Microfinance, India's sub-prime crisis, Vivek Kulkarni

Imagine that your maid borrowed Rs 30,000 from you, promising to repay within a year from her monthly wage of Rs 4,000. Do you think you could cut Rs 2,500 from her monthly wages, every month? 

First of all, do you expect her to repay anything? Would you charge any interest on your lending?

Most likely, you might write off the entire amount, considering her child's education and husband's health problems.

Microfinance Institutions (MFI) are in a similar situation. According to the Government of Andhra Pradesh, more than Rs 25,000 crore has been lent to over 80 lakh poor families. On an average each family owes Rs 30,000. Most MFIs charge 27 per cent interest on loans. Some MFIs seem to use strong-arm tactics in loan recovery, with a few reported suicides. The Andhra Pradesh Government reacted with an ordinance to regulate MFIs. Most likely, the MFIs might be forced to write off a big chunk.

HOW IT UNRAVELLED

First, MFIs were in a hurry to grow fast. SKS Microfinance, a listed company, has grown 90 per cent annually for the last four years (see Table), from just two lakh members to 40 lakh members in less than three years.

The loan disbursements have gone up from just Rs 150 crore to over Rs 4,400 crore in three years. Growth prompted investment grades from rating agencies. Whenever loans are disbursed in haste, one can anticipate problems later.

Second, the concept of self help group (SHG) was not followed. The concept involves forming groups of 15-20 women, who meet regularly, understand each other's problems and bond for a while. They are expected to save a small amount, keep the money in bank and earn interest.

A member could borrow when she falls ill and can't go for work. She would return the money with 18-24 per cent interest to the group. The recovery is almost certain, due to peer pressure and bonding with the group.

Such group formation and bonding takes a minimum of six to nine months. The MFI did not have so much time and wanted to grow rapidly in tune with their private equity investors. They went in for the Joint Liability Group (JLG) method. Their agents would persuade five women to form a group and each guaranteed the others' loans. Most members of JLG could not develop the special bonding they would have in SHG.

Third, the MFI apparently charged lower interests of 12-18 per cent in JLG, compared with that of 18-24 per cent charged by SHGs primarily run by the PSU banks. MFI interest rates were non-transparent and effective rates often were over 27 per cent, considering loan processing fees, penalties and hidden charges.

THE SUBPRIME BUBBLE

How did the borrowers repay? Many adopted what is now known as ‘ever greening' tactics. They would borrow on Mondays from one MFI and repay to the other MFI on Wednesdays. Since all of them were growing with plenty of funds from the private sector banks, the party went on.

Of late the PSU banks too joined the party. For instance a major PSU bank that had Rs 1,000 crore exposure to SHG based loans, lent another Rs 60 crore to MFIs.

Should we credit the Government of Andhra Pradesh for bursting the MFI bubble? Has the lending reached many subprime borrowers? Prima-facie the evidence seems in favour of the government.

Each poor family seems to have borrowed over Rs 30,000 per year. While every MFI claims that it has lent just Rs 10,000 per family, multiple lending suggests a higher figure.

Most MFIs claim they have lent for income-generating activities. In reality, most lending has been for consumption purposes – buying a TV, repairing a house, paying for school-college fees or for serious illness of a family member.

Thus, indiscriminate lending and irresponsible borrowing was encouraged, leading to the sub-prime bubble.

THE WAY OUT

First, the sector has to be regulated by the state governments. They can, however, go overboard and stifle the sector. Politicians would be too happy to ask people not to repay their loans to banks. The Andhra ordinance expects MFIs to obtain approval to make tiny loans, which is impractical. Hence, regulation has to be tempered by a sensible institution like RBI.

Second, the regulation should encourage bonding their members, with savings, self-help, education, and not just credit. Money has to be lent only when the economic viability of projects is well established. The capacity of a village or a cluster to support income-generating activities has to be worked out to cap MFI lending geographically.

Third, the MFIs who give credit to crores of women groups don't employ women to the same extent. Most show just 3-4 per cent women employees. This percentage must go up drastically. A holistic scheme to help the poor has to include – health insurance, self-help, education, employment and finally credit. Many MFIs overturned this philosophy by concentrating just on credit.

(The author, a former IT Secretary, Government of Karnataka, is founder of Brickwork Group.) 

