In India, greed creeps into microlending, critics say
Friday, October 29, 2010
NEW DELHI - The microcredit revolution has been celebrated for helping poor women in developing countries start small businesses. By lending them money for purchases such as a buffalo or sewing machine, the women were able to help lift their families out of poverty.
But critics say the microcredit model has been perverted by commercial greed in India, with reports of abusive collection methods and sky-high interest rates.
"What began as a simple, innovative model of providing credit for the poor women who were excluded from mainstream banks underwent a paradigm shift in India," said R. Subramaniam, principal secretary for rural development in Andhra Pradesh. "Many of these microfinance lenders morphed into for-profit companies six years ago."
In the southern state of Andhra Pradesh, which the has the highest number of micro-lending businesses in India, at least 25 defaulters have committed suicide in the past two months, according to the government. At least 31 other suicides are under investigation.
Founded in rural Bangladesh, the Nobel-prize winning microcredit revolution called Grameen Bank became a global phenomenon as a system very small loans to poor people . The industry has boomed in India, growing at 70 percent annually in the past five years.
Critics say that rapid growth has resulted in abuses.
"Each loan agent had a target to fulfill and was knocking on people's door with easy credit without due diligence. That is how the rot set in. It's not unlike the subprime crisis in America," Subramaniam said.
Vijaya Kasipati, who lives in the village of Lachepet in Andhra Pradesh, said she had defaulted on five loans totaling about $ 2,000 from different micro-credit institutions. Loan recovery agents barged into her home last week, she said, with dozens of men shouting insults.
Two hours after the men left, she said, her husband, Jangam Kasipati, a temple priest, suffered a massive heart and died.
"The shock was too much for him. The agents were rude and very insulting. The whole village heard them," Kasipati, 46, said by telephone the village of Lachepet. "I just could not repay, I tried hard. The agents harassed me every week."
India's government is introducing a national law to scrutinize the institutions.
Earlier this month, the Andhra Pradesh government introduced an interim law calling for more disclosures, a ban on coercive loan recovery measures and better controls on multiple loans to one person. The law also mandates displaying interest rates prominently on signboards and setting up of district-level courts to hear complaints.
The microfinance industry has challenged the curbs in the state high court. Advocates say that about 80 percent of the sector is already regulated by India's central Reserve Bank of India and blame informal fly-by-night operators for the abuses.
"The way the rural economy is structured, moneylenders are an integral part of it. The moneylenders do feel threatened by the inroads made by the formal sector micro-finance institutions," said Alok Prasad, chief executive of the Microfinance Institutions Network, the industry association.
Some of the advocates say the new curbs could trigger a meltdown of the industry, with loans worth $6.6 billion and more than 30 million borrowers. "Everybody loses - the banks, the micro-finance institutions and the clients. Where will people go for their credit needs if the tap is suddenly turned off? Stop pushing them back into the arms of the village moneylenders who have been exploiting people for centuries."
But complaints about aggressive tactics abound.
Official say that harassment by agents included beating up defaulters, humiliating them by making them stand in the sun all day and hurling abuses at them outside their doors.
"You need to be very very careful when you are working with villagers. If you show up at their door with easy loans, they accept. They think, 'Money has come to my doorstep, why send it away?' So the same person is given more than one loan by several agents without checking their credit history and capacity to repay," Subramaniam said.
The loan size ranges from about $250 to $500. The borrowers have to pay the interest every week, a dramatic change from the earlier Grameen Bank model of monthly payments. Prasad said that the interest ranges between 24 to 36 percent. But an official said that some charge interest of 50 to 60 percent as well.
Critics said some of the small loans are being used to pay for weddings, pilgrimages and even cellphones.
"Where is the question of a small business? A woman has to immediately start weekly repayments," said Jamuna Paruchuri, project manager for gender at the government's Society for Elimination of Rural Poverty. "The woman is caught in a debt trap. She takes a second loan to repay the first."
In the village of Gangapur, B. Satyamma, 48, said she has struggled to repay a $250 loan she took out for a family medical emergency. She walks 5 miles a day to pluck cotton buds in distant fields because the wages are higher there.
