For Micro-Finance survival, they need to muzzle their Spin Doctors and listen more to their High Priest

 

 Spin-doctor, a expression that became a part of our lexicon in the 1980s,  is commonly used to describe PR experts as well as political or corporate representatives whose job it is to put a 'positive spin' on events or situations. Sometimes companies give them a more sophisticated designation - image transformation strategists that are often synonymous with re-branding functions. Described often as Goebbels children, they are adept at the art of controlling the direction of an event or issue through which they cherry pick sides of it they want to show while not shedding light on the rest. In practical terms, spin is manifested as dissimulation, lying, deceiving, vexing and confounding with the intention of deflecting attention, foiling or pre-emptive blocking.

A string of suicides in Andhra Pradesh that put micro-finance under the spotlight, triggered a backlash because of which, MFIs found themselves reduced to fighting for their basic survival. No surprise here to find a variety of spin-doctors functioning as their apologists, fending off and neutralising any criticism that the industry faces currently, almost oblivion to the fact their support is to a slow sinking Titanic. Two of the industry’s most high profiled spin-doctors are Vineet Rai and Sasi Thumulurai. This is how they profile themselves as authors of their articles:

Vineet Rai,  Founder and Chairman of Intellecap.  He is also founder of Aavishkaar, an investor in commercially viable enterprises that also have a social impact, which recently won a G20 award.

Sasi Thumuluri, employed with Habitat for Humanity International as Global Business Strategy Manager, based in Washington DC. He is microfinance professional with over a decade of experience in India and abroad. He follows the sector and keeps particular interest in India story. He is also a director of Trident Micro-finance. He has studied the business of microfinance in over 30 countries and has a good grasp of its details.

Two of the most significant spins in this debate are those related to suicides and interest rate. In this post, we bust these spins.

SUICIDES

Vineet Rai (Read more here) 

“How come farmers in Vidharbha were committing suicide when no Microfinance was taking place? Or why do people who have no debt commit suicide (10.8 Indians per lakh )...The government has complained that too many poor borrowers find themselves subject to coercive collection practices by MFIs. It knows that its SHG members sometimes "double-dip" by taking on additional loans from the commercial lenders, and it sees that they tend to repay MFIs faster. However, there are explanations other than coercion that might explain that. MFI loans are more expensive than SHG loans, so a customer with two loans outstanding might reasonably choose to repay the MFI loan first.”

 Sasi Thumuluri (Read more here, here & here)

“True, it is not possible to judge from here the merits of the links between microfinance and reported suicide cases. One simple thought – how can 30-40 people from 30-40 completely distinct locations take such an extreme step all at once in a span of 2-3 weeks when everything seems fine since last 15 years that microfinance existed in the state and more of the same practices and competition existed for more than 3 years now?

It is hard to fathom how these organizations might have turned into goons and killers overnight! Media and politics are traditionally linked in India, so does in many countries, and it is not surprising that both sing the same song around such monsoon weddings!”

“It is hard to believe that someone would end his/her life for less than Rs. 100 ($2). Even for someone with 5 loans of similar nature total interest obligation does not seem worth one’s life......It is certainly plausible though that some of the bereaved families have borrowed large sums from informal sources too and the total obligation of payments exceeded their capacity.

Most MFIs conduct business with groups of women who meet in weekly intervals for making repayments and applying for new loans. Such meetings are usually held in open places in the presence of 20-40 women, and often men and children watch over. In a scenario like this the scope for applying strong-arm tactics seems like a remote possibility. As noted above since many households in the state have access to about 2 or more MFIs it is unlikely that a client would put up with any such coercive actions exhibited of an “x” MFI, nor could “x” MFI resort to such practices openly, else they lose business to competition. So, it sounds like a distant likelihood that anyone would have to resort to suicide as a respite from MFIs. In rare occasions though peer pressure could lead to someone resorting to such extreme end.”

“While it is difficult to pin-point how much of this is the result of MFIs’ own doing, one would be tempted to wonder at this juncture – what exactly is the purpose of MFIN’s and Sa-Dhan’s being? ...Why has there been no representation from these bodies with the government of AP to present its side of the story before such a harsh action was taken? Why did no one come out to challenge the allegations and protect the sector?"

