Tuesday, November 30, 2010

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!

  







Sunday, November 21, 2010

SKS Micro-finance has become a Proxy, Hammer it, Hammer the Whole Industry,



From a high of Rs 1,490 soon this is when the after listing, the SKS script closed last Friday at Rs 673, significantly below its listing price of Rs 985, after making a new all time low of Rs 601.

There was full drama too at the counter, the day after the share hit the 20% downward circuit breaker (see chart), reacting to SKS comments that its collections have come in lower than normal, post the Andhra Pradesh government ordinance. Presumably, to allay investor's fear after the crash, the CEO-Chairperson of SKS, Vikram Akula and his CFO, Dilli Raj, on opening bell gave an one-hour studio interview with CNBC-TV 18, the country's premier financial news channel. During the course of the interview, the SKS share soared to trigger the upper 10% circuit breaker, giving rise to speculation that this was a turnabout in the script's downturn momentum. 
Yet, this elation proved a momentary bubble. Despite mind boggling market breadth (7 million share turnover), SKS only managed to close 5% higher than its previous day's close, suggesting that the rebound was only in the nature of a relief rally. Technically, the script still remain very weak, having made new lows in each of the past eight consequent trading sessions. This week we can expect bear hammering to resume though the stock may open with some gains on Monday. Unlike the beginning of last week, where short positions significantly outnumbered longs, at close of the week, it was the exact opposite. Being a highly volatile script, SKS price movements are extremely vulnerable to news flows. There exists little possibility for sufficient flow of good news to sustainably power any strong upward movement of the script. On the contrary, there are increased possibility of bad news flows that could trigger sharp, speedy, downward movement of the script through panic selling especially when longs outnumber shorts in trading positions. 
Though Rs 601 is likely a good support level, it is unlikely to be firm enough to act as a bulwark against any gravitational pull down effects from really bad news flows like the possibility of a Regulatory Bill that strangulates micro-finance growth. Even the bulls understand this and accordingly it becomes very unlikely that there would be any frenzy bull charge to be seen during this week's trading. 

We suspect Rs 300 or near about, (the price Narayana Murthy of Infosys bought into the script), as its  true intrinsic price  level. But with the dark underbelly of micro-finance daily being constantly exposed, the bottom of the share could even plunge below Rs 300 levels. Vikram Akula on the run up to the IPO said investing in SKS will give alot of money for its investors. It is ironic that it is the bears who are now making all the money out of SKS script these days and the investors ended being burnt by it!

Last week, many equity analyst and brokerage firms have downgraded SKS profitability, most of them advising investors to dump SKS. These include  Rajesh Jain; Deepak Mohoni; Jitendra Sriram; Sharyans Resources; Karvy; Infina Finance and several others. Mutual funds have already dumped SKS (Read here). 

JP Morgan and Kotak Mahendra though drastically cutting down the profit outlook by 30% for SKS in the next three years, however upgraded the share to a buy at Rs 700 levels. The irony was just as JP Morgan's and Kotak Mahendra's advisories were flashed, the SKS script breached Rs 700 and went straight to Rs 601, in a matter of minutes and then rebounded sharply to suggest Rs 601 as a fairly strong support level for the script instead of Rs 700 as they suggested. Both JP Morgan and Kotak Mahendra provided a whole series of risk caveats accompanying their buy advisories while capping the stock's upside from buy levels to 25-30%. In simple words, both advise buys while cautioning the script falls within the highly risky category viz. advise buy only for those with very high risk appetite!

Our blog was in fact the first to categorically give advance warning, as early as two weeks ago, that SKS script was entering a free fall  (Read here) and many of these equity analyst and brokerage firms including JP Morgan had been repeat visitors to our site.

Being highly volatile as demonstrated by Friday's wild swing of Rs 102 together with as much as 70 million in market depth that is rapidly growing, makes the SKS counter a trader's delight. It is probably on its way to be the number one counter for equity traders in the country. This can't be good news for the micro-finance industry, as this puts both SKS and Vikram Akula under constant media glare, becoming the proxy for continued debate on the social relevance of the industry. We understand many in the  micro-finance industry are actually appalled and squirming at this turn of events.

