Merely increasing funding for microfinance, without learning from past mistakes, will not solve the microfinance crisis. As one of the biggest lenders to the microfinance sector, it is up to SIDBI to develop necessary safeguards to ensure that the industry it helped create, does not collapse under the weight of its sometimes over-enthusiastic support for MFIs

I read a very interesting news report yesterday that the Small Industries Development Bank of India (SIDBI) is determined to lend more money to MFIs during this fiscal (as compared to what it advanced last fiscal). This is indeed great news and I am delighted, because shying away from financing MFIs is not the real solution to the microfinance crisis, where liquidity is indeed very important.
The news item reads:
"Small Industries Development Bank of India (SIDBI) plans to disburse around Rs1,000 crore in credit to microfinance institutions (MFIs) during 2011-12, which is 19% more than the loaned amount last fiscal. 'We are not shying away from lending to MFI sector in the recent time. Rather, we do have a target of disbursing around Rs1,000 crore of loans in the current fiscal against Rs840 crore of advances last fiscal,' SIDBI Deputy Managing Director N K Maini told reporters on the sidelines of a seminar on 'Microenterprise Financing' here. …The fund flow to the MFI sector from financial institutions, especially from commercial banks, has dried up in the aftermath of the ordinance passed by the Andhra Pradesh government, restricting some of the lending practices followed by MFIs. … 'We feel that Indian MFI sector is very responsible and continues to be economically viable,' Maini said. SIDBI, which lends money to the MSME sector, is also trying to rope in foreign private equity (PE) investors to invest in Indian MFI sector, he added. 'We have recently met PE players in London and are continuously trying to rope in PE players into country's MFI space,' he added."ⁱ

That said, I was somewhat stunned by the cavalier attitude of the above mentioned SIDBI senior management staffⁱⁱ  who said that SIDBI would finance MFIs much more than last year, and gave a ballpark figure of Rs1,000 crore. I was also perplexed by his statement that 'MFIs are responsible' and there is nothing wrong with their behaviour. I soon realised that SIDBI had (perhaps) not learnt from its past experiences.

Coming in the backdrop of the country's largest microfinance crisis, I am really appalled by this self-denial and refusal to learn from the on-going mess. The Andhra Pradesh microfinance crisis occurred because of several factors including the (a) the desireⁱⁱⁱ  of many MFIs, equity investors and lenders for faster growth, higher profits and greater shareholder wealth, that was achieved through various means such as over, multiple and ghost lending; (b) the strong policy drive for including large numbers of people quickly through a well-intentioned but poorly implemented financial inclusion paradigm; (c) the regulatory gaps and supervisory failure with regard to delivery of financial services to low-income people through MFIs; (d) the huge vulnerability (due to several reasons) in the livelihood of low-income people, especially those living in rural areas and urban slums; and (e) the refusal of all stakeholders to recognise the fact, that in the absence of other enabling services and infrastructure, merely pushing more and more money (=consumption loans) in the hands of low-income and excluded people, cannot help reduce their vulnerability/poverty and could in fact, become counterproductive if it enhances their indebtedness.

Therefore, given this situation, I have to question SIDBI's strategy of indiscriminately fixing targets for disbursing loans to MFIs and perhaps, pushing more consumption loans into the hands of low-income people. That indeed was a major cause for the burgeoning growth of MFIs during the period April 2008 to March 2010, and repeating the strategy now does not seem prudent at all.

I am deeply concerned at this because SIDBI is a public institution with a great mandate and a fantastic track record of work and under no circumstance should SIDBI be allowed to suffer undue losses because of the perceptions and actions of its senior management staff. Therefore, it is critical that we learn, especially, from the past (three years) experience of MFI financing and to facilitate this, I share some key data for the benefit of all stakeholders. A close look at the data reveals that indeed, SIDBI played a major role in the recent burgeoning growth of the Indian microfinance industry.

As the data suggests, SIDBI has consistently been ranked first among all DFIs/bankers in terms of loans outstanding (from the microfinance segment) in the three years. While year on year, SIDBI has increased its outstanding portfolio and disbursement^v , what is interesting to note is that the growth has been phenomenal during the years 2008-09 and 2009-2010, both in terms of loans disbursed as well as loans outstanding. What makes SIDBI's loans even more powerful is that it is real long-term funding! And please keep in mind that the period of fastest growth in Indian microfinance (both in terms of gross loan portfolio and active clients) and largest equity investments, occurred during the same period of April 2008-March 2010, as shown in table below.

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