From these extracts, it is obvious both Vineet and Sasi admit the reality that often the poor borrow from multiple sources exceeding their repayment capacity. The Centre for Micro Finance at IFMR Research, with funding from the Banker’s Institute for Rural Development at NABARD, conducted a household survey of 1,920 households in rural Andhra Pradesh to understand their access to and use of financial services. They found 28% of households with an MFI loan outstanding had multiple MFI loans outstanding, and 82% had at least one more loan from a formal source.

Vineet goes on to acknowledge that these borrowers tend to repay MFIs faster but rules out coercion as a reason for this by rather cleverly floating the argument that there could be other explanations such as the interest rates of MFI being more expensive and as such these loans accorded more priority by borrowers. But the problem with this type of argument is that if  there is  good reason to suspect over-indebtedness exists and it is getting worse, and that sufficient client protection are not in place, logically we would have expected plausibility of MFI coercive pressure to be rather high. Dr. M S Sriram, perhaps one of the best known researchers of this industry confirms this may be the case when in an article in May 5 2010 prophetically warns:

“Is there a bubble being created? Are most microfinance institutions chasing the same customer? Are we pushing the customer — the poor woman — into a debt trap? Would this lead to suicides? We have to realise that these are not issues of today, but issues of yore.”

Vineet’s strategy may appear equally clever when he asks, “How come farmers in Vidharbha were committing suicide when no Microfinance was taking place? Or why do people who have no debt commit suicide (10.8 Indians per lakh)”

But the fact is that though the country have witnessed before farmer suicides as in Vidharbha, this time it appears  that it is by mostly by traders and women, the primary target of MFIs, that makes the latter the natural suspects.

With such overwhelming high plausibility, why would the likes of Vineet and Sasi still pursue their line of spin denying suicides? We need to know their background to know where they are coming from.

Vineet's company Aishkaar’s microfinance fund has investments in five MFIs, of which Chennai-based Equitas Microfinance earned it an IRR (internal rate of return) of 160 per cent on exit this September! Sasi belongs to and have financial interests in the MF industry.

Obviously, their intent is just to cast enough doubts to make the claim of MFI induced suicides appear less credible. The micro-finance industry grew at a tremendous rate on the back of their carefully crafted image as Messiahs of the Poor. Take this away and gone is their growth, and the industry reduced to fighting for their basic existence, as they are at present.

Sasi on the other hand, incredibly tries to create an impression that it is as if it the first time the  micro-finance industry faces such charges of inducing suicides. Incredible because he profiles himself as one who follows the sector, keeps particular interest in the India story, a director of Trident Micro-finance that operates in India and having a good grasp of its details. However, that’s exactly what he does.With such a profile, can Sasi actually feign ignorance about Krishna (Andhra Pradesh), Nizamabad (Andhra Pradesh), Kolar (Karnataka) and Idukki (Kerala)? These crises signaled that everything is not well with the models pursued by MFIs in the country.

Apparently,  Sasi pretends ignorance of  the APMAS document - Voice of People on the Lending Practices of Microfinance Institutions of Krishna and Guntur Districts of Andhra Pradesh that firmly indicts microfinance institutions in a series of charges, including inducing suicides. Read more here. Various Telugu daily newspapers and electronic media have in the past several years, highlighted the negative implications of MFIs, including the suicides they induce.  A few months back the NDTV showed news clipping of the cremation of a farmer who committed suicide unable to stand the continuous harassment at the hands of micro-finance goons. NDTV had carried a Bhubaneshwar dateline story on March 19, 2010, "Orissa: Loan driving farmers to suicides". The report reported:

"In 2009, 43 farmers in Orissa committed suicide. It was a year that saw a massive farm loan waiver by the UPA government and also a record investment of over Rs 1400 crore in farm credit by the state government. But they were all small farmers who couldn't access institutional loan and had to borrow from microfinance NGOs at an exorbitant rate of interest. Many, even the state government, suspect it's this exploitative loan network that may have driven loan farmers to commit suicide.” 

