Rogue Micro-Finance Companies: Naxalites have no confusion who they are.

 “WARANGAL: Taking a tough stand against micro finance institutions (MFIs), the Maoists have asked MFI managements to close their operations in villages immediately in the wake of series of suicides by women.

Maoist party KKW (Karimnagar-Khammam-Warangal) secretary Sudhakar warned MFIs of dire consequences if they do not call it quits. In a statement here on Friday, he said agents and representatives of MFIs are humiliating rural women and insulting their family members because of which several villagers have committed suicide.

He termed the government ordinance on MFIs as a sham since agents continue to collect loan instalments from women forcibly. He also warned SKS Finance chief Vikram Akula, Share Finance company owner and member of Rajya Sabha V Hanumantha Rao, L&T, Swayamkrushi, Chaitanya MFIs' owners of serious consequences.”   Times of India

Maoists or Naxalites also called the Naxals is a loose term used to define groups waging a violent struggle on behalf of landless labourers and tribal people against landlords and others. They aim to fight oppression and exploitation to create a classless society. 

 The above quotes are their cry for annihilation of class enemy, which in this case are micro-finance institutions (MFIs).  From their statement, it is clear that they are not against all MFIs in particular, but only the biggies. They loath these biggies so much so that they warned them to shut shop in Andhra Pradesh or suffer dire consequences. 

 

On the other hand, the biggie MFIs shrug off the blame to “Rogue MFIs”  for the present crisis in the industry: “Dr Akula admitted there were “rogue” elements operating in the microfinance market and they needed to be checked. Do not destroy the entire industry because of the actions of a few rogue players,” he said”. Wall Street Journal - livemint.com

 
“Mr Alok Prasad, CEO,MFIN, pointed to some fly-by-night, small-time moneylenders who are working under the garb of MFIs and giving the sector a bad name. These are unregistered players who are not RBI-regulated NBFCs. The government should go after them rather than come after registered MFIs, Prasad said” www.karmayog.org

 “On the harassment allegedly caused to the public by MFIs, Mr Mahajan said that there are many other companies which are pretending to be MFI, but are not registered”.  Deccan Chronicle

Notice, the biggie MFIs are careful not to name these rogue elements, creating doubts who they are. Are then these biggie MFIs scapegoats for a problem caused by a minuscule clutch of rogue MFIs? Or are Naxalites simply targeting MFIs just because of ideological revulsion. We researched and came across some interesting industry statistics in a blog administered by Ramesh Arunachalam, a MFI practioneer, called Candid Unheard Voice of Indian Microfinance:

This data reveals that just 6 large NBFC MFIs accounted for a whopping 95% of all active MF borrowers in the country. Despite a gripping monopoly within the industry, Vikram Akula in his interview to CNBC-TV18 10 days ago hinted of further industry consolidation - a euphemism for mergers and acquisitions viz swallowing up the smaller players by the biggies. This leaves us with the question, just who are these biggies? Ramesh Arunachalam's statistics prove helpful again: 

So the biggie MFs are SKS, Spandana, SHARE, BASIX, Asmitha and Trident who accounted for 94.7% of the total active borrowers. These 6 MFIs added a whopping 12.20 million clients in the last 5 years ending March 2009. Of these, as much as 9.76 million clients were added in the last two years. So it is readily apparent that the same 6 biggies are the dominant, fast growing and large scale institutions, operating under the RBI regulatory framework. So dominant that there cannot be any widespread  MFI induced suicides, without their involvement. 2.07 crore households were given loans as per the available data as of 2009. But the total households of AP, as per the same source, are 1.6 crore and the poor households 25 lakh. This means the loans were given more than eight times the number of poor. In other words, MFIs were engaging in multiple lending in a significant way. - indebting the not-so-poor segments and pulling them into the vortex of poverty.

Devinder Sharma in his blog gives us an insight to the scale of profiteering:

"Dainik Jagran, the largest selling newspaper in India (it is in Hindi), has carried today (Nov 27, 2010) an interesting report that should serve as an eye-opener. It says that the Ministry of Finance had a couple of days back held a discussion on microcredit in which a document detailing the profits earned by the MFIs was placed before the members. The details are shocking, and show how the MFIs have been extracting their pound of flesh in the name of poverty eradication.

