Sunday, September 30, 2012

India # 11: Patna III, Government cripples the microfinance industry


Patna, Bihar, III--Government Cripples Microfinance in India

What we have just witnessed is a uniform microfinance system:  each recipient receives the same amount—10,000 rupees—for the same length of time—one year.  Moreover, all loans must be run through the same group-lending model, ten in the case of women, five in the case of men.  This makes little sense.  How can every potential business need the same amount for the same time?  And yet this is the system mandated by the Indian government for all microfinance loans through non-banking organizations such as Seija. 

Other ACCION Ambassadors in the field this summer have debated the merits of group versus individual lending.  Group lending is good for the lender.  Because each member is responsible for the loan of all members, the lending organization has virtually no risk.  Yet the group model requires a cohesiveness that is not easy to sustain.  And men are less willing than women to meet monthly and assume responsibility for someone else.

The Indian government exerts a powerful control over microfinance, which it tries to channel through its own government-owned banks that are required to devote 40 percent of their portfolios to social purposes such as very small businesses.  Sometimes these banks outsource this responsibility to organizations like Seija.

Government control got a great deal worse in 2008 after a huge crisis in the state of Andrah Predesh.  Thinking it would be a gold mine, many banking and non-banking institutions jumped into microfinance in the early 2000’s, pushing out loans perhaps like American banks pushed home loans on those who could not least afford them, which brought down the world economy.  The result in AP was a rash of suicides by lenders who could not pay, leading to a halt in new lending and a crippling of the industry of which ACCION’s partners are a part.  The government is slowly writing new regulations.  

Suicides were already epidemic among rural farmers.  In a five year period, 200,000 suicides were recorded—which tells you something about the state of rural life.   For example, India has widely adopted Monsanto’s Bt cotton, which can reduce costs and increase yields.  But small farmers can be wiped out if their Bt cotton crop fails, for example, because of a failure of the monsoons.  The book “Planet India,” an otherwise optimistic book by an Indian-American woman coming home, was particularly critical.

In a recent newspaper article, a Monsanto defender said Bt cotton was not to blame for a run of suicides because only 29,000 deaths had been recorded in cotton country and that rate was the same before as after Bt cotton was introduced.  How’s that for a winning endorsement: plant my cotton and you’re no more likely to commit suicide? 

But I digress from Saija’s 180 million rupees worth of loans.  The question would seem to be whether the group lending  model and loan officer initiatives can help recipients make more in the next year than the $56 they will be paying in interest.  Handing out the money was a rush, in a rush.  Making loans work for the vast majority of recipients under restrictions set by the government will be the great task ahead.   

 

 

 

Patna, Bihar, III--Government Cripples Microfinance in India

What we have just witnessed is a uniform microfinance system:  each recipient receives the same amount—10,000 rupees—for the same length of time—one year.  Moreover, all loans must be run through the same group-lending model, ten in the case of women, five in the case of men.  This makes little sense.  How can every potential business need the same amount for the same time?  And yet this is the system mandated by the Indian government for all microfinance loans through non-banking organizations such as Seija. 

Other ACCION Ambassadors in the field this summer have debated the merits of group versus individual lending.  Group lending is good for the lender.  Because each member is responsible for the loan of all members, the lending organization has virtually no risk.  Yet the group model requires a cohesiveness that is not easy to sustain.  And men are less willing than women to meet monthly and assume responsibility for someone else.

The Indian government exerts a powerful control over microfinance, which it tries to channel through its own government-owned banks that are required to devote 40 percent of their portfolios to social purposes such as very small businesses.  Sometimes these banks outsource this responsibility to organizations like Seija.

Government control got a great deal worse in 2008 after a huge crisis in the state of Andrah Predesh.  Thinking it would be a gold mine, many banking and non-banking institutions jumped into microfinance in the early 2000’s, pushing out loans perhaps like American banks pushed home loans on those who could not least afford them, which brought down the world economy.  The result in AP was a rash of suicides by lenders who could not pay, leading to a halt in new lending and a crippling of the industry of which ACCION’s partners are a part.  The government is slowly writing new regulations.  

Suicides were already epidemic among rural farmers.  In a five year period, 200,000 suicides were recorded—which tells you something about the state of rural life.   For example, India has widely adopted Monsanto’s Bt cotton, which can reduce costs and increase yields.  But small farmers can be wiped out if their Bt cotton crop fails, for example, because of a failure of the monsoons.  The book “Planet India,” an otherwise optimistic book by an Indian-American woman coming home, was particularly critical.

In a recent newspaper article, a Monsanto defender said Bt cotton was not to blame for a run of suicides because only 29,000 deaths had been recorded in cotton country and that rate was the same before as after Bt cotton was introduced.  How’s that for a winning endorsement: plant my cotton and you’re no more likely to commit suicide? 

But I digress from Saija’s 180 million rupees worth of loans.  The question would seem to be whether the group lending  model and loan officer initiatives can help recipients make more in the next year than the $56 they will be paying in interest.  Handing out the money was a rush, in a rush.  Making loans work for the vast majority of recipients under restrictions set by the government will be the great task ahead.   

 

 

 

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