 

The allegation of media-political conspiracy by Sasi is simply yet another example of a well thought rhetorical tactic of diverting attention away from the embarrassing association of MFIs to suicides. Why is it a red herring? Politicians instinctively can sense public mood and this is the reason why across the political spectrum there exists a consensus that MFIs need to be reined in. If media such as Wall Street Journal, CNN-IBN, TimesNow etc have reversed their perception of MFIs it is because they have done their own investigations. If they are giving increasing coverage space, it is because of their practice of a recursive feedback loop i.e. if a story gets traction it produces more stories that in turn drive more traction.

The State Human Rights Commission is shortly expected to publish its reports and many NGO and human rights activists are trying to investigate these suicides. As and when these are published, there would be more embarrassment for the MFI industry. The Gender Unit of SERP (Society for Elimination of Rural Poverty) has already come out with a report listing the victims of microfinance institutions in Andhra Pradesh. Out of the 123 alleged cases of harassment that the report lists out, there are 54 death cases. Read more here.  And as for Sasi's puzzled indignation on why MF’s association such as MFIN and Sa-Dhan’s were muted in their defence of the industry, it is most probably that they saw no purpose to defend the indefensible. The knowledge of MFI suicides is common knowledge to all those who follow Andhra development.

[Note at the time of writing, Channel 9 broke the news that MFI suicides are continuing and that the Naxalites have joined the backlash against MFIs by kidnapping their field staff.]

INTEREST RATES

Vineet Rai (Read more here)

 “When we discuss profits in micro-finance it seems to me that making profits is very easy - "Charge interest and make profits".  Here are some facts that may clear that myth – The ROE for SKS was negative till 3 years back ( after 8 year of Operations) and Basix ROE was sub 10% till two years back. Most other MFI use to dream of breaking even.... The margin between all costs and defaults and lending cost is such that bottom line would continue to increase ... initially faster compared to the asset growth (efficiency of scale) and over time in line with asset growth. Final interest would come down ( as has happened but the investors coming late is assuming that the company is large enough and safe enough to give me a lower but safe return)”.

 

The table providing the RoE of various micro-finance institutions in the country illustrates why microfinance is the envy of commercial banks and the reason more and more players are rushing into the sector just as bees are attracted to honey. It also clearly illustrates why Vineet may not be telling us the whole story. It is left to Vijay Mahajan, described as the father of micro-finance in India, to complete the story as he did in an interview to Forbes:

 “It is largely due to exuberant growth with exorbitant profits and no reduction of interest rates that regulators and society [are] taking such an adverse view of this sector. All these years, we have told everyone that as we cut costs through scale and efficiency, we will pass on the benefits to the consumers. The regulators tolerated our interest rates on that promise. We let them down because we did the first, but we’re not doing the latter. Instead we have made extra normal profits."

Sasi Thumuluri (Read more here)

“The truth is MFIs do charge higher rates than banks and very few, if any, charge more than 36%, all inclusive...Now, let us assume that MFIs reduce the interest rates to 7.5% flat (half of the original rate) which translates into approx. 15% effective rate, close to commercial bank lending rates. The interest obligation ends up to be Rs. 62.5 ($1.25) per month or Rs. 15 ($0.38) per week. So, it sounds like the argument is essentially about the difference of Rs. 62.5 ($1.25) per month or Rs. 15 ($0.38) per week per average MFI loan. It is hard to believe that someone would end his/her life for less than Rs. 100 ($2). Even for someone with 5 loans of similar nature total interest obligation does not seem worth one’s life. Based on this logic the real problem seems to lie somewhere else, certainly not in interest rates per se."

The State Review of MFIs makes nonsense of Sasi’s spin of interest rates as reported by Deccan Chronicle on the basis of individual MFI affidavits filed with the government:

“L&T has given loans to 5,903 people in Adilabad district to the tune of Rs 185.10 crore, at an interest rate of 59.53 per cent. Spandana lent Rs 50.30 crore in Anantapur district with an interest rate of 31 to 34.42 per cent and Fulltron charged 36 per cent interest. The MFI giant, SKS, is still charging 31 per cent interest on old loans while it has reduced it by two per cent for new loans. In East Godavari, the Mahila Adarsh Seva Society charged 38 per cent and GP Mass Finance Ltd. also charged 38 per cent interest on loans. In Kadapa, Trident Microfin and Bharathiya Samudradhi Finance charged 32 per cent interest, and Share Microfin charged 30 per cent. Basix charged 34.40 per cent interest on Rs 31.66 crore worth of loans that it disbursed.

