S. Balakrishnan

It is a sad commentary that helping the weak and the poor should be driven entirely by the profit motive as seems to be happening in the evolution of micro-finance.

MICRO-FINANCE. It is the latest financial wave and craze. Egged on by multilateral institutions such as the World Bank, the success of the pioneering Grameen Bank of Bangladesh and management guru C.K. Prahalad's book, The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits, micro-finance, starting as a cult, is now well on its way to becoming a `growth' sector like IT and many industry and market segments.

Formal acceptance and recognition by the `establishment' of its boundless possibilities has come with no less a magazine than The Economist devoting a recent issue to micro-finance.

What has sparked off this piece is the perception of micro-finance as the (next, big) business opportunity. The Economist's survey makes no bones about it. How else can we attract capital to this activity, argues the author of the survey in an e-mail.

There seem to be two models here. In the first, a small community, called a self-help group (SHG), is directly assisted by a bank (it was - and remains - the Grameen Bank's approach) and is, in a sense, collective lending with the SHG responsible for repayment of the loans to individuals in the SHG. Clearly it is a neat risk mitigation strategy without imposing additional costs on borrowers. Many such SHGs have sprung up, especially in Tamil Nadu (prompting a visit to the State by Rahul Gandhi).

Now comes micro-finance as a business. An institution - usually an (erstwhile) NGO but a lot of new players whiffing money have lately jumped in - becomes an intermediary between the bank and borrowers. Ergo, the bank's exposure is no longer to collateral-less individuals at `the bottom of the pyramid'. The intermediary's services naturally do not come free, as it is responsible for debt collection and bad debts.

The Economist's survey speaks of a high-profile Indian bank charging 8 per cent to the micro-finance institution, which, in turn, could charge anywhere from 18 per cent to 35 per cent to its borrowers. The excuse? But for us, they would pay 100 per cent.

Profits in the informal money-lending business are so high that it was bound to attract the hungry eyes of clued-in banks in a desperate chase for profits. It is Michael Milliken, the junk bond trader's thesis - that the default rate on high interest loans is far less than that reflected in the interest differential compared with prime loans - all over again.

Of course, a great business opportunity exists. There is talk of securitising these loans, which means the banks originating them will sell them to buyers at much lower rates of interest - possibly in single digits. (Trust public sector banks to buy these assets off the new-generation and foreign banks and absorb the entire credit risk at single digit rates of interest on the strength of a `credit rating'. So neither the final lender nor the borrower gets any benefit).

It is a sad commentary that helping the weak and the poor should be driven entirely by the profit motive as seems to be happening in the evolution of micro-finance and is a depressing contrast to the numerous individuals and organisations engaged in selfless charity. Undoubtedly there are fortunes to be made - much as there are rich pickings in speaking and writing about poverty - but one would respectfully disagree with the latter half of the title of C.K. Prahalad's book. Contradictions sometimes elude the brightest of minds.

Corporatisation of micro-finance denies the finer spirits of human beings.

In the final analysis, is it all about maximising stock market valuations? If so, it is well in tune with the zeitgeist.

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