"I have to do this to keep up with my weekly repayments of $6," she said.
Paruchuri said some loan agents create fraudulent accounts.
Savitri Edulu, 40, rolls beedis, traditional cigarettes, for a living in Lachapet village. A few months ago, an agent asked her to sign papers and offered her $25 as commission.
"It was quick money, and all I had to do was sign," she said. "Little did I know that the agent borrowed loans worth $ 2,500 from five different lenders in my name. Now different men are banging on my door every week, and the agent has absconded."
Courtesy : The Washington Post
MFI agents 'forcing' debtors to commit suicide: Study
Jinka Nagaraju, TNN, Oct 20, 2010,
HYDERABAD: In a shocking and disturbing revelation about the methods of the micro finance institutions (MFIs) in disbursing and recovering loans from the rural people of the state, a government study has found that some MFI agents themselves are encouraging the debtors to commit suicide so that their loans are repaid. This happens because the borrowers are covered by insurance.
Till now, there have been at least 45 suicides reported in the state in the last one-and-a-half months allegedly due to the coercive practices employed by the MFIs in recovering the loans. "MFI agents are provoking defaulters to commit suicide as all the borrowers are covered by insurance and if the defaulting member dies, the MFI will get the repayment from the insurance company," said the study that was conducted last week in various villages of the district by Sujata Sharma, project director of District Rural Development Authority (DRDA) of Warangal.
According to sources, the MFIs draw up an insurance cover for the borrower at the time of loan disbursement. In the eventuality of suicide, they recover the amount under the Loan Protection Fund (LPF) by which 10 per cent of the loan amount is deposited with the RBI which repays the remaining loan amount due from the defaulter. In fact, the study demolishes the theory that the MFIs are improving rural credit and, in fact, conclusively proves that the loans were taken only because of the presence of the MFIs.
In most cases, "there was an element of wasteful expenditure by the poor due to the availability of the easy loan from the MFIs....The presence of easy loan at the doorstep has certainly played a stimulatory role," the study said.
The six major reasons for which the loans were taken from the MFIs were for expenditure on marriages, death ceremonies and certain other rituals, medical expenses for those ailments not covered by Arogyasri, repayment of old dues, children's education, income generating activities including agriculture and male members getting habituated to liquor and not contributing to the family's income.
Explaining the methods adopted by the MFIs to trap the rural folk by doling out loans and, Budithi Rajasekhar, CEO of Society for Elimination of Rural Poverty ( SERP), the monitoring body of Self Help Groups (SHGs), said: "A major modus operandi is to lure a greedy SHG group member by bribing her with money and gifts to introduce the MFI agents to other members. For example, in Dubbaka mandal of Medak district, all the MFIs formed a syndicate to coerce the members to take loans."
The ugly underbelly of Microfinance
Roli Srivastava, Swati Bharadwaj-Chand & Partha Sinha, TNN, Oct 18, 2010,
SKS Microfinance, India's largest microfinance player, arrived with a bang with its hugely successful IPO in August. However, the recent sacking of its MD and CEO Suresh Gurumani has opened up a pandora's box that is now threatening to expose the ugly underbelly of the sector which, many allege, is teeming with players who are no better than moneylenders but have so far been able to operate under the pious garb of poverty eradicators.
TOI spoke to a cross-section of people associated with the sector and found that most are of the opinion that far from pursuing their socalled vision of eradicating poverty and being poor-friendly , private MFIs are actually in it just for profiteering as they are lending to the poor at interest rates as steep as those charged by moneylenders, or 'Pathaani Vyaaj' , a sobriquet derived from the ruthless moneylenders of Afghan origin who operated during the early 20th century.