There are so many variations in the interest collected by the MFIs. There is no uniformity, said Mr R. Subramanyam, principal secretary, rural development department. Insurance premium, processing charges and administrative charges are added on to the cost of the original loan and in some cases these additions make up 20 to 30 per cent of the loan. ...When borrowers fail to pay one EMI, the additional interest is calculated at double or triple the interest rate. The interest continues to remain the same until the principal amount is paid off. More often than not, the final interest rate works to nearly 50 per cent”

Interest rates accordingly could be actually anywhere between 50-100% or more and not as Sasi painted at a benign 15% effective rate. The Indian Express in their article, "Andhra’s Small Debt Trap"  further makes mincemeat of Sasi’s claim that even a five-loan interest obligation seems illogical for borrower’s to end their lives through publishing an investigative case study. Extracts of this are provided below: 

“On October 4, unable to pay back the five loans she had taken, 23-year-old Bandaru Padma jumped into the village well along with her two children. The total outstanding against her name was Rs 79,000. She had taken loans from Share Microfin, Spandana, SKS, Basix and L&T,” says Padma's father Balaiya. But none of the villagers knew of the interest they were being charged. 

All I know is I have to pay a weekly amount of Rs 250 for 50 weeks on a loan of Rs 10,000, says Satyamma. She’s not sure which MFI she has borrowed from.  Villagers say they have been hit by a series of crop failures since 2001 and so took loans from the MFIs since their procedures are easier than those of other agencies. Of the 150 families in the village, 147 have taken loans. What’s surprising is that all these 147 families have taken multiple loans—six or seven from four or five MFIs. The small Chennaipally village now faces a debt of over Rs 40 lakh.  

We have had SHGs in the village for several years now and it started with simple chit funds. Then people from SKS Micro-finance came and offered us loans of Rs 5,000. All we had to do was furnish a photocopy of our ration card. Even before that loan was cleared, Share Microfin MFI came and offered Rs 10,000 as loan. They were followed by L&T, Spandana Sphoorti and Basix. Within a year or two, all the 147 families had taken multiple loans amounting to nearly Rs 1 lakh or more says village sarpanch Siddhiramulu. A majority of the villagers took the second loan from the same MFI to clear the first loan and make a few household purchases. Then they took the third loan from another MFI to clear the second loan”

To make their arguments look superficially convincing, spin-doctors like Sasi, to buttress their case, accordingly take to logical simplification in order to prevent understanding of the actual ground situation complexity. The excellent blog posting “Andhra Pradesh’s Animal Farm: Debt traps, life insurance and death bonuses” provides a list of factors for the poor falling into microfinance debt traps, that makes it evident that the issue is not as simple as the industry’s spin doctors like to portray: 

• Prior indebtedness: if the poor are already in debt before they come to an MFI, which is likely, the new loan will be an additional burden unless interest rates are sufficiently low (which in AP they weren’t).
• Business failure: (assuming a client actually use their MFI loan for business purposes) micro businesses fail regularly. MFIs’ clients operate in highly volatile economic environments, which are usually already saturated at the lower end, creating a high risk of entrepreneurial failure and thus deeper debt.
• Consumption borrowing needs borrowing: some borrowers make unwise decisions, but many are so poor that they must use loan funds to cover the costs of immediate survival needs, such as rent, food or medical assistance. The interest paid on their loan can effectively increase the cost of those bills by 1.5 to 2 or more. 
• Unsustainable, excessive or dishonest interest rates – there comes a point where, no matter how profitably a loan is used, the interest becomes too large to be covered by business proceeds; lower rates would mean more profits retained by the poor and less debt burden. High rates may be “sustainable” for MFIs but unsustainable for borrowers. Additionally, MFIs often hide the real interest cost by quoting flat interest rates or charging hidden fees (see Times of India on this).
• Graduated lending: offering a larger loan to a borrower at the end of a completed loan cycle is not bad per se. But in many cases MFIs require borrowers to take larger loans, leaving the poor with the only choice of taking on greater debt or exiting the programme.
• Skewed repayment cycles: in some cases, MFIs such as Grameen operate repayment modalities for their loans, which require large lump-sum payments (for instance loan fees) at the end of the loan cycle. This creates a bottleneck in borrowers’ finances, which often leads them to borrow at higher interest rates from other sources and use the next MFI loan to repay the temporary loan, which in turn must be repaid with fees, and so on.
• Multiple borrowing and multiple lending: most overindebted poor are indebted to more than one creditor and must balance the repayments to all creditors. While a client may be ‘performing’ well on one loan, she or he may be in arrears on another, making her or him subject to higher interest rates as a punishment and harassment from that lender’s agents.

