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...

 

Backlash of Andhra Suicide spreads: Now Bangladesh Caps Micro-credit Interest rates

Dhaka-Micro-finance lending pioneer Bangladesh plans to cap the industry's interest rates amid criticism that for-profit groups are demanding excessive payments from poor borrowers, an official said Tuesday.

Muhammad Yunus, who created the microfinance concept and built up specialist lender Grameen Bank, won a Nobel prize for his work but the sector has since grown into an unregulated, multi-billion-dollar commercial industry. The government's Micro-credit Regulatory Authority (MRA) has approved new rules banning microfinance lenders from charging more than 27 percent interest on loans, MRA director Sazzad Hossain said.

"Many micro-lenders have earned a bad name for charging high interest rates. There are also isolated incidents in which lenders have used force to compel borrowers to repay loans," Hossain told AFP. One out of every five of Bangladesh's 146 million citizens is a micro-credit borrower, relying on one of more than 1,200 micro-finance institutions whose interest rates vary from 20 percent to 51 percent, according to the MRA.

"We oppose the interest rate cap. It will be hard for micro-lenders to stay afloat charging just 27 percent interest," said Mosharraf Hossain, head of the Credit Development Forum, a microfinance industry association. Hossain said local microfinance institutions have high costs as many borrow money from private banks at around 13 percent interest, then lend the money on, adding that there are extra costs when operating in remote, rural areas. "We also write off huge amount of loans during natural disasters such as cyclones, floods," he said, warning that if the sector collapsed due to caps on interest rates, it would hit the poor hardest.

The MRA move comes after India's Andhra Pradesh state, the hub of Indian small loan activity, cracked down on micro-financiers following accusations that high interest rates and aggressive debt collectors had led to over 30 suicides. Bangladesh's new regulations, to come into force in July 2011, also ban unofficial deductions by lenders for so-called saving schemes, limit charges for administration fees and set a 15-day mandatory grace period for repayment.

Courtesy Bangladesh-web.com

 Courtesy Bangladesh-web.com

Micro-Finance To Face Slow Painful Death. SKS Share to enter Free Fall. Sell, Sell, Sell!

SKS, the Indian micro-finance giant’s IPO was supposed to signal the coming of age of  micro-finance (MF). Instead, it contained the seed for the destruction of the entire industry. Their Rs 10 share on listing attracted a premium of Rs 975 and such was the investor confidence, it touched a high of Rs 1,490 in a matter of days.

Then hell broke loose with the industry hit by charges of them profiteering and causing farmer suicides. Its reverberations were so strong that it had been felt by the industry all over the world. The stock plunged to Rs 890 before recovering to be a tad over its listing price and hovering around this range for the last one week.

Much water has flown under the bridge since. The script is presently very weak both technically and fundamentally.

Technicals

 

The upper chart illustrates that the predominant trend is steeply down and the probability of the share crossing Rs 1,000 again is likely to be nil. The lower chart compares SKS price movement with those of the Mumbai Sensex. Even when the Sensex trend shows a firmly bullish trend, those of the SKS script is clearly moving in the reverse direction. Both charts show a classical bearish pattern of the SKS share. So bearish, that even when penny stocks gained during the Diwali trading session, SKS still ended up in the negative. Candlestick analysis has similarly given a clear bearish confirmation and all technical indicators give a sell signal.

Since it’s a new stock without a price history, it is difficult to guess what its next support level is. Its historic low is Rs 890 though this cannot be considered a firm support level since the script was hammered there from levels of 1,490, its historic high, a fall of 33%.  By then bears made a killing and covered their shorts as the market tentatively greeted favourably SKS decision to cut back their peak interest rates by 2% and with Narayana Murthy, founder of Infosys, rushing for a hastily convened Board Meeting to firefight the situation. As on 5th November, SKS closed at Rs 992, giving it a P/E of 36.8. Trading volumes have become thin and therefore not a reliable indicator of its actual value.

 

As seen from the table, SKS has been steadily losing its value over the last one month after the MFI was tainted with allegations of being linked to borrower suicides and problems related to governance became public. During the last week, it began to move increasingly within a narrow band and we should be expecting a swift and sharp downward breakout very shortly.

So what could be its next price support level? An informed guess could be Rs 637 - the price Vikram Akula sold part of his holdings to Tree Line Asia, the Singapore Hedge Fund. Assuming annualised earnings per share (EPS) of 30 on an expanded equity base and price-earnings ratio of 20, this places the share value around Rs 600. So most probably, it is within the range Rs 600-630 which the script is most likely to move next. But depending on the import and quantum of bad news flow, even this support level may look very weak.