Courtesy: The Hindu

Micro Finance Institutions Operations & Impact - Guest Post by Bhakther Solomon

About the Author: Bhakther Solomon , the CEO of Development Promotion Group (DPG), Chennai, is an economist by training who worked within the NGO sector for more than 35 years.

He initially worked in senior management capacity for several NGOs, including ActionAid India before founding DPG in 1986 which works in Tamil Nadu, Andhra Pradesh and Karnataka. These projects, both urban and rural in nature, range from watershed development to sanitation to housing to education.

Since 2000, DPG had begun an active role in the provision of micro credit facilities, facilitating federations and SHG-Bank linkages.  RA

In recent years, both urban and rural areas have seen the entry of many Micro Finance Institutions (MFIs) and MNC sponsored Micro Finance Companies. Their declared goal is to provide Micro Finance to the poor, at least cost, at their door steps. One can now see nearly a dozen Micro Finance institutions in almost all villages in our working areas. On the positive side, this has reduced the role of money lenders and the interest rates have come down. 

The other side of the picture is that these institutions have now slowly pegged up their interest rate. In the early period i.e. about a decade ago, MFIs did provide credit at around 12% equivalent to the bank interest rate. But now their rates are much higher than the Bank loan rates. It goes up to even 36%.

MFIs: New Lenders:

If one takes into account all the hidden charges, the interest rate varies from 18% to 36% and in a few cases, well above 36%. Again, due to availability of plenty of credit outlets, many are forced to take credit for all purposes. It is also surprising to note that few families have become clients in more than two or three institutions. A Bangladesh model is slowly getting in operation, wherein one gets a loan from a MFI to repay another MFI loan. Strange but true. 

In few cases, I won’t be surprised if such a trend creeps into our villages also. Even if the credit is used for productive purpose, whatever the poor get as “additional income” is now mostly appropriated by the “new lenders”. Unfortunately, the simple explanation given by MFIs for high interest rate is that the cost of funds plus operation costs are much higher that the normal bank rate! Unfortunately, the labour theory of Karl Marx is not even being talked about by his so-called followers!

Dictomy: 

It is a pity that NGOs which come into being to help the poor to acquire their legitimate rights to be established from the Government, Banks and other development  organizations have now floated their own for-profit micro-finance  institutions to “serve” the same poor. 

The alternative model of growth initiated by MFIs has become very costly compared to normal development credit from banks and other Government sources. The MFIs that are supposed to mobilize the people to get Bank loans under Differential Rate of Interest (DRI) Scheme and other portfolios have now become merchants of their own credit portfolios. Unfortunately, these merchants are more visible everywhere than the financial inclusion policy and practices of banks!

Privatization:

There is a danger of the Government slowly withdrawing from its anti-poverty programmes and allowing “Privatization of anti-poverty programmes”. There is also the danger of Graham’s Law of money operating, in rural areas. The danger of these new Micro Finance entrants driving out old Community Based Organisations’ (CBOs) small Micro Finance Initiatives. 

Will this bubble explode at one point in time resulting in greater injury to the poor? How long will this go on? Will there be a regulatory body-self regulatory or Government controlled one – to ensure that the marginalized are not explicated further? What matters in Development is not the cost of operation but the causes that lead the families to poverty! 

Can SKS Microfinance buck the industry’s momentum to doom?

November 16th 2010.  Ever since the crisis broke out in Andhra Pradesh, MFIs have used every trick in the PR book to whip up sympathy, but instead found that their support base continuously dwindling even faster.  It is one thing for Vijay Mahajan, President of MFI association M-Fin to attempt to play the sympathy card and another for founder-Chairman of SKS Microfinance, Vikram Akula to do so. SKS being the only listed MFI Company in the sector the key difference between the two. So when Akula naively disclosed that collections have come in lower than normal post the Andhra Pradesh government ordinance, the effect was a virtual invitation to bears to hammer the stock. And the bears responded with glee.

November 17th 2010.   SKS share touched a historic low of Rs 601 in the National Stock Exchange (NSE) - a fall of 60% from its all time high of Rs 1,490  - trading stopped by triggering the 20% downward circuit breaker!

November 18th 2010.    Feeling the pinch, Akula and his CFO, Dilli Raj walks into CNBC-TV 18 Newsroom to give an interview in an attempt to stem the tide. The interview succeeded in arresting the decline of the stock, giving it a small bounce.