 An analysis of 13 major non-banking MFIs shows that the profits these firms accumulated by charging exorbitant interest from the poor borrowers had swelled from Rs 677.3 crore in 2007-08 to Rs 3776.93 crore in 2009-10. In other words, their profits had multiplied by 5.5 times over a period of two years. Since the MFIs have failed to expand the borrower base, it is quite evident that the profit increase is based on the interest amount they have managed to garner.

So while the poor took the fatal route to escape the humiliation that comes with coercive recovery of outstanding loans, the MFIs have made it rich. Bandhan Microfinance has broken all records. Its profits swelled by 34 times in two years. Some of the other players -- SKS Microfinance, Ujjivan Microfinance, BSS Microfinance, Share Microfinance, Sampada Safurti, and Grameen Financial -- have also managed to collect huge profits.

The 100 odd cases booked by the Andhra Pradesh police for coercive practice and abetting suicides overwhelming come from staff of this group of six. Further, these are the same MFIs the Naxalites singled out to target.

Quite a series of coincidences,  you would say! Still consider this. These statistics further indicate that 2007-2009 was the period these 6 biggies of the MFI industry historically clocked their fastest growth - growth almost in geometric proportion. 

How dangerous such a pace of blistering growth was brought home in 2005-2006, even when MFIs were clocking one-twentieth of this pace. The industry then experienced the Krishna crisis, wherein they attracted similar charges as they are today. To disarm public ire and backlash against them, they then came up with a tactic of evolving a voluntary Code of Conduct that among other things promised reducing their interest rates, avoidance of multiple lending and adoption of coercive recovery practices.

Since this Code was merely meant to be tactical and not a serious commitment, they instead upscaled their past misdemeanors, more so as these Biggies were all planning to go public through the IPO route. As they transformed themselves to for-profit institutions, they began to give more and more representation within their governing boards to private equity (PE) firms and venture capitalists. Since the latter had huge financial stakes in this class of MFIs, they begun to slave drive MFI managements to higher and higher Return over Assets (RoA) ratios to enable better valuations of their shares on listing so that they could exit with mind boggling profits. As a result, the objective of facilitating social capital was jettisoned lock-stock-and-barrel as these MFI biggies went berserk on an over-extended profiteering spree that placed increased reliance on more and more coercive recovery practices. These MFIs became solely lending enterprises, niche bank operators competing primarily with money lenders.

In identifying the rogues in the MFI industry, we need to keep these statistics and history in mind to understand the present MFI crisis in order to better understand plausibility. While the MFIs and their apologists hardly deny that this had been the case, what they desperately try is to erase the taint of these biggies being the cause of the  suicides of their borrowers. MFIs mercurial growth has been accounted by piggy backing on images of them being Messiahs of the Poor. Once this mask is removed, and they are exposed as a form of disguised moneylenders, they end up fighting for their basic survival as they are currently. So it becomes important for them to absolve themselves from charges that link them to inducing suicides.

The Suicide Cover-Up

We have in one of our archive postings (read here) exposed how the industry’s spin doctors attempted absolve the industry from charges of inducing suicides by borrowers. Even Vijay Mahajan, the president of the microfinance industry association, has been bluntly critical of MFIs as quoted in the New York Times: "In their quest to grow, they kept piling on more loans in the same geographies…That led to more indebtedness, and in some cases it led to suicides."

A week ago, I reacted to a posting in the blog of Consultative Group to Assist the Poor (CGAP), a World Bank offshoot, titled Crisis by Invitation. The author was Narasimhan Srinivasan, whose profile suggests that he had been a development banker (with RBI and NABARD) and now an international consultant to IFAD, World Bank, ADB, Gates Foundation, DFID, CGAP and many others on development finance and rural development. He has authored the State of the Sector - Microfinance India Report, brought out by Access Development Services for the last three years, 2008, 2009 and 2010. Srinivasan as an industry apologist in this post also ridicules the charge of MFI induced suicides.  My reaction to his post was not published by CGAP, presumably because it was inconvenient to these MFI biggies. Consequently I take the opportunity to publish it in this blog:

 Mr. Srinivasan

 The extracts from your post:

Despite the above, your post incredibly concludes: "Suicides were linked to microfinance in some of the media. While suicides are extreme decisions, the symptom of excessive burden of debt in some cases is not the real cause."