While there is no disagreement that the script is a bear’s delight, what queers the pitch is the falling volume, which limits freedom to exit.  In the last trading session, just 12,527 shares changed hands, mostly delivery selling. This is just 4% of the 28,738,066 shares with non-institutional shareholding of SKS and a fraction of 1% of total shareholding.  Compare this figure with the brisk trading of  the share in its first hour of trade - 97.71 lakh shares or approximately 58% of the IPO size has been traded! That's how illiquid level it has fallen.

From its listed price of Rs 985, the share skyrocketed 1,490 on large volumes suggesting retail investors who bought the share post listing are sitting tight with huge losses and haven’t made up their mind yet whether they want to dump it or wait for a miracle trend reversal giving them an exit opportunity to avoid losses.

But as MF industry stumbles from one crisis to another, almost everybody would have by now reconciled to the fact they are holding on to a dud share. Now, if they are not allowed to exit, then investor anger builds up. This does not augur well for any future IPOs that the industry plans to follow. On the other hand, panic selling can open the floodgates and then we can see a free fall for the share.

 

Fundamentals

1.  Fund flow affected: Private equity firms feel that the flow of funds to the MF sector would be affected. Vikram Utamsingh, executive director & head of the private equity group at KPMG India, said private equity investors would be very wary about putting money in an industry where business ethics have been questioned. Read more here. 

2.  Poor Governance: Just 6 weeks after the successful debut, the man in charge, CEO & Managing Director Suresh Gurumani was given the boot by the company’s board. “I think we are seeing for the first time a listed company acting like a privately held fiefdom”.  Read more here. Gurumani went to court and got a stay, until an extra ordinary general body of shareholders ratifies the Board of Governor’s decision. Read more here. SKS is likely to announce this week the timing of this EGM. As and when this is held, this would be messy and dirty linen washed in public that further reinforce SKS poor governance public perception.

3.  Crisil to re-rate the sector downwards: "But the biggest micro-finance irony came from rating agencies like CRISIL, which informed the market that they are re-assessing the generous credit rating they had given to many MFIs. Though CRISIL, a Standard & Poor’s company, deserves some credit for always keeping some reservations about the socio-political risks the MFIs faced, the moot point is what kind of an expertise is involved in re-evaluating the ratings much after even the smallest investors have re-evaluated companies like SKS Microfinance. Now, the real paradox is whether Indian rating agencies themselves will get regulated and re-rated due to the MFI rating fiasco, much like how the US rating biggies like S&P, Moody’s, & Fitch came under scrutiny for indirectly causing the sub-prime housing finance crisis. The Indian agencies were already facing some potential regulatory heat before the MFI house of cards started tumbling." Read more here.

4.  Increased bureaucracy: Starting this week, Micro-finance Institutions (MFIs) in the state will be required to double check with this database and ensure that a potential borrower has repayment capability and does not get multiple loans. MFIs operating in other states will have to follow the database from January 1, according to the Microfinance Institutions Network (MFIN).  This increased bureaucracy practically cripples the growth rate of MFI.

5.  Ordinance: The Andhra Pradesh government has introduced a Bill making mandatory for MFIs to register before lending to borrowers. Alok Prasad, CEO, MFIN said, “The registration process was very onerous, that needs to be simplified and rather that doing it across each single district with the government authority it should be at the state capital level. It should not be on an annual basis and may be five years and a review after that. So firstly registration, second is vis-à-Vis the clients themselves where I think the government’s rules are very anti-client. For example repayments can happen only at the Gram Panchayat office which means the client has to walk long distance, loose whole day; wages may be in the process.” Read more here.

"While coercion will be a crime of sorts, leading to a punishment of up to three years, the MFIs will also have to disclose the interest collected to the authorities on a monthly basis. The government will also set up fast track courts to try the violations of the MFIs.  This means no more usurious rates and mega profits. Repayment rates will drastically come down, affecting net profits”. Read more here. A worse nightmare, the governments of Karnataka and Orissa have announced to bring similar bills and this is likely to tempt more state governments to follow suit. Read here and here. 

6.  Repayment Plunges: On an average, the Hyderabad-based SKS collects dues of Rs 28 crore a week, and around 38 per cent of its business comes from the State. The company could neither collect dues nor disburse new loans in some regions, as its employees were not allowed into the villages. Read here. To make things worse the festival season is typically the peak season for micro-finance institutions (MFIs), as people buys things ranging from new clothes to crackers and small-scale manufacturing and trading activities need greater cash flow. Because of all controversy, MFIs were not able to capitalize as they did in previous years. Read more here. This rings the death knell for the micro-finance industry, as it will make the recovery of tiny loans very difficult.

