Microfinance institutions (MFIs) in India have been taking a serious beating recently. The threats and actions of politicians are so bad that they threaten the future of the industry in the country, and the primary reason is microfinance’s success.
MFIs are working wonders to help people pull themselves out of poverty. Foreign aid has a bad track record over the past decades of being largely unsuccessful in alleviating poverty. MFIs have shown that there are alternatives to government-driven aid and that the private sector can—and under the right circumstances will—play a role in helping the poor.
The key is that MFIs provide a tool, not a handout. And the tools come not just in the form of loans, as is the common association. MFIs also often provide savings accounts and insurance. The poor often live in rural areas with little access to traditional banks and therefore normally have no reliable place to store money. When their only income comes from a harvest, which happens once or twice a year, they are forced to store their harvest income unprotected “under a mattress” and have the self-control not to spend it too quickly. Or, alternatively, they actually pay someone to hold their money for them.
Think of how backwards that is: In the West, we receive interest on our savings accounts. The poor have so few options that they pay someone else to hold their money for them, as it at least won’t be stolen from their house or washed away in a flood or other natural disaster. Having access to a savings account is a substantial step toward having a steady income throughout the year. Some MFIs even require people to put aside a small amount of their income each month toward savings to teach them financial basics.
Some MFIs also offer insurance. Rural farmers are vulnerable to debilitating weather fluctuations; MFIs can allow farmers to insure themselves against crop loss. Insurance can also help in a disaster, such as a fire.
And of course, MFIs provide loans to poor people who otherwise have no access to capital, allowing them to start small businesses or invest in a current business. In addition to businesses, MFIs are also a credit source in emergencies. Before MFIs, if a family member fell ill and required treatment, a poor family would have to borrow money from a local money lender, who may charge as much as 300 percent annual interest on the loan. MFIs empower people to not be beholden to such lenders.
So why all the problems in India right now? MFIs are taking power away from politicians, and the politicians don’t like it. MFIs empower people to take care of themselves, become more economically free, and rely less on politicians and government officials who demand bribes for services. Microfinance also improves education, as more parents can afford to send their kids to good schools. And a more educated population holds a government more accountable.
It also seems that the politicians have found an easy way to score political points and votes. By painting the MFIs as the “bad guys,” the politicians become the good guys. The politicians tell borrowers not to repay their loans, relieving borrowers of debt in the short run, which in turn earns the politician a vote in the next election. In the long run, however, unpaid loans will put MFIs out of business. Additionally, the politicians are working to cap interest rates, require specific repayment methods, and more. While this may sound good in theory, in reality capping interest rates would limit the population that MFIs can serve, as they would no longer be able to reach the poorest of the poor.
The politicians are even harming the achievement of India’s own primary economic goal of “inclusive growth.” By cutting the poor off from access to finance, they are ensuring that the poor—especially the rural poor, who make up close to 60 percent of India’s population—are unable even to try and keep up as other sectors of the economy take off.
If the officials are allowed to follow through, poor families will once again be left only with seedy money lenders for finance and one fewer tool for pulling themselves out of poverty.