Those familiar with the functioning of MFIs point out that the lending model of for-profit MFIs is not exactly pro-poor . While offering a loan, they often quote a "10% flat" rate of interest, which, on the face of it, appears like a good deal. However, there is a catch. This 'flat' rate of interest means that it will not be calculated on reducing balance. It implies that even after the borrower has paid a few installments, the interest would still be calculated on the initial sum borrowed, and not on the balance loan amount. The result is a (hidden) final rate of interest of 24-30 %, or even higher for the poor who can barely afford a square meal a day. "Microfinance, as practised by MFIs is unethical to the extent that it evades the truth in lending," said R Balakrishnan, a financial market veteran turned independent adviser . The high rate of interest is also leading to defaults and fraud. Recently , there has been a spurt in suicides in Andhra Pradesh and Orissa, allegedly due to harassment by MFI agents who started resorting to strong-arm tactics to recover loans as chances of default rise. M Subba Rao, of NGO Masses, who trained under Grameen Bank founder and Nobel prize winner Muhammad Yunus in Bangladesh, describes the cases of alleged harassment by MFIs as the result of 'irresponsible lending' . "There is high pressure on the staff (of private MFIs) to lend. They have targets to meet and they dump money (on people)," said Rao.
Consider this: The loan outstanding , according to the latest estimate by Microfinance Institutions Network (MFIN), the organization of 40 MFIs, is about Rs 30,000 crore with about 3 crore poor banking on MFIs for their financial needs. While the four southern states of AP, Tamil Nadu , Karnataka and Kerala account for a chunk of this borrowing, West Bengal and Orissa too have rural poor relying on MFIs. Besides, the sector is also on an uptick in UP and Haryana.
SKS Microfinance founder and chairman, Vikram Akula, is at great pains to ensure that everything is above board in the company. And more so due to the bad publicity the company got after its board sacked Gurumani. "We believe there is a right way to do microfinance and we have been practising it over the past 13 years with not a single case of unethical practice against us." The company, Akula said, clearly communicates to the borrowers that though the loan was at a flat rate of 12.5%, it effectively works out to over 26% because there is an "extraordinarily high cost of doing microfinance" . Since most of its lenders don't understand rate of interest, SKS' agents communicate to its borrower how much they have to pay in terms of rupees per week.
Akula, whose company is the largest MFI in the country with over 73 lakh customers, also denies the possibility of its staff using strongarm tactics or misleading borrowers . Instead, he blames the bad name that the sector is getting to new MFIs jumping into the fray sensing a lucrative business.
Of course, eradicating poverty through the MFI route, for some, is a lucrative business. The IPO document by SKS disclosed that Gurumani was drawing an annual salary of Rs 1.5 crore, an equal amount or more as performance bonus, and also a one-time bonus of Rs 1 crore. Akula is entitled to up to 1% of SKS's net profit, in addition to ESOPs.
Not surprisingly the 'success' of some of the MFIs and the mega-listing of SKS recently have stunned even seasoned bankers. When asked about the success of the MFI business in India, during a recent interview with TOI, SBI chairman O P Bhatt said even he was surprised by their numbers. He wanted to go deeper into their finances and business model to understand how MFIs, which borrow from banks including SBI, can make profits which these very banks can't make. After all, like mobile tariff plans, no financial product is protected by patents and IPRs and the uniqueness of any new and lucrative one cannot last for more than 24 hours.
The problem seems to be with the business model, and not the approach . In India, there are three kinds of MFIs: The government-supported self-help groups, non-profit NGOs and the private for-profit firms. While private MFIs say that the smaller entities have earned the sector a bad name, social workers and industry veterans at the grassroots say that bigger players with bigger targets have led to such incidents. In many instances, multiple MFIs lend to the same clients, resulting in repayment problems and eventually to defaults.
'MFIs have lost ethical values'
ANABARD-funded study says Vijay Mahajan's Basix Microfinance — with funding from Ford Foundation , Swiss Agency for Development and Cooperation and Sri Ratan Tata Trust — became the first MFI with a 'forprofit model' not only in AP but also India.
Industry observers point to a trend: Register a company under Section 25 of Companies Act, 1956 as a not-forprofit entity, use grants — local as well as foreign — and do social lending to build a book, buy an NBFC (preferably a dormant one), do a reverse merger and become a for-profit MFI. Says the head of a financial services company : "The problem starts when shareholders of forprofit companies put pressure for return."
source : The Times of India