Added 20 August, 2010

Article on The Hidden Risk of Securitization - Part II: Establishing a Sounder Basis for Microfinance by Vinod Kothari & Daniel Rozas on Microfinance Focus News sequel to the 6th July Article, see link below

Added 6 July, 2010

Article on 'The Hidden Risk Behind Microfinance Securitization' by Vinod Kothari & Daniel Rozas on Microfinance Focus News

Added 8th June, 2010

RBI new Guideline and impact on Microfinance - Vinod Kothari

Added 18th March 2010

Microfinance: How overdrive may kill a benign noble cause:
Vinod Kothari

When credit becomes easy, creditor becomes uneasy - the adage may be age old, and yet repeated often enough because people cyclically tend to forget it. So, cyclically, there is an oversupply in a financing market, and the result is the savings & loans crisis of the early 1980s in the USA, or subprime mortgage crisis of 2007-8. The oversupply brings things to a crash, and then there is overcaution, leading to complete drying up of a market. In other words, the market for finance, like the pendulum of the clock, does not reach a balance - it constantly continues to search for a balance.

Microfinance is currently in an overdrive format. The reasons are not difficult to understand. Private equity investors are chasing microfinance entrepreneurs. The build-operate-grow-sell model seems to be attracting entrepreneurs imagination. The model is like this - build a microfinance institution, quickly grow branches and borrowers, and grow volumes, and then sell equity at prices that seem like fantasy come true. This has obviously stressed on the need to grow branches, borrowers and volumes. Start-ups with 2-3 years history claim to have built hundred thousand borrowers in a short span of time.

Also, larger players need to constantly maintain the earnings per share that they had projected when they attracted capital. This would mean they constantly need to continue growing. Penetration rates in a certain geographical market reach saturation after a while -forcing them to search for new geographical regions, including those that are already being served. The result is what is obvious today - there are multiple MFIs operating in a single village, all scouting for the borrower's thumb impressions.

Extremely laudable developmental work is being done by smaller and medium MFIs, particularly the NGOs and developmental bodies in small places scattered all over rural India. However, the pressure to grow the book size on the larger entities has pushed them to compete with these small and medium MFIs, including the NGOs. Obviously, larger scale brings economies and efficiencies that smaller players find it difficult to cope up with.

The result is - the marker is soon getting into the "whales or minnows" mode, which have looked alright for the corporate arena, but microfinance, at least for the sake of argument, might have been a different field. If financial inclusion is the very promise of microfinance, the whales-or-minnows scenario is a move towards concentration, which is very unlike the inclusion theme that microfinance carries.

For small and medium MFIs, institutionalization, corporatisation and operational efficiency is the need of the hour. Suvidha, an entity formed to cater to the service needs of small and medium MFIs, is meant to address this need. Vinod Kothari and Sunil Shah have formed Suvidha to provide institutionalization services to small and medium MFIs who seem to be currently starved of both capital and credit.

Suvidha is also bringing together MFIs in the Eastern Region, including the West Bengal, Bihar, Uttar Pradesh, Orissa, MP, Chhatisgarh, Jharkhand and the NE States. The Summit, slated for 9th-10th April in Kolkata, will aim to bring together the MFIs in the region, particularly the small and the medium ones, to understand and address their concerns. Not that larger entities are not involved - in fact, Bandhan is one of the joint sponsors of the programme.

The 2-day summit will bring together regulators, policy makers, industry players, service providers and experts and provide a voice to the microfinance segment.