December   3rd 2010.    The stock closes at Rs 711.30, though it made a recent high of Rs 750 intra-day. In the last week, volumes thinned considerably except on Friday, which saw bulls trying to breakout out of range but the huge selling pressure brought back the share to Rs 711.

The question is whether SKS can hold on to its strong support between Rs 705-711 or would this range instead turn into a strong resistance level for that stock? To answer this we need to revisit Akula’s claims on November 18th to ascertain their veracity on the basis of new information now available to the market. Extracts of their verbatim CNBC interview is provided as given in MoneyControl.com

CLAIM 1:  EXPOSURE IN ANDHRA AND IMPACT ON REPAYMENT

Akula: Let me start by emphasizing that while the ordinance has had an effect on some microfinance institutions, we are here, today, representing SKS Micro-finance and not the sector. In our case, we haven’t seen a significant impact as of yet... If you look at the attendance at our meeting, last week for example where we do have the data, the attendance at the meeting of our borrowers is 97%.It is true because of the ordinance, we weren’t able to conduct financial transactions but the fact that borrowers were coming to our meetings at the rate of 97% shows that there continues to be from the borrower level, customer confidence. 

Raj: 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....There could be some minor impact on FY11 earnings guidance that we have given but we have just three days data, so it is near impossible to define the impact in a week’s time.

At the beginning of the crisis, Akula put SKS exposure in Andhra as high as 38%. By Nov 18th, his CFO now says it is a measly 20% in an attempt to play down Andhra’s criticality in affecting the bottom line performance of SKS Micro-finance. Akula further totally retracts his statement made a few days earlier that his collections are affected in Andhra. His CFO further skirted the question by resorting to technicalities claiming since the periodicity of collections from weekly to monthly basis has been changed, it is too early to comment on overdues.

WSJ-Livemint.com   4th Dec

“The ordinance has led to massive defaults by borrowers in AP, forcing the industry to stop issuing fresh advances, Mahajan said, adding that the industry is now worried the trend will spread to other states. Mahajan said over 90 per cent of borrowers in the South Indian state have not been paying their EMIs for over a month now... Already, 90-95% of the Rs.8,000 crore outstanding MFI loans in Andhra Pradesh are overdue.

In the villages, news spread fast and since we have stopped fresh lending, people have come to believe that we are in crisis and so why to pay up?," Mahajan said, adding that this has aggravated industry's troubles.” 

So just three weeks after the Akula-Raj CNBC-TV18 interview, according to M-Fin Chair, MFIs are experiencing in Andhra a default rate of over 90%.

Christian Science Monitor Nov 17

"But the current crisis is roiling the entire industry,” says Matthew Titus, executive director of Sa-Dhan, a Delhi-based association that groups over 260 nonprofit, self-help, and commercial lenders. “It’s not only the bad boys that will get hit. Everyone will get hit. People can’t differentiate between who are the good boys and who are the bad boys”.

Both MFI associations (M-Fin and S-a-Dhan) assessments of negative impact radically differ from those Akula tries to paint. Akula claims SKS is immune to any significant impact flowing from the ordinance, while MFI trade associations’ assessment clearly think on the contrary - that its impact will be cross the board, sparing none!

CLAIM 2: MATERIAL IMPACT IN NON-ANDHRA STATES

 

Akula: If you look at the non-AP portfolio, which is close to three quarters of our overall portfolio, there we continue to have 99% repayment rates. So there are absolutely no issues in 18 states where we work.   

Wall Street Journal: 19 Nov 

“While Mr. Akula’s booster dose of confidence may provide temporary relief for investors, concerns still linger, as J.P. Morgan’s Seshadri Sen said in a recent report. We believe that the Andhra Pradesh book would be impacted significantly and credit behavior in other states would also be materially impacted.”

WSJ-Livemint.com   4 Dec

Mahajan: It is only a matter of time before the news spreads to other parts of the country. Already, we have seen some things happening in Madhya Pradesh, where a municipal councillor after losing an election urged borrowers not to pay back MFIs. Chandrababu Naidu is doing it on a much larger scale in Andhra Pradesh, he said, calling Naidu’s campaign “irresponsible”.

Three weeks from the CNBC interview, there are strong indications that MF repayment rates are starting to decline as credit behaviour in non-Andhra states starts to change.