WHIFF OF FRESH AIR: HONESTY AND PRAGMATISM BY THE HIGH PRIEST OF MFI

"I believe in Schumpeterian creative destruction. Its time has come. The present MFI model has to go.... It wasn't just about giving loans. It was also about creating livelihood mechanisms, which would build capacity among the poor to repay their loans easily, and leave them better off than before" 

This is Economic Times quoting Vijay Mahajan, considered the high priest of Indian microfinance. The paper noted that this statement was ironic for a man also presiding over the Micro-finance Institutions Network (MFIN), an industry coalition, and is currently engaged in dousing the fire in Indian microfinance - cajoling bankers, assuaging governments, building confidence and seeking a shift in stratagems.  The article continues:

“The starting point of the Basix model is risk-mitigation. The usual risk-mitigation tools aren't accessible to the poor," explains Mohammed Riaz, head of the north Indian operations of Basix. Breadwinners of the family or cattle die. Crops fail. Nature ravages. Sickness debilitates. One stray incident can wipe out the net worth of a family.

Basix, along with insurer Aviva, pioneered micro-insurance in India, in 2002. Riaz, an old Aviva hand, joined Basix three months ago. Basix has also implemented the complex weather index-based crop insurance, in which claims are triggered by an adverse weather event and settled over a geographic area. Today, over 3.5 million of Basix customers hold policies covering life, health, crop and livestock, among others. The livelihood triad, therefore, engenders a type of engagement that builds skills and capacities of individual households. It also strengthens entire communities, rural or urban, through institution and local infrastructure building.”

Support for the Mahajan line for the re-structure of the industry according to Economic Times struck a chord at a recent Mumbai conclave of MFI practitioners. The paper quoted Sundara Rao, country head of Oiko Credit, a global microfinance fund:

“In the next decade, tier-II and tier-III MFIs will have to focus on livelihood mechanisms and then weave microfinance around it”

It is significant that Sundara Rao confines expectations of such a restructure to only tier-II and tier-III MFIs, suggesting perhaps the Mahajan line lacks support of tier-I MFIs. But for these MFIs looking for a new growth path, they have the advantage of looking to a readymade model in Basix, a tier-I MFI:

“The triad rationale: microcredit by itself is of use only to the more enterprising of the poor and to those who live in areas that have a certain threshold of economic activity. For the less enterprising, they have to first learn to cope with risks, through savings, insurance and acquisition of skills. In backward areas, the poor require considerable handholding: input supply, training, technical support, market linkages. Services like Ag/LEDS cannot be delivered to individuals, which mean the people Basix works with have to necessarily coalesce into informal or formal groups, cooperatives, or producer companies. 

The formation and nurturing of such groups require IDS. Basix, therefore, through a bouquet of companies - Bhartiya Samrudhi Finance, the Krishna Bhima Samrudhi Local Area Bank, Indian Grameen Services, the Livelihood School, and the Basix Academy for Building Lifelong Employability (B-ABLE ) - has evolved an entire livelihood ecosystem in its areas of operation. Though rooted in microfinance, it is a completely different play from the neighbourhood MFI.”

Though the Basix model may not be exactly an embodiment of perfection, it is apparently the best that we have and presents a foundation, which could be further build upon. It is a break away from micro lending extended as a standalone function but returns to the appreciation that micro lending is just one mechanism in the toolkit of global poverty alleviation. More significantly, if such a restructure happens, it would signal the return of micro-finance operations with a soul. It’s only with a soul that micro lending can make life easier for the poor. Without it, it becomes a curse for the poor as we are seeing today. For all this to happen, the MFI industry needs to muzzle their spin-doctors and listen to their high priest.