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.”
“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.
