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LATEST NEWS UPDATES | Responsible finance

Responsible finance

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published Published on Nov 22, 2010   modified Modified on Nov 22, 2010

Therecent crisis in the micro-finance industry, brought about by some incidents in Andhra Pradesh, has led to the development of a new conceptin the Indian thinking on development — that of “responsible finance”. Responsible finance is supposed to mean financial activities by companies that make just about enough returns to stay in business and charge rates of interest on loans to the poor that are only marginally higher than what the banks charge their prime customers. Many of the people pushing for this approach are the very same ones who had at one time firmly believed that micro-finance institutions will be the panaceafor all those households that are financially excluded.

The success of the Grameen Bank in Bangladesh convinced Indian policy-makers, politicians, intellectuals and almost everyone else that this was the way to go for India. With similar micro-finance institutions, India would solve the problem of financial exclusion faced by poorer households. Consequently,such institutions mushroomed all over India and poor households startedgetting loans they had never been able to get from anyone but the localmoneylenders. India was proud of its micro-finance movement and waited for great things to happen. Given the romance with micro-finance, few, apart from the “financial inclusion” enthusiasts, asked why banks never lent to the poor. The reason, of course, lay in the fact that the cost of such lending to a commercial bank is much more than what banks could charge as interest rate. In other words, it was irrational to think thatany and everyone could set up micro-finance institutions and charge commercially viable interest rates that were not too high. Micro-financeinstitutions working with committed NGOs can reach a large group of excluded households. From this it does not follow that anyone who sets up such an institution will do it to help the poor; on the contrary, opportunists will use the euphoria to rake in as much as they can.

Markets develop whereprofits can be made. That was what the moneylenders did and that is what micro-finance institutions will do. Indian policy sought to discourage moneylenders and now everyone is baying for the blood of micro-finance institutions. The unhappiness with moneylenders took banksto rural India, and the unhappiness with banks encouraged authorities to permit the mushrooming of micro-finance. Now, the unhappiness with these institutions is making policy-makers look for “responsible financiers” in the name of financial inclusion. The real issue is one ofreducing costs of lending to poor borrowers, rather than of identifyinggood Samaritans who will act responsibly. Worse, there is an assumptionthat good Samaritans can be created with ad hoc rules and policies. Theromantic approach to micro-finance led us to unreal expectations. The idea of “responsible finance” is also a romantic one that will disappoint policy-makers. Problems relating to delivering low cost and affordable finance in a sustainable way are better solved with the mind,rather than the heart.

The Business Standard, 22 November, 2010, http://www.business-standard.com/india/news/responsible-finance/415664/


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