THE VIKRAM AKULA-DILLI RAJ HARD SELL - BOOMERANGS


video


It was however interesting to note that Vikram Akula repeatedly chose to describe SKS as a business. Though he wore his trademark designer Khadi kurta, all pretense was off to live up to his Messiah of the Poor image carefully crafted by his PR Department. This image fell apart quickly as the world realized that this sleazy operator only used images of helping the poor to catapult himself as one of the wealthiest in the world. Maybe in the course of time, who knows he would discard his ethnic wear too to exchange for a Pierre Cardin suit and tie too? These days Vikram Akula walks, surrounded by a protective cordon of security men armed with AK47s, being afraid of a violent backlash from the public, especially Naxalites. That a person once touted as the Messiah of the Poor now needs protection from the poor is an image the industry would like to wish away in their present  battle to win public support. But there he is as mascot for all those who want to ban MFIs or rein them in by strangulating regulation. Vikram Akula embodies everything we find repulsive of MFIs and we cannot ask for more as our mascot!

Back to the exclusive interview with CNBC-TV18, Chairman Vikram Akula and his CFO Dilli Raj tried to allay investor fears of  prospective insolvency of the company by arguing SKS was well capitalized. Akula said that though the Andhra Pradesh ordinance has some impact on the MFIs, SKS could easily weather the storm on the back of a strong balance sheet, capital adequacy ratio (CAR) and besides its non-AP portfolio has 99% repayment rates. 

Dilli Raj intervened to reiterate that "There are absolutely no issues in 18 states where we work." Akula further informed that SKS exposure to AP stands at Rs 1400 crore which is 26% of the total loans."  "ICICI Bank, Axis, SBI, PNB have supported us. We do not need any liquidity support from anyone and our loan book is expected to grow to Rs 7500 crore while RoA maintained at 5%", Akula boasted.

Dilli Raj added "To start with our exposure to Andhra Pradesh it is a mere 20% of total portfolio mix. In hard number that is Rs 1,400 crore compared to an assets under management (AUM) of more than Rs 5,600 crore. In terms of your question on what is overdue, the ordinance came into effect from October 15, with a monthly periodicity so collection it started November 15 onwards. It is just three days, which is too early to talk about what is overdue.

Going back to one point on the capital adequacy, the way to look at it is our exposure to Andhra Pradesh is a fraction of our net-worth of Rs 1,800 crore are not a multiple. There has been liquidity in the price for some time now. We manage our liquidity through well defined liquidity metrics, which calls for holding sufficient cash and cash equivalent to meet all corporate obligations including bank repayment, OPEX and most importantly disbursement to existing customers for the next six months."

The duo said that though SKS is hardly affected by their recent backlash against MFIs, the smaller players may not be that lucky and this may bring about industry "consolidation", a euphemism for mergers, acquisitions and bankruptcies.

Vikram Akula continues "Given our scale and our efficiencies in terms of economies of scale, even at 24% there is a margin one continues to have that will allow for continued profitability. Maybe not the same profitability we once had but certainly a healthy profitability going forward. The specific numbers we are not in a position to comment on as of yet because we need to wait and see how monthly versus weekly evolves." 


While the immediate impact of the interview led to increased market confidence as reflected in the SKS share rebounding to trigger the 10% upward circuit breaker, as the market slowly started to digest the import of SKS statements, more and more it looks as a total public relations disaster exercise:

1. The share price of SKS tanked when the company issued a statement that the Andhra developments will have material impact on their bottom-line. (Read here). In less than 24 hours, Chairman Vikram Akula and his CFO Dilli Raj went on air to virtually retract this statement. Firstly, this detraction came at the cost of SKS credibility, already severely battered. Secondly, it signals a blow to the Narayana Murthy policy line of maintaining complete transparency. This act signals the return of spin as SKS policy. The board room battles with SKS could now turn more interesting. Watch this space. 

2. The claim that SKS is a business and well capitalized opened a can of worms. Firstly, it fanned the fires of the on-going debate, even within the government, whether such firms  deserve priority lending subsidies. The chorus against the government to end such policies is now expected to grow even louder and shriller. In this sense Akula-Raj put their foot into their mouth. 

Secondly, it may accentuate the split within MFIs even deeper. Vijay Mahajan, the visible face of MFIN, a micro-finance association, earlier told the media that the micro-finance sector is collapsing from cash flow problems.So real was this prospect that the industry fanned the rumour  of the banking industry collapse due to their exposure to the micro-finance industry, even when it wasn't a fact. SKS on the other hand, broke ranks with the industry to claim that bank lending to them remain unaffected and that they are in the pink of financial health. This has not gone down well within the industry, creating much  disaffection among MFI community, particularly smaller ones who are suffering from severe cash flow problems on account of banks going slow on releasing even committed credit pipelines. This  gaffe by Akula-Raj duo is bound to raise the question whether SKS is the sole beneficiary of government partiality. The government, already pushed to the backfoot with allegations of Rahul Gandhi's links to SKS on the basis of one innocent visit to SKS a few years ago, are now expected to take a harder line. 
 