CLAIM 3: LIQUIDITY  

Akula:  No banks have withdrawn from them. “ICICI Bank, Axis, SBI, PNB Have supported us. We do not need any liquidity support from anyone” 

Raj: As of date we are in complete compliance with a self-imposed financial discipline. We hold sufficient liquidity, we thank eight banks who have leased Rs 367 crore to us in the last 15 days and we are sitting on a sanction pipeline of Rs 2,500 crore and we disbursed Rs 1,050 crore 

Times of India  4 Dec 

“Microfinance lending activities across the country will be "dead, absolutely" by January 1 unless banks release fresh credit to the cash-strapped sector, an umbrella body representing MFIs said today.

If the current severe credit crunch continues till the end of December, "There will be no microfinance in 2011... Come first January, we are dead, absolutely... it will be finished," the President of the M-Fin Network, Vijay Mahajan, told reporters here today on the sidelines of the annual Bancon 2010 banking conference.” 

WSJ-Livemint.com   4 Dec  

"Some institutions that have sanctioned lines of credit are not disbursing money. But we have to explore all options,” said S.V. Raja Vaidyanathan, chairman and managing director of Chennai-based Asirvad Microfinance Pvt. Ltd.

Our (MFIs) total outstanding with banks is Rs 24,000 crore and we pay them about Rs 1,000 crore monthly. A substantial part of this is from AP and as of now, we are diverting the money from the rest of the country to repay their debt," Mahajan said.

Business Standard    26 Nov  

“Investors are shying away from securitised loans of micro-finance institutions (MFIs), as the ordinance issued by the Andhra Pradesh government has slowed recoveries, creating uncertainty around the underlying portfolio. 

Securitisation is the process through which MFIs pool the receivables from loans given to their customers and sell these to third parties like banks, insurance companies and mutual funds. Unlike the traditional loan portfolio sale or assignment, in this process the MFI portfolio is rated and converted into standardised securities, which can be traded more easily. Securitised loan products of MFIs were emerging as a good investment option, as they offered returns of 9-12 per cent per annum. The size of this market was pegged at a little over Rs 1,000 crore.” 

The downgrade significantly constrains MFIs ability to raise external funding. Further access to fresh loans from banks and financial institutions has dropped materially, which is probably due to attempts by banks to reduce their exposure to the sector. MFIs are now being double squeezed in terms of liquidity. On one hand, sanctioned credit lines have been effectively radically cut. On the other hand there are no takers for their securitization products. The net effect affects MFIs ability to service debt and limits their fresh disbursements, which can have a cascading effect on their growth and asset quality in the near term.

CLAIM 4: PROFITABILITY  

Akula: 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.

Sify.com 23 Nov 

“Ratings agency Crisil has put 12 microfinance institutions (MFIs) – including the country’s largest, SKS Microfinance, and Spandana Sphoorty Financial – having bulk of exposure in Andhra Pradesh on a rating watch with negative implications... The implementation of the Andhra Pradesh (Andhra) ordinance has triggered a chain of events that can permanently damage the business models of MFIs by impairing their growth, asset quality, profitability and capital-raising ability," the rating major said on Monday.

Last week, Fitch India had said the securitised paper floated by Indian MFIs was unlikely to receive the highest long– or short–term ratings as a consequence of the unique risks they faced. The limited historical asset performance and evolving regulatory and legal framework would also prevent highest rating for MFI securitised paper, according Fitch India.”

Together with MFIs forced to reduce their interest rates, the downgrade by rating agencies like CRISIL and Fitch would imply that their own cost of borrowings would now be higher, lowering margins even further. 

The Hindu-Businessline   24 Nov

“Microfinance institutions (MFIs) in West Bengal witnessed almost 50 per cent drop in monthly disbursements over the last two months on account of a liquidity crunch in the system. The cash crunch is primarily because of banks' hesitation to lend to MFIs after the recent Ordinance promulgated by the Andhra Pradesh Government making recovery from borrowers difficult for these institutions.

Disbursements have dropped from about Rs 100 crore a month till about two months ago to just about Rs 50 crore at present, according to Mr Shubhankar Sengupta, Managing Director – Arohan Financial Services and Member – Microfinance Institutions Network (MFIN). Commercial banks that account for almost 80 per cent of our source of funds have now gone slow on lending after the Andhra Pradesh Ordinance. These banks have a big exposure to the MFIs in that State and as repayment, there has taken a hit they have adopted a wait-and-watch policy and are unresponsive to MFIs in other parts of the country as well, he said.”

