Malcolm Harper

Q: What is your overall impression of the loan waiver policy?

A: I think the loan waiver is an expensive, populist device that won’t have much effect. The government may get votes in the short-term, but I’m not sure the waiver will help them get votes in the long-term. Also, this move will destroy the credit culture, and it’s a classic, misguided populist intervention.

Q: You mentioned that the loan waiver will likely affect the credit culture. How do you think the loan waiver will affect the microfinance sector at large? Do you think it will lead to a reduction in credit discipline?
A: I imagine it would, although I haven’t been sufficiently in touch to know whether this is the case. You could argue that in the long-term, the waiver will increase business for MFIs because the banks will be less willing to lend, regardless of priority sector requirements, and therefore MFIs will come up and fill the gap. But as far as people’s willingness to repay loans from any source, even though it’s not been a loan waiver for MFI loans, I will be most surprised if the waiver doesn’t have some negative effects on people’s willingness to repay loans from other sources. I know that the 1989 loan waiver by the BP Singh government, which I think was the last nationwide loan waiver, had a very negative impact on the credit culture. Of course there was hardly any microfinance at that time, but the credit culture took many years to recover. In some ways, perhaps, the country’s credit problems in the early 1990’s created a vacuum into which microfinance institutions and self-help groups could enter.

Q: There was a recent survey conducted by Outlook magazine that targeted residents living in one of Orissa’s poorest districts, Borangir. One of the questions asked was “What is the one thing you want the government to do to radically change your life?”, and the options included things like health, infrastructure, and education. Interestingly, the most popular response by far, which 47% of the respondents selected, was that people wanted the government to provide a larger and cheaper loan. Given your experience working in microfinance across the world, why do you think poorer people in India believe the government should provide access to credit?
A: Well, I suppose when somebody asks you about what the government should do, you tend to remember things they have done in the past, and which might have helped or at least been delivered in the past. It’s not much good saying the government should provide decent primary schooling or decent primary health care because they know from years of experience that the government has failed on these fronts. And of course the government of India is one of the world’s major offenders in that regard. So you ask for something which you know the government does have.
“They have money, so let’s ask them for money.” Usually, I think responses to that kind of question are inevitably skewed towards what that institution or indeed that person, can provide. Accordingly, the responses reported in Outlook magazine could be a product of the fact that since independence, or at least since IRDP, the government has provided subsidized money, which many people benefited from, although of course large numbers of people didn’t benefit or even suffered as a result. Ultimately, it’s a “more of the same” request. So I wouldn’t take that kind of response too seriously in terms of what people really need.
There’s no doubt that in the context of SHGs and microfinance in general, some people need access to larger loans. There is one view of microfinance, which I don’t wholly subscribe to, which regards it as a wonderful device for keeping people poor by doubling the loans and keeping them in debt, which is highly profitable for lenders or banks – lenders of lenders. I’m not sure if I’m being too cynical, but microfinance loans are small, and it’s also more or less in their nature that they should be. Everybody receives a similar amount and although they are too small for people who want to do something ambitious, the cost also is not too high to people who want to trade, not too high if it’s just a replacement for a moneylender loan, but far too high if you want to grow anything or make anything. The returns on either tiny scale manufacturing, growing paddy or other very small-scale business activities are not sufficient to pay the interest rates charged by most microfinance institutions. So, those who are trying to start or grow a business, they need larger loans and they need cheaper money.

Q: Earlier you said a loan waiver policy is a classic misguided policy. Do you think this policy has any positive impact on distressed farmers who have moneylender debt?
A: I was involved in a panel advising the government of India on what to do about farmer suicides. I agreed to be a part of this panel after receiving assurances from the highest level that there would be no loan waiver. So, I was very disappointed when all our recommendations were ignored and they decided to go with a blanket loan waiver which is far more easy to implement and far more expensive, but far less effective. This loan waiver does not directly address moneylender debt, and I saw somewhere that three quarters of the farmers committing suicides owed money to moneylenders. Therefore, waiving of formal debt is at best an indirect way of addressing this problem. And there have been, in Andhra Pradesh and other places as well, programs which were very cleverly designed to refinance moneylenders’ debt. The government didn’t try to scale such programs. Instead, they just decided on a blanket waiver for certain classes of poor farmers’ formal debt. And in fact, the majority of those committing suicide were not actually small farmers. Ultimately, the loan waiver doesn’t address the needs of these larger farmers with debts to moneylenders.