3. Notice the differing estimates of SKS AP exposure at differing points of time by the company's official spokesmen. When the crisis first broke out  this figure was put as 38%, then it dropped to 28% and now Vikram Akula  says it is only 26% while his CFO puts it at a mere 20% in the very same interview, where the duo appears together. Perhaps, based on the Andhra developments, the SKS long term strategy is to drastically reduce their AP exposure. But the fact is, as of today it is fairly high. SKS is the leading MF lender in the state with some within the industry even saying that the state accounts over 50% of their lending. 

Andhra being the MFIs largest market in the country is not an accident as their growth was fueled by piggy backing on NGOs and SHGs  who have a very strong presence in the state. Outside its major markets -  South India, Orissa and West Bengal - it is not easy for MFIs, including SKS, to compensate losses from Andhra from increased profits  from rest of the country  for the simple reason that neither NGOs and SHGs have much of a presence nor SKS have the infra-structure  to scale-up overnight.  

This perhaps explains why the Akula-Raj duo chose to be evasive on repeated questions on how hard their earnings will be hit due to the Andhra developments. It must be noted that SKS attracted a high PE (Price/Earning)s because there was lot of expectations built in probably  based on their 2009-2010 numbers,  that their 20010-2011 performance would be even a lot better. The probability of these expectations materialising remain extremely low, though the SKS third quarter results would be a clearer indicator.

 4. The claim of outside AP, SKS repayment is around 99% should also be taken with a pinch of salt. Sources within MFIs suggest that in West Bengal and Orissa, the other two major markets for micro-finance, repayment rates are down to 80-95%. The morale of micro-finance have taken a huge beating all over the country and this is bound to reflect itself in repayment payments in the weeks and months again, that in turn reflect itself on both the top-line and bottom-line of the company.

5. Smaller MFI players should take huge offense about Akula's comments that they may not be that lucky and this may bring about industry "consolidation", an euphemism for mergers, acquisitions and bankruptcies. One small MFI promoter rang me up yesterday to say "SKS is the government's blue-eyed boy. After the IPO, SKS is cash rich, and now out to either bankrupt us or swallow us in his own terms."  Surely the split within the MF industry will increasingly become visible and pronounced. It will the small MFs vs the big guns. Who would the public support then? The odds are with the smaller MFs. 

Update

1. MFIs responsible for 16 suicides, SKS among them, final number to increased as investigations get complete: AP govt: Read more

2. MFIs no better than Moneylenders, need tight regulation: Reserve Bank Governor: Read more

3. Contrary to Akula's claim, rating agency CRISIL  said that Bank funding to entire India MFI sector diminished: Read more

4. Udaia Kumar, managing director of rival Share Microfin says: Even if a single MFI defaults, it might have a trickle-down effect on the entire sector Read more
 6. Crisil claims collections have dropped by below 20% as against almost 99% prior to the government ordinance. The report said that the creditworthiness of the MFIs also depended on their exposure to Andhra Pradesh. Read more.



























 

Wednesday, November 17, 2010

Where's the Microfinance Coercion? Here's the Proof!

 What is Coercion in Repayment; A Client Perspective from Indian Micro-Finance
Courtesy: Ramesh S Arunachalam
We have been hearing the term coercive repayment and this is what we have understood from our interaction with about 52 microfinance clients in the field in India, during the last 6 weeks. These items represent a compilation of what several clients (especially, those with multiple loans) and/or their families told us as we talked to them in various places in Andhra Pradesh, Tamil Nadu, Karnataka, Orissa and West Bengal: 
 Note: There are Video Clips/Recordings available of what clients said for the record

Client A: “The fact that fieldworkers/agents came day after day (for week after week) and pressured me to pay back is itself a sort of harassment and coercion. As I (and family) do not have serious livelihood means, we have to either borrow from another MFI (this would help consumption and also repayment for some time) or borrow from money lenders (at even 10% per month) to pay them and get them off our backs. The idea is WE HAVE TO SOMEHOW PAY THEM or they will not leave. When all options of borrowing run out, we either have to migrate or die. This is what is happening to other women and may happen to me someday soon”

Client B’s Husband: “My wife who committed suicide, had taken 8 loans and had to pay back 2 loans on Monday, 1 Tuesday, 1 Wednesday, 1 Thursday, 1 Friday, 1 Saturday (every fortnight one), and 1 once a month. There was no respite during the week and on Saturday, she felt happy that Sunday was the next day but that was short lived as we had to make payments from Monday again and the whole cycle continued…When one has to pay loan repayments on 6 days a week and people will not leave without collecting payments, it is downright harassment.”