It is of course possible that all cases booked by the police of AP may not be linked to MFIs though prima facie it may look to the contrary.  The courts will determine that and we should await the process of law before making definitive comments. However the logical consistency of the extracts of your post does suggest a high plausibility of MFI induced suicides in most of the cases booked by the Andhra Police.

"AP has an average of 2000 farmer suicides each year—if 54 suicides as reported in some papers are attributed to MFIs- what are the remaining attributed to? Do we need laws restricting some other sectors of the economy for the other suicides?"

If you have some grounding in psychology, you would appreciate that this phenomenon of suicides is rather a complex subject and could be triggered by a variety of factors - both internal and external to the victim and acting in combination. It is usually triggered out of difficulty in coping with despair that includes financial difficulties, troubles with interpersonal relationships etc. It can be also triggered by low blood pressure or mental disorders like depression, bipolar disorder, schizophrenia or substance abuse. It can also be triggered by such factors like humiliation or related to culture. It can be associated with ideology or a military strategy as in the case of suicide bombings or Japanese hara-kiri.

All individuals entertain thoughts of suicide at some point of their lives, though only a few succumb to the thought. There are accordingly individuals with high suicide risk profiles and cultures like Tamil Nadu and Andhra were suicide rates are higher than the national average. Further though poverty may not be a direct cause, it can increase the risk of suicide, as it is a major risk group for depression. Now if you acknowledge that “the exponential growth and high concentration in AP was not accompanied by the required SENSITIVITY in dealing with vulnerable people”, it seems to me that you are accordingly implicitly accepting the reality of MFI induced suicides. The latter are akin to a woman raped ending her life or a student publicly caned ending his life due humiliation.

The manner the MFI as an industry and their spin doctors approached the charges of suicides, they antagonized public opinion. If MFIs first condemned these incidents, compensated victims and brought their collection agents to book, they would have redeem themselves in the eyes of the public. Instead what we see is MFIs in a state of denial and countering arguments that on the face of it appears puerile. SKS gave Rs 4.5 crore life cover for its former CEO. And the insensitive manner MFIs are dealing with client suicide is what puts off the public - the differential values MFIs place on life!

But then this is only the way MFIs sees this whole crisis - the poor not in the radar at all but only the business- here’s your extract: “What is at stake is not only Rs 167 billion ($3.8 billion) in microl-oans in AP, but also the future of microfinance in India. While Rs 52.5 billion ($1.1 billion) is the exposure of MFIs that will be directly affected by restrictions on collections, visits to the borrowers and bundling of weekly installments in to monthly installments, the damage potential is deeper.”

Please remember that MFI growth was on piggy backing on the false image of being the Messiahs of the Poor, once this mask is stripped off, you lay exposed and find that you are in the verge of extinction. 

If Naxalites Are After You, Then You Must Be The Enemy Of The People.

In the seventies, as a little boy in the boarding of one of best known private schools in the country at Bangalore, I had gone to Kerala for the first time to spend the summer holidays with my cousins.  And as I traveled from the railway station to my aunt’s house, we came across a large crowd looking at a head strung up on a pole. My aunt covered my eyes and spared me the gruesome sight.

The only explanation by Aunt gave was that these were Naxals, bad people who love to kill plantation owners and the rich. And this was the impression I carried all through my education career and the initial working days In the late eighties, now a consultant with a donor, I went to Munar, a plantation hill station in Kerala for an evaluation study.  When in Kerala, you must visit the local “toddy shop” to eat fish to be washed down with freshly tapped toddy. There we met an old man, fairly drunk and we got talking. He told me that he was a Naxalite in his younger days and he has annihilated many class enemies including beheading one and putting it on a pole. Why do this ghastly act? I found myself asking him. With no remorse he retorted: 

“Leave alone wage exploitation, how would you react when the estate owner comes to take your wife, daughters for enjoyment by him and his friends in their booze parties. When my youngest daughter, age 12, the apple of my life, came back traumatized with extensive bleeding and bruises died, after her cremation, I knew what exactly I had to do.”    

One may disagree with their violent methods, but not even the government disagrees that the Naxals usually fight a valid cause, even as they crack down on them. And if Naxals have declared MFI biggies as their class enemy, we know there cannot be smoke without fire. This is why biggie MFIs these days walked with a security armed with AK 47s!