Q: We had an opportunity to speak with a member of parliament. Her response to our questions about the loan waiver was that the government has to do something realistic, that’s doable. If you had a chance to design this loan waiver policy, what would you have done differently?
A: I wouldn’t have done a loan waiver policy. As I said, I was involved in a small panel trying to advise the government on how to address growing farmer distress, and without going into too much detail, we suggested a one-time loan settlement. This would have been a type of loan waiver, but not a direct loan waiver, and we also recommended a number of other steps. But it’s interesting that you say “doable”, because our panel said all recommendations must be “actionable”, and there was an implied criticism of the numerous previous reports which basically recommended that everything that hasn’t worked in the past be made to work.
The criteria we set for ourselves was that everything that we recommended should be doable, not only doable in principle, but also policy actions that should be done in India right away, and on a large scale. We came up with a range of suggestions under the headings of finance, insurance, lower input costs and social capital, all of which were eminently doable. So, I think my answer to your loan waiver question would be that loan waivers are not the only doable step. Also, I gather, although I’m not so well informed, that while the actual loan waiver may be doable, it lacks clarity around who’s eligible, how banks are reimbursed, and so forth. In the end, it’s doability is not altogether clear.

Q: One of the biggest criticisms of the loan waiver is it only helps people who have access to formal finance. Is there a way to design a waivel policy that would alleviate the distress from moneylender loans?
A: It would be very difficult because in the classic governmental hiding-their-head-in-the-sand approach, moneylenders officially do not exist. Therefore, it is very difficult for people to show they have debt from moneylenders. In fact, I have come across numerous cases of people who sign blank-stamped loan agreements because moneylenders are not willing to take the risk of handing out the agreement which could be shown to be illegal, but they still want something they can use to get people to repay the loan.
It’s terribly difficult partly because moneylenders officially don’t exist. But we did find, again, going back to what we did on this panel, I think it was in Andhra Pradesh, a successful effort under the Velugu project for refinancing, not waiving, moneylender loans with bank loans. Yes, it was through SHGs in AP. This is one of the things we proposed should be expanded nationwide. The program would be difficult to implement, but it did seem to be doable. What would make the process tricky is moneylenders are quite reasonably not willing to formally acknowledge the fact that they made loans which are illegal under the law.

Q: Let’s say you had 60,000 crores to spend on improving access to finance for India’s poor farmers. How would you spend it?
A: That’s a lot of money.

Q: I think we put you on the spot.
A: No, no, fair enough. I think, what I’d do, and this is making all kinds of extraordinary unrealistic assumptions about the quality of delivery channels and the institutions, but I would try to use it to restore PACs [primary agricultural credit societies] to their proper role. I would use the money to get PACs to do more product linkage, to do more joint liability group lending to farmers, and generally to play the role that they were originally designed for in 1994, but which has gradually been eroded ever since. I would try to revive the PACS and the whole cooperative credit structure which is there in form, and which has already performed capably in West Bengal and some other parts of India. This role shouldn’t be played by MFIs, which have high costs. And it shouldn’t really have to be done by commercial banks or even RRBs. So I haven’t exactly outlined how I would spend the 60,000 crores but I think that’s reviving PACs would be my main focus And I think the World Bank, with the help of GTZ and others, is looking to improve PACs, and I wish them good luck.

Q: Concluding remarks or comments?
A: I happened to see some figures from UNICEF last week on child malnutrition in India, and the proportion of Indian children and babies who suffer from malnutrition is much higher than among Bangladeshi children or Pakistani children. And this really demonstrates that for all the talk about India shining and all the money being spent on grossly populist, expensive, and relatively ineffective measures like the IRDP or the loan waiver, India is not really scratching its itches and is not addressing the problems of ineffective delivery channels and poverty in general. It’s a rather negative conclusion, but I see the loan waiver as part of the problem that leads to that wretched performance.