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Microfinance mess result of a deep malaise within

In India, all financial services started off as straightforward products and then completely deviated from their original goal

A lot of people now believe that the microfinance industry is imploding. According to news reports, a large proportion of borrowers across Andhra Pradesh have stopped repaying their loans. It seems they are being encouraged to do so by politicians who are now competing to lead what they believe is emancipation from the evil of microfinance.

There is no doubt that microfinance operators have themselves created an opening for this. An activity that started off with an intention of transforming the lives of the poor now stands accused of being little better than the traditional moneylender.

The general formula seems to be to take a good idea and a straightforward product and then take it in some direction which is completely contrary to the original purpose. Mutual funds, insurance, housing finance are three major examples. Consumer loans of all kinds, currency hedging products mis-sold to exporters (including a lot of small companies), the list is endless.

Mutual funds were supposed to be a vehicle for encouraging retail investment into stocks, but a huge part of the industry's attention stays focused on short-term corporate business. Insurance was opened up because Indians had so little risk and life cover but the industry has become a weird mutant which avoids selling risk cover so that it can focus on abusively-priced investment products. Housing loans has become a vehicle for highly-leveraged speculation in housing, which itself has become a major factor that is driving up prices. The RBI has now had to enforce that borrowers put down a minimum of 20 per cent to try and reduce this. Last year, when the rupee made a sharp move there was a huge crisis because it turned out that banks, instead of helping exporters hedge against adverse currency movements were basically selling leveraged currency speculation products.

Of course, the financial services industry offers the excuse that this is a free market and customers freely choose what products and services they buy. This is bunkum. A market functions when there is symmetry of information between the buyer and seller. However, in each of the above, the financial types' energies are dedicated to creating an information gap, services which are designed to ensure that the buyer doesn't understand what he is buying.

I think there is a deep malaise in the way these industries approach their business. I don't know whether it's the people, the culture, the incentivisation or what, but there's a widespread attitude that the customer is an idiot and his money is there for the taking.