14861 - SPECIAL ARTICLE Commercialisation of Microfinance...

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SPECIAL ARTICLE Economic & Political Weekly EPW june 12, 2010 vol xlv no 24 65 M S Sriram ( [email protected] ) is an independent researcher based in Bangalore. Commercialisation of Microfinance in India: A Discussion of the Emperor’s Apparel M S Sriram Most of the early microfinance in India happened through donor and philanthropic funds, which were channelled to not-for-profit organisations. As the activities scaled up, microfinance moved to a commercial format. Using publicly available data, this paper examines the growth imperatives and the transformation processes of four large microfinance institutions in India. It studies the implications of the transformation process and its effect on the personal enrichment of the promoters of the MFIS . It examines the governance processes in these institutions and questions the moral and ethical fabric on which these institutions are built. L ong been discussed as an innovation to address poverty is- sues, microf nance 1 is now being viewed as the next big in- vestment opportunity. The language oF microf nance has undergone a Fundamental change in the two decades oF its evolu- tion. As some large microf nance institutions ( MFI s) hit the c apital market, we examine the origins oF these MFI s, their t ransFormation processes, and the overall trajectory oF the g overnance processes. When we look at the two decades oF MFI presence in India, we f nd three distinct waves. The f rst wave was when the develop- ment sector discovered the methodology oF reaching loans to the poor through a scalable model, which was mastered by the Grameen Bank. The second wave was when these MFI s reached scale and sought methods to morph into commercial orga- nisations. The third wave was when mainstream institutions like L&T f nance and Equitas took to microf nance as a business. Most high growth MFI s have adopted and improvised upon the Grameen methodology. This methodology has the Following elements: (1) IdentiFy customers using a poverty index thereby ensuring homogeneity in borrowers. (2) Organise them into groups. Groups address the issue oF in- Formation asymmetry and lack oF collateral by transFerring an individual liability into a group liability and hold the group mor- ally responsible For repayment (Sriram 2005b). (3) Have standardised products and systems, enForce disci- pline, and ensure that the exceptions (non-attendance in meet- ings, non-payment oF dues, etc) are dealt with severely. This template could be applied irrespective oF local/cultural issues. The small loan amount did not threaten the vested inter- ests oF local moneylenders; it did not aFFect the basic Fabric oF the local economy. The amount was suFf cient For the borrowers to go through the process oF group meetings. It was also attractive For the MFI s because they could keep track oF their work through cli- ent numbers, portFolio quality, amount loaned and recovery.
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This note was uploaded on 07/31/2010 for the course FIN 201 taught by Professor Hcverma during the Summer '10 term at IIT Kanpur.

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14861 - SPECIAL ARTICLE Commercialisation of Microfinance...

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