7.  Human Rights Commission probe: The police have booked at least 70 cases across the state against representatives or affiliates of micro finance institutions, hardly a week after promulgation of AP Micro Finance Institutions (Regulation of money lending) Ordinance, 2010.) Read here. The State Human Rights Commission, on Tuesday, issued notices to 4 District Collectors and Superintendents of Police, directing them to submit a comprehensive report on the exploitation and harassment of microfinance institutions in tribal areas. According to sources, the Commission, taking Suo Motu notice against the exploitation of tribals and farmers and luring them into taking loans at hefty interest rates, directed district Collectors Superintendents of Warangal, Anantapur, Karimnagar and Rangareddy to submit a comprehensive report on the affairs of microfinance institutions (MFIs). Read more here. . This report should be ready by this week and as and when it is released could be a trigger for panic selling.

8.  Competitive Political bashing: Not only the government but the main opposition party has joined in MF bashing. Chandra Babu Naidu, ex-chief minister said "Don't repay your loans till the interest rate is brought down to three percent as promised by the government. If MFI agents harass you for repayment, tie them up in a room and call the TDP workers for support," addressing a public meeting at Uppal. The growing public ire against the rising incidents of suicides saw offices of SKS Microfinance being targeted by irate groups across the state. Read more here.  As politicians in other states realise that MF bashing is a vote winner, Naidu’s antics can be expected to be replicated all over the country!

9.  Net Margins to Be Double Squeezed: First a Working Committee recommended exclusion of bank loans to NBFCs from the Priority Sector Lending (PSL) category and then the Financial Services Secretary wrote a letter to banks urging them to “ensure that the rates of interest charged by the MFI to eventual beneficiaries are at reasonable level, say around 22-24% per annum”. The latest in this chain has been the exclusion of the Non Banking Financial Companies (NBFCs) from the list of entities to be engaged as Business Correspondents by Banks and deprive them of priority lending status. Read here.

10.  SKS not to get banking license: One of the reasons why SKS attracted a whooping P/E was the expectation that it could get a banking license. The Finance Minister sprung a surprise in his Budget speech when he announced that RBI is contemplating issuing additional banking licenses to private sector players.  All 10 top MFIs were eyeing for this licenses. It makes perfect sense for a Micro-finance Institution (MFI) to take a plunge into full service banking as it reduces the cost of capital by half. Currently, a Micro-finance Company musters capital at a cost of 11-13 per cent, but once transformed to a bank the cost would substantially reduce to 7-8 per cent. But with this scandal exploding, this dream has gone up in flames Read here. 

 We further encourage readers to visit two excellent postings by the blog Finance Mortem. In a post dated 9th April 2010 titled “Commercially Yours, SKS Micro-finance IPO”  and 24 December 2009 titled "SKS Microfinance IPO: A Zealot’s Dilemma". This makes the following conclusions:

• That the IPO is priced undeservingly high.
• That book building process has been manipulated by finance sharks in the board of SKS  to jack up valuations.
• That Vikram Akula is just a fall guy in this whole controversy - A group of four PE investors of SKS, replaced Mr Vikram Akula (founder of SKS), as promoter of the firm (reported on 11th March, 2010).
• The IPO has been brought about at the behest of the PE investors of SKS as a major chunk of the issue proceed is used to give exit to the PE investors at inflated levels.
• The IPO merely provides an exit route to existing investors, then the entire process will be a shareholders’ re-organisation exercise rather than being an alternative and meaningful fund-raising activity.
• The Government and the Regulator are in the process of finalizing the regulatory guideline for the sector.
• Many social investors believe that it is a profiteering mentality to rush for an IPO before the regulations come into effect. The prudential practice would have been to first prove that the company and its business model can withstand the regulatory environment and then come up with an IPO. The sheer credibility that regulation brings in will attract more investors to the IPO.

VCircle blog in their post of 11th November 2008 interviewed Vikram Akula and this is what he said: "SKS has raised funds from Sequoia Capital, Vinod Khosla, Odyssey Capital, Silicon Valley Bank and others. Talking about the exit route to the investors, Akula said its likely to be through an IPO. But they have other options like mergers and acquisitions on the table. Also the investors are likely to get a return of 20%"  

Here's the confirmation from the horse's mouth that such an exit for investors were being planned as far as two years ago. The investors did more than 20% return. They took more like 20 times multiples of their investment. This is valuable foreign exchange we are talking about.

The postings then paint a different picture of Soros, Narayana Murthy and Khosla. It appears pre-IPO PE investors wanted to exit at inflated prices and left this trio carrying the baby (dud share) meaning suckered them! Imagine the headlines of international media when they discover that old Soros had been suckered! Why the gang of 4 pre-IPO PE investors wanted to rapidly exit with inflated profits was because they wanted to beat the new MF regulations coming by December that would have capped their interest rates on one hand and deprived them of priority lending rates by public sector banks, the combined effect would virtually put them out of business.