Microfinance - the attack on the poor

After many attacks by the popular media on microfinance industry generally and SKS finance in particular, the victim has been the poor. For a change from other voices, Indian Express carries a great editorial Don’t micro-manage.

What people don't get about microfinance is that it provides competitive interest rates - which logically are lower than the next best alternative i.e. moneylenders (who can charge upto 1% interest a day). If they didn't charge lower, no one will go to them - poor people in need to micro loans are not stupid. This is the less important of the two arguments.

The real problem microfinance is able to solve is 'access'. This is at two levels, one is being able to borrow at all given that the loans are uncollateralised - something which banks are loathe to do, even nationalised ones with a mandate to lend to the rural poor. The second more important one is access at the right time - for instance before sowing the crop for farmers. Banks take weeks and months to process loans and a one week or one month delay of disbursement means, the farmer cannot sow the crop and is also sitting on idle money for which she must pay interest and possibly default.

Given the innovative ways in which microfinance ensures repayment through peer pressure, they are able to ensure impressive recoveries. Banks with their formal structures can by no means ensure recovery. As far as instances of arm twisting and bullying by micro-finance goes, that is a law and order problem and not one of financial regulations. Ultimately, any control of interest rates and other economics fighting regulations will choke both the industry and ultimately the poor people who could be productive, but for urban intellectuals choking their capital in righteous rage.