MFIs similar to moneylenders, says Reddy by Gayatri Nayak
Published on Nov 23, 2010
Modified on Nov 23, 2010
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Yaga Venugopal Reddy , former Reserve Bank of India governor credited with saving the nation’s financial system from the 2008 meltdown, has said what many finance experts believed, but did not have the courage to admit publicly: microfinance is India’s subprime. “Ultimately, it’s something like subprime lending,” Mr Reddy told ET in an interview ahead of his book release. “The same incentives are operating here... it was securitisation and derivatives that operated in the US. Here it is the priority sector lending by banks.” Subprime lending refers to loans extended to people with poor repaying ability that ultimately led to defaults. The Rs 25,000-crore microfinance industry is facing tumultuous times ever since the biggest, SKS Microfinance, created a controversy two months ago by sacking chief executive Suresh Gurumani. There was a confluence of woes for the sector when the Andhra Pradesh government came up with legislation curbing their operations. Banks pulled back on lending as some of the institutions were behaving more like moneylenders and in some cases drove borrowers to suicide. Indian banks such as SBI , ICICI Bank and Axis Bank are estimated to have lent Rs 16,000 crore to micro lenders. ICICI’s lending is at Rs 2,000 crore, SBI’s at more than Rs 1,000 crore and Sidbi’s at Rs 4,000 crore, according to data from rating company Care. The financial magnitude may not be the same with the Indian microfinance industry being tiny compared with the subprime lending crisis that led to more than a trillion dollars of losses and sank many venerable institutions. But there are similarities such as opaque practices, high salaries and commissions inducing unethical business, and leverage. The current practices may create systemic problems too, unlike moneylenders who operate with their own money. “If it is profit and if there is lending, aggressively, then it’s just moneylending,” said Mr Reddy, who was criticised before the credit crisis for his conservative approach to policymaking.
“Also, if you look at it, the resource is leveraged, it’s not just moneylending business. The moneylender normally lends out his own money, whereas here the MFI is actually borrowing money from depositors and lending the money. So essentially, he is a moneylender, but a leveraged moneylender.” Many admit to the fact that the industry has gone astray with the lure of superlative returns as private equity investors such as Sequoia Capital smelt an opportunity. But that did not mean that its role in financial inclusion could be discarded. “Yes, I agree with Mr Reddy when he says a lot of perverse incentives got aligned,” said Vijay Mahajan, chairman of BASIX, a micro lender, and head of Microfinance Institutions Network. “Here perverse incentives got aligned like in the US and in two years the sector went from helping the poor to preying on the poor.” These institutions are no more the not-for-profit ones as envisioned by Nobel Laureate Mohammed Yunus, so regulations are essential, says Reddy. Bangladesh-born Yunus had seen micro lending as a vehicle to lift people out of poverty rather than enhance returns of wealthy investors in private equity funds. “The idea that MFIs should be treated like banks but given soft regulations is dangerous,” said Mr Reddy. “We had a somewhat similar experience with urban co-operative banks.” (With inputs from Ruchira Roy in Mumbai) |
The Economic Times, 23 November, 2010, http://economictimes.indiatimes.com/news/economy/indicators/Microfinance-in-India-is-like-subprime-lending-Y-V-Reddy/articleshow/6972903.cms
Tagged with: Microfinance
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