Client C: “The collection agents/staff came and stayed put with us until we paid the instalments and this built our pressure as they would be watching us, often passing snide remarks and insulting us. They would even ridicule our children and basically try to embarrass us – so much so that, we would even not hesitate to go to a money lender and get the instalment amount as a loan at 5-10% rates of interest and send them off.”

Client D: “One MFI had the practice whereby if the 1st staff did not return within a stipulated time of 2 hours, other staff will successively join him. Soon, by 10/11 AM, there could be 4/5 people sitting near our house and making all sorts of insulting remarks. They also publicly shamed us in the village. I once ran here and there and finally paid them off at 4.30 PM in the evening and I was traumatized at the end of it all. Now, I dread their coming every time…

Client E’s Husband: “Some collection agents were really rude-after my wife committed suicide.” They came and said, “If you cannot find means to repay, then you should send out your two beautiful daughters, and get them to earn money by other means (prostitution…) and then repay to us.” One of them even said, “If you cannot do that, send them to me and I will use them and pay off your instalments. They are very beautiful and would be able to earn a lot. I wept as I heard this…”

Client F: Another client says she is unable to bear the harsh language of MFI staff and, as a result, was pressured to take loans from local money lenders @4% interest per month to pay back instalments. She also claimed to have sold off her jewels to repay MFI loans as their staff were abusing her, whenever they came to the village for collections.

Client G’s Husband: One client’s husband said that the staff said, “We do not care if your wife died. You better pay when we come back tomorrow”. The husband further said that, “I had to borrow at 12% to pay them the next day as otherwise, they had threatened to chain me to the Big Tree, outside of the village and make me a laughing stock”.  

Client H: Another client said, “The earlier support (SHG) groups have now become pressure groups that insult. So there is no respite and harassment is 24x7 as group leaders and other members live at the village itself and they obstruct participation in village activities if the loan instalments have not been paid. You just cannot get away without paying as they have a lot of local influence and can do anything…” 

Client I: A client remarked that in the case of defaulting members, if the defaulter did not repay the loan over dues, the group leaders and MFI centre leader simply took over the defaulter’s assets into their possession and then, they repaid the loan amount by liquidating it.

Client J: A client said that, “once at the time of weekly repayment, there was a death in the neighbour’s house who was also a member and the collections agents told the bereaved family that unless she paid the last two overdue instalments, they would not allow the body to be lifted or rites to be performed. Then, the client claimed that, she went to a money lender in a nearby bigger village and got an emergency loan at 7% and helped her neighbour pay back the instalment”.

While the above is by no means a scientific study, it nonetheless provides some (initial) indication into the kinds of coercive mechanisms that could be used at the field level (not exhaustive) by some MFIs and it does converge with the findings of previous research into coercive repayment (APMAS and others). These have been compiled into key coercive recovery strategies that could be used by some MFIs and these are summarized below:

Strategy # 1 - Life/Work Obstruction: Field workers, agents, centre leaders and/or group leaders/members may hinder and obstruct the normal life and work of clients and/or their families and thereby, force them to repay, using several means (borrowing from money lenders, take over assets etc) that may not necessarily be in the clients’ interest and one which could cause undue hardship to them.

Strategy # 2 - Threats: Collection agents/field workers could threaten the clients that they would resort to violence and/or physical abuse if money is not repaid; they may also carry the threat out, if money is not forthcoming from the clients;

Strategy # 3 – Verbal Abuse: Field workers/agents may (verbally) insult, abuse and/or intimidate the borrowers and their family members and get the repayment

Strategy # 4 - Following the Client and Pestering: Field workers/agents could continually follow the borrowers and their family members from place to place and pester them for payment and keep on embarrassing them, until the money is paid;

Strategy # 5 - Repossession and Sale of Property: Sometimes, the centre leaders and/or group leaders/other members may even take over property owned or used by clients and sell that and take the repayment

Strategy # 6 - Satyagraha Outside Clients House/Place of Work: Field workers/collection agents could sit outside the house or places of work (like fields/shops) for hours and hours and keep on harassing for payment and leave only after they get it

Strategy # 7 - Embarrassment Strategy: Field workers/collection agents may sometimes even talk to business customers and/or guests of the clients and embarrass clients and thereby get them to repay

Strategy # 8 - Physically Take Over Assets/Documents as Collateral: The centre leaders, group leaders and/or other members could forcibly remove assets/documents of the borrower (like ration card etc.,)  and not return it until the repayment is made by client

Strategy # 9 – Physical Intimidation: Field workers/collection agents may physically intimidate the clients and get local toughs to rough them up once or twice, so that repayment is forthcoming thereafter

Several questions arise from the above discussion and the RBI sub-committee would surely have to look into the (range of) mechanisms that have been and are being used by (some) MFIs to collect loans at the grass-roots.

