“Capping Interest Rates For MFIs Will Hurt The Poor”

Your work is admired, but your decision to go for an IPO did not go down well with people (including  Prof Mohammed Yunus) who see it as wealth creation at the expense of poor.

I have great respect for Prof Yunus. Before starting SKS, I spent time at Grameen Bank to learn its model. In microfinance, both for-profit and non-profit models play a role. India needs about Rs 2,40,000 crore of microcredit. A for-profit model is critical to tapping the capital markets to meet the needs of the poor. In 12 years, SKS has reached more than 7 million people. It took Grameen three decades to reach the same number.

Has microfinance become more about profits and topline growth than helping the poor access affordable loans free of debt traps? Are MFIS moving away from jansewa?

SKS uses investments, profit and topline growth to give poor people access to financial services. This is  large-scale jansewa. A commercial model is a critical tool to accelerate inclusion. SKS has checks to ensure we serve the customer first. We do not incentivise our staff on loan size or collection. In the states where we have economies of scale, SKS has reduced interest rates to 26 per cent.

How do you rate the role of self-help groups vis-a-vis joint liability groups, which are growing rapidly?

SKS’s joint liability groups are better monitored and trained than many self-help groups. We require potential members to undergo financial literacy training to understand interest rates and the repayment process. Moreover, we provide members with individual loans for income generation, whereas self-help group borrowers take loans for the entire group. Chances are not all members get an equal share of the loan amount.

There is increasing pressure on banks to reduce exposure to MFIS and reach rural areas  directly.

Most banks do not have the infrastructure, corporate culture or knowhow to develop last-mile networks in remote areas. By the time most banks open, SKS field officers have already visited hundreds of borrowers in the villages.

There is also a proposal to cap the interest rate charged by MFIS.

Capping interest rates would damage the goals of financial inclusion. It would stifle smaller MFIS and strangle a fledgling industry. Competition among MFIS is the best way to bring down interest rates.