MFIs similar to moneylenders, says Reddy ............

 The man who protected India’s economy during the subprime crisis raises red flag, bats for stricter curbs on micro lenders Gayatri Nayak MUMBAI
YAGA Venugopal Reddy, former Reserve Bank of India governor credited with saving the nation’s financial system from the 2008 meltdown, has said what many finance experts believed, but did not have the courage to admit publicly: microfinance is India’s subprime. “Ultimately, it’s something like subprime lending,” Mr Reddy told ET in an interview ahead of his book release. “The same incentives are operating here... it was securitisation and derivatives that operated in the US. Here it is the priority sector lending by banks.”
Subprime lending refers to loans extended to people with poor repaying ability that ultimately led to defaults.
The 25,000-crore microfinance industry is facing tumultuous times ever since the biggest, SKS Microfinance, created a controversy two months ago by sacking chief executive Suresh Gurumani. There was a confluence of woes for the sector when the Andhra Pradesh government came up with legislation curbing their operations. Banks pulled back on lending as some of the institutions were behaving more like moneylenders and in some cases drove borrowers to suicide. INDIAN banks such as SBI, ICICI Bank and Axis Bank are estimated to have lent 16,000 crore to micro lenders. ICICI’s lending is at 2,000 crore, SBI’s at more than 1,000 crore and Sidbi’s at 4,000 crore, according to data from rating company Care.
The financial magnitude may not be the same with the Indian microfinance industry being tiny compared with the subprime lending crisis that led to more than a trillion dollars of losses and sank many venerable institutions. But there are similarities such as opaque practices, high salaries and commissions inducing unethical business, and leverage.
The current practices may create systemic problems too, unlike moneylenders who operate with their own money.
“If it is profit and if there is lending, aggressively, then it’s just moneylending,” said Mr Reddy, who was criticised before the credit crisis for his conservative approach to policymaking. “Also, if you look at it, the resource is leveraged, it’s not just moneylending business. The moneylender normally lends out his own money, whereas here the MFI is actually borrowing money from depositors and lending the money. So essentially, he is a moneylender, but a leveraged moneylender.”
Many admit to the fact that the industry has gone astray with the lure of superlative returns as private equity investors such as Sequoia Capital smelt an opportunity. But that did not mean that its role in financial inclusion could be discarded.
“Yes, I agree with Mr Reddy when he says a lot of perverse incentives got aligned,” said Vijay Mahajan, chairman of BASIX, a micro lender, and head of Microfinance Institutions Network. “Here perverse incentives got aligned like in the US and in two years the sector went from helping the poor to preying on the poor.”
These institutions are no more the not-for-profit ones as envisioned by Nobel Laureate Mohammed Yunus, so regulations are essential, says Reddy. Bangladesh-born Yunus had seen micro lending as a vehicle to lift people out of poverty rather than enhance returns of wealthy investors in private equity funds.
“The idea that MFIs should be treated like banks but given soft regulations is dangerous,” said Mr Reddy. “We had a somewhat similar experience with urban co-operative banks.”


(With inputs from Ruchira Roy in Mumbai)

My Comments:
Readers were asking about what can be fate of MFI's in the present circumstances when AP governmnet has put restrictions on MFI's?
I would like to write here that ,the trend is not good looking at now when it is seen that all types of tricks are used to get the money back which is resulting in sucide of borrowers.That is a very bad situation and this can hurt the MFI  as a whole.
As Dr.Reddy rightly pointed put that the same intention what Nobel Luareate Mohamad Yunus was upto is not there.When there is profit , then it is money lending and when the practice to get the borrowed money is offensive which leads to sucides then one have to think on the rules and regulations and that will come eventually and that will hinder the profit margins of MFI's.
It is good that all these has come out before it became too late.
I would write that this will have negative effect on MFI Co's like Arman Finance, Capital Trust ,SKS Finance and other unlisted Cos which are thinking of coming out with IPO's.