A rigorous scientific study will have to be commissioned and undertaken by a neutral set of people and only that can reveal the real extent to which such coercive tactics and strategies are used by (some) MFIs on the ground...
 

Sunday, November 14, 2010

SKS Micro-Finance Drifting into a firm Bear Grip


As expected, bears hammered the SKS script from Rs 992 levels at the start of the week to Rs 919.85 closing this week. When we started this campaign, SKS traded around the Rs 1010 range. Accordingly, if 100 SKS shares were sold at the time of our first posting, this would have realized a profit of a cool Rs 90,000 by now. 

Technicals however show a mixed signal, suggesting that the script maybe range bound in price movement this week. However, being a new script with little price movement history, reading too much into technicals may not be advisable. Last Monday and Thursday saw bulls trying to break out on double the daily average volumes. Despite this, if SKS entered up losing over net 7% during the week indicates huge selling pressure, suggesting the share increasingly falling under a firm bear’s grip. The very fact that the bull charge was not sustained uniformly throughout the week is perhaps yet another indicator  - bulls left to marshal their resources for a charge in sporadic spells. 
Bulls perhaps realize that they are badly trapped in this script and hoping to exit at higher levels. However, from Rs 910 downwards, we are entering the first of the series stop loss zones. Accordingly, bear’s are in with an opportunity this week to create panic selling that could see high volumes. As and when these stop loss points are triggered, we could witness a blood bath for bulls. The flow of bad news doesn’t seem to stop for micro-finance companies, This not only put a big question on their future earnings but also financial solvency as a going business.  

The latest news flows are as follows:

1.  Micro-finance companies, including SKS are running scared, so much that they have closed down their websites. Official website of one of the largest microfinance institution in India, Spandana Spoorthy Financial Limited has been “out of order”  for the last few weeks. The website of Share Microfin Limited was also ”down” this week. Both these institutions are based out of the Indian state of Andhra Pradesh, which has come under severe stress since the issue of microfinance ordinance, by the state government. The official website of SKS Society, a sister concern of SKS Micro-finance, was also hacked prior to its initial public offering in the month of April this year. (Read more here

2.  SKS Micro-finance is playing down its identity and going into preservation mode. At its modest office in a residential colony in Warangal district, India’s largest microfinance company has taken down its board. At its head office in upmarket Begumpet in Hyderabad, it hung a cloth mesh in front of its plush, six-storey glass building, ostensibly to protect it from the public ire over suicides. (Read more here)

3.  TV5 News a regional Telugu news channel has broadcast a news report yesterday alleging that more microfinance clients have committed suicides and that the ordinance has been ineffective in reigning in micro finance institutions. (Read more here). This may provoke the High Court to be less lenient towards the stay plea of MFIs against the Andhra Ordinance. Even worse, as long as Telegu TV and print media keep the focus on suicides and MFIs, repayment prospects of loans will suffer. As this situation extends weeks and month, it can lead to cash flow problems that could lead to MFIs being unable to pay staff salaries and layoffs, which in turn can accentuate collection of loan amounts.

4.  For the first time, Naxals have thrown their hats into the ring and kidnapped field staff of micro-finance companies. (Read more here). From now on micro-finance tycoons like Vikram Akula (SKS), Uday Kumar (Share) comes immediately under the radar of Naxals and we could expect from now on see their likes moving with AK47 armed security cordon. It would be sensational if Naxals manage to kidnap one of these MFI tycoons and in Al Qaeda style make them confess their crimes against public on tape. Vikram Akula in his book Fistful of Rice had admitted that he faced death threats from Naxals. Accordingly, the Naxal threat is no empty threat to be taken lightly and as long as it persists, MFI staff will be hesitant to visit villages and use strong arm tactics that affect loan repayment again. 

