India is a land of entrepreneurs. From tech-savvy businessmen to street barbers, the country is full of people who can identify opportunities and use them to their advantage. The unorganised "micro-moneylenders" in the southern state of Andhra Pradesh are no exception.
To illustrate the point, let us take the example of a hypothetical village in Andhra. As with most fertile villages in the region, MFIs (microfinance institutions) have a strong presence in the area. For years now, they have been lending small sums of money to women in the village, purportedly to help them jumpstart micro-businesses. The MFIs send staff to collect weekly loan instalments, which they do in early morning centre meetings. In these meetings, 20-40 customers gather and repay their instalments together, and if somebody cannot pay, the others cover for her.
Suppose that, in our hypothetical village, one such meeting just ended. Customers are pleased that they have paid the money they owed this week - it means they are a step closer to receiving a larger loan in the future. The loan officer is similarly pleased - 100% collection means that he will get a pat on the back and a boost in his variable income. Far away in a world-class Indian city, the MFI's founders are also pleased - high repayment rates mean that more investors will be interested in them.
As of late, however, high repayment rates may speak of something else entirely. Specifically, they may mean that micro-moneylenders are at work. These individuals, it seems, come in two flavours. To date, both have only been seen anecdotally, but both have the ability to subvert the microfinance industry. The first type looks and acts like a traditional moneylender. Minutes before centre meetings, they offer money to cash-poor customers - typically 200-400 rupees (£3-£6) - and ask them to repay within a week. They are quick, inconspicuous, and exorbitantly expensive.
The second type is harder to find, since they look and act like MFI customers. In isolated incidents, it seems enterprising customers have begun "lending" money to their fellow centre members. Before the meeting begins, they subtly dole out cash to those in need, and in return, charge commission for their generous services.
The presence of micro-moneylenders should hardly come as a surprise to microfinance practitioners. Many customers in Andhra are running three to four loans simultaneously, meaning they need to continuously be cash-rich to pay instalments. For customers that run seasonal businesses, such as harvesting rice or weaving winter blankets, this may prove difficult. Customers also know that the loan officer will not adjourn the centre meeting until every rupee has been paid. This practice was begun to instil discipline in repayment habits, but over the years, has become a nuisance to women whose livelihoods are time-dependent. Women who are paid by the number of saris they produce, or by the time they spend picking cotton, want centre meetings to end as quickly as possible - even if it means becoming further indebted in the process.
Unfortunately, it is impossible to determine how widespread micro-moneylenders are. To date, their existence has been only verified in whispers from branch staff in areas with high microfinance activity. There are no statistics, academic reports, or roundtable discussions to confirm how active these individuals are.
Regardless, the presence of micro-moneylenders should serve as a warning signal to the industry. Traditional wisdom has, for years, been telling us that the higher the repayment rate, the more effective the MFI. Staff incentive schemes and investment decisions have been made using this linear benchmark. The emergence of micro-moneylenders reminds us that the story may not be so simple, and that high repayment rates may mask other, less appealing, truths.
At its outset, microfinance was created for two primary reasons. First, it was developed to fight local moneylenders who charged exorbitant rates. Second, it was designed to help disenfranchised individuals climb rungs of the socioeconomic ladder. In the future, practitioners should keep both of these guiding principles at the forefront. Those who do will be the ones to truly benefit the women of our hypothetical village.