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Microfinance: Saviour or Shylock?
By  Rudroneel Ghosh, 22 Jan 2011

With brisk growth within the microfinance industry, the idea of profiting for the poor has slowly mutated to profiting from the poor. When MFIs like SKS Microfinance go public or start relying on traditional banks to generate funds and scale up, they inextricably tie the fate of the poor to the financial motives of profit maximising entities. The more micro-loans one can give out, the more dividends one can pass on to investors. Microfinance was supposed to replace the village moneylender with institutionalised credit for the poor, not substitute him with corporate loan sharks.

Whichever way one looks at it, perfectly balancing social benefits with profit-maximising goals in fairly impossible. When it comes to the crunch, the profit motive will always win. But profits should be earned to increase the scope of benefits to the poor, not for the personal aggrandisement of profit-driven investors. All profits generated in the process would be wholly re-invested in the company to expand and diversity operations. Investors would be able to recover their investment over time, but not a penny more.

MFIs in Crisis


In 2005/2006, a major controversy broke out when there were reports of farmers suicides,

Special Chief Secretary (Revenue), AP, V.P. JauhariJauhari, told reporters that he had learnt from the district Collector that 10 persons had committed suicide, as they were unable to repay the loans borrowed from the MFIs. Stating that the post-mortem reports were awaited, he said he would submit a detailed report on the functioning of the MFIs to the Government in 10 days.

No transparency

Mr. Jauhari observed that the MFIs were collecting high interest rates from the borrowers. There was no transparency in the process of issuing loans and the money recovery mode.

The State Government is contemplating to enact a legislation to punish micro-finance institutions (MFIs) for their reported malpractices and exploitation of gullible members of the self-help groups.

Sources said Chief Minister Y. S. Rajasekhara Reddy made this proposal while reviewing the functioning of MFIs at a review meeting here on Monday in the light of the reports that some of them were collecting interests rates as high as 24 per cent.

He also ordered an inquiry by Special Chief Secretary, Revenue, V. P. Jauhari, into the affairs of the micro-finance agencies in Guntur, Krishna and Nalgonda districts and issued directions that the matter be taken up with the Reserve Bank too. "They can't play with the lives of innocent people", he was reported to have observed.

The Chief Minister noted with anguish that the MFIs were resorting to forced recoveries and harassed hapless rural people and asked district Collectors to stop these forthwith by whatever steps possible.

Creative MFIs”; epw articles


Understanding the MFI crisis

It should be recalled that the beginnings of the Self Help Groups (SHGs) idea was in the struggle against usurious money lenders, led mainly by action group, mostly naxalite sympathisers in Telangana and North Andhra regions. Instead of paying back loans, organised groups just pooling in the money, to take care of further needs of money by individual members of the group. This later morphed into the SHGs of today, via the route provided by SEWA (Self Employed Womens Association) on the one hand and the Grameen Bank of Bangladesh, based on the philosophy of banking the unbankable.


From all descriptions of the MFIs, they are now headed by MBAs, organised into a Section 25 companies ( Companies limited by Guarantee), who have successfully used peer pressure, and micro level economics and tactics to do the biding of larger banks, and international donors including the World Bank, the WFP, and so on. The principle policy approach ( as advised by the Consultative Group to assist the Poorest, a world bank initiative on microfinance) is to total cost recovery


Immediately after the crisis, the MFIs got together and adopted a Voluntary Mutual Code of Conduct . They release an indicative schedule of interest rates, of between 21 and 24 percent.

They have also agreed to certain norms as far as recovery and governance. More important is the problem of poaching on SHGs.

Source: Microfinance Institutions in andhra Pradesh, H S Shylendra, EPW, 20 may 2006)

SHGs & Credit


For sometime now, development and poverty eradication literature, have been manufacturing a consensus on the route to sustainability of developmental efforts. Thus consultants of all hues, at various level, mainly consisting of person schooled in B schools, called a commercial approach, under the guise of market mediation, sustainability of finance and efficiency.

This was in sharp contract to the earlier political and social concerns of moneylenders, or issues of equity as exemplified in movements like the Pani Panchayat (equal rights to water irrespective on land holding), or the SEWA approach of empowering women vendors at the market place to directly sell, or the old womens thrift groups, which ensured that interest paid by the women was recirculated among the same group members either by way of hiring local staff, and recyling the money in the community in the form of further loans.


Equally devastating was the hugh amounts of outside money that was infused into the system, which ensured that large amounts of money was repatriated back into the mainstream economy by way of salaries, and repayment of interest, as well as developing an economy which would develop products for the mainstream market, thus ensuring thaqt resources like food, and bio-mass are exported.

Whatever income was generated inside the economy, also found its way out, as people bought even their own provisions from the outside market.


Bablu Ganguly of Tmbaktu collective at a conference on Market Access for Small Producers .."nutrition is going out...


four years since he spoke these words, his organisation has furthered it's own Swa-Shakti (Self-strength) programme which is an SHG registered under MACS ( Mutually Aided Cooperative Society. five year ago they recieved several offers from big banks for hugh amounts as loans at 8 to 10 %. There was tremendous pressure from the society members, who saw other other SHGs in the beigbourhood taking hugh amounts from these very banks.


Today besides the normal figures o..

they have the following programmes:

a small eating house in their village, which serves only local food, mainly based on traditional millets, and local organic vegetables, and

a weaving centre ...

A groundnut grading centre


other programmes of the associated organisations of the same NGOs

An annual earth festival where traditional, local seeds have sparked a trend of re-sowing and propagting local organic varieties of rice, millets, groundnut, livestock

Timbaktu Organic: A programme to promote sowing of local millets, organically without pesticided or chemicals

Alongwith a programme to procure the same outputs and sell it in the local market, over time.

A programme to make



table from