5.  The Microfinance Institutions Network, a self-regulatory body of a clutch of 44 NBFC MFIs, has asked Rs 1,000 crore in the form of business continuity facility, a euphemism for emergency money, to ensure survival. Rumours are circulating that some MFIs are so cash strapped that they soon would not be able to pay staff. (Read more here).This news in particular can’t be good for bulls. Even if a tier-III MFI files for bankruptcy, the news can trigger bear hammering of SKS script to Rs 300 levels. MFIN said liquidity with MFIs had almost dried up, with collections during the past month having fallen a dramatic 50-90 per cent. MFIN felt this could be addressed if banks set up a Rs 1,000-crore liquidity easing channel. "Obviously, banks will price their loans based on the risk assessment," said Alok Prasad, chief executive officer of MFIN. He said an increase in bank rates would put a spanner in the plans of MFIs to reduce rates for borrowers. MFIs also seem wary of approaching the banks for new loans. "There are no requests for new loans from the MFIs," said the managing director of State Bank of Hyderabad, Renu Challu. No new microfinance loans were being given in Andhra Pradesh, which accounts for a third of the total outstanding of about Rs 30,000 crore. Read more here. Pinched by bank funding drying up, leading microfinance firm Basix has cut its advances to a third in the past month. In the past month, Basix has disbursed only Rs 100 crore against the up to Rs 300 crore it would have otherwise done. Read more here.

6.  The State government’s decision to review the operations of micro finance institutions has opened quite a can of worms as it exposed them, including SKS of charging usurious rates.  Contrary to what MFIs say, they are in fact charging very high interest. Most companies impose an interest rate of 30 per cent on a population that is largely poor. Countering criticism of their high interest rates, MFIs had claimed that the interest was 24 per cent, but the affidavits they have had to provide at the time of registration have exposed this as a lie. Interest rates are as high as 36 per cent and more. (Read more here)

7.  The Micro-finance Bill, which was ready, is now to be re-formulated again, taking into account the recent developments in Andhra Pradesh. Within the Congress, there is a strong move to cut MFIs to size and instead promote NGO-SHG-bank linkage as the flagship development programme of UPA II (NREGA being the flagship development programme of UPA I). If this is accompanied by the withdrawal of priority lending status to MFIs, this will sound the death bells for MFIs in this country. 

To what extent MFIs are pushed to the walls is indicated by the fact that these MFIs are registering themselves in the districts despite their public opposition to the Andhra Ordinance.  The ordinance issued by the AP government halted all MFI operations until they register with the district authorities. In our archive post, Vijay Mahajan, the high priest of micro-finance admitted that days of business as usual is over and the need for MFIs to adopt a new business model if they want to exist. Read more here  


UPDATE: 18/11: JP MORGAN OUTLOOK


• We believe that the headwinds for SKS and the MFI industry are still not over – we cut our estimates by ~25-35% for FY11-13 and reduce our PT by 30% to Rs 700. The stock is still expensive at 1yr fwd PB of 2.6x, and we think the issues with the sector are quite deep. Despite Tuesday`s 12% correction and the possibility of a technical bounce notwithstanding, we maintain our (still) contrarian UW, and don’t believe that it’s too late to exit the stock.

• Deep earnings cut, by 25-35%. Our key earnings changes capture the AP situation on multiple fronts: a) a drying up of disbursements in the state b) margin pressures from rising fund costs, lower yields and negligible securitization, c) higher credit costs from one-time losses in AP and d) lower opex as we see inevitable cost cutting in AP.

• Non-AP issues still not significant. We have not captured any issues outside AP. Media reports (ET, 14 Nov) suggest that MFIs are cutting rates in West Bengal (SKS’ second biggest state), but we think it’s a bit early to start capturing that in our earnings. Government intervention in states outside AP, however, remains a risk to our earnings forecasts.

• Too early to write off business model. The microfinance business model is being challenged in public debates on multiple fronts – efficacy in poverty alleviation, impact of high interest rates on borrowers, existence of over-leverage among borrowers, to name a few. We think MFIs could continue to exist, and profitably so, though aggressive overregulation is a risk to that assumption.

• Cut TP, retain UW, still too expensive. Our new Dec-11 PT (Sep-11 earlier) share is based on a 3-stage Gordon Growth Model and implies a PT of Rs700 vs Rs1000 earlier. We think SKS is still very expensive at 2.6x 1-yr fwd PB–we think the risk reward still favours the private banks given better scalability and earnings visibility. Maintain UW. 

Key risks: Court ruling against AP ordinance (it’s still in court) or that AP ordinance does not convert into law from Centre.
Centre.

Saturday, November 13, 2010

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.