made to expel such players?...The [Reserve Bank of India] needs to recognise and hold accountable a credible, well resourced industry association.

The events of the recent past should not encourage the illusion that the SHG [self-help group] model is the way, truth and light for financial inclusion in India. People involved in the sector admit that the SHG model is struggling, and will crumble unless rapid efforts are made to reengineer it.4 Too much has been made out of the SHG model, and too many government programmes are made to ride on SHGs. It is time for an open and honest review of SHGs---analysing why MFIs had the space to lend to SHG members when MFIs were charging 24% (or more) and SHGs were charging just 3%.