Steps MFIs need to take for the poor in India

Fariduddin Chaudhari, Advisor to a Kuwait-based consultancy

Today, microfinance institutions (MFIs) finds itself on a sticky wicket when faced with the charge of levying high and opaque interest rates from borrowers, employment of goons to recover money from defaulters and of being responsible driving some borrowers to suicide. It appears that their latest strategy is to ask to just be allowed to coexist along with self-help groups (SHGs) and even moneylenders.

But this attitude misses the main point: that MFIs needs to reinvent itself to be able to stay as a hope for the poor. This article discusses a few important steps that need to be taken in this direction.
Banks must reduce their rates drastically: Banks lend to MFIs at around 12% while MFIs lent to borrowers at around 30% before the Andhra Pradesh ordinance and at about 24% after it.

As for administrative costs, these are much lower for banks and much higher for MFIs. For example, a bank may lend 100 crore to an MFI while the MFI will lend an average of 50,000 to no less than 20,000 borrowers; or 2,000 borrower groups if each group consists of 10 persons. It is, therefore, clear that the MFI has to work very hard to administer 20,000 or even 2,000 contracts.  Continue reading