West Bengal is the second biggest market for SKS Micro-finance and the M-Fin claims that bank disbursement for the entire industry there is reported to have dropped above 50%. We further learn from Mahajan that though MFIs are able to recover advances in non-AP states, they have disbanded altogether or drastically cut down loan advances in these states to tide over liquidity problems. Accordingly we may infer MFI loan disbursements have overall contracted drastically in the country which in turn should have high material impact of the performance of the sector MFI which start reflecting itself in their third quarter results and we can have an insight to their full impact from the fourth quarter results. 

CLAIM 5:  TRANSITORY OR TEMPORARY PHASE 

Raj: This is a transitory, temporary issue and we don’t see any material impact of that on our net worth or our FY12 earnings.

Raj’s statement is typical of one being in denial. The current problem may be transitory or temporary but the question is how short or long drawn out will be such a phase? The MF Bill was supposed to be introduced in Parliament this month but it has been withdrawn to be re-drafted to reflect the experience of Andhra. At the very earliest, the bill can be expected now to be introduced during the Budget session in March and bill could take as much as end of next year to be passed. As and until the Act is passed, this crisis will not go away.

The current buzz within government circles is to let things drift and permit a few MFIs to go bust to drive MFIs to a level of desperation that they would accept even an Act that put them under tight leash in order to prevent repetition of AP behaviour. But the MFIs are already in such a heightened state of desperation that they are willing to even accept public sector banks mulling the prospect of getting their shares at par in exchange of defaults as seen in these media reports: 

Indian Express  5 Dec 

“Public sector lenders have come out with a proposal to salvage troubled microfinance industries (MFIs) —conversion of loans into equity in the company in case of any default. State-run Corporation Bank is the first bank which has come with the idea to safeguard its risk through this route.

Other lenders like State Bank of India, Bank of India, Indian Overseas Bank, Punjab National Bank and SIDBI — which have maximum exposure in the sector — are also said to be toying with this idea, said a banking source. “The microfinance industry is a very lucrative sector and we consider it very good from the investor perspective. From now on, we will be putting a clause in our loan contracts through which we will get an equity stake in the MFI in case of a default,” Corporation Bank chairman and managing director Ramnath Pradeep said.

No lending has yet been done under the equity-in-case-of-default clause. This applies to the newer ones which we will be giving,” Pradeep said. “The equity-for-loan clause mentions that the stake will have to be given to the bank at par or at the face value of every share, which can result in a windfall to a bank,” Pradeep said, adding “MFI shares are still strong. The share's market value can be Rs 700 but I will get it for Rs 10 as the face value.”

WSJ-Livemint.com   4 Dec 

Mahajan: Already, 90-95% of the Rs.8,000 crore outstanding MFI loans in Andhra Pradesh are overdue. Right now companies are just collecting from other states and disbursing it in Andhra (Pradesh), but this cannot continue for long because some of the other states have not seen disbursals in the last two-three-four weeks and the borrowers there are wondering as to why companies are only collecting dues and not giving out loans,” he said.

Mahajan added that if this continues the same way for a few more days, then defaults will start in other parts of the country too, because a lack of disbursements will push borrowers towards defaults.

MFIN’s Mahajan said equity is only one of the few things MFIs have to give as collateral “because our only assets are the credit we have given, and we own very few fixed assets”. 

So if non-Andhra states are still giving healthy repayment rates to MFIs, then Mahajan does not expect this to continue as “a lack of disbursements will push borrowers towards defaults”. The longer this crisis lingers on, the higher the chances of MF industry going bust as the crisis expands country wide in impact. 

The MFI sector is besides looking to the neo-liberals within the government and bureaucracy to ensure that the MF Act in its final form will be compassionate to their interests. This expectation too is devoid of reality. The government is of course under considerable pressure from the World Bank to integrate MF within their existing development schemes such as NREGA. While the government is open to this suggestion, they want to ensure MF to be gentler to the interests of the poor as compared to the barbaric streak the latter displayed in Andhra. While the central government pressure succeeded in getting MFIs to reduce their interest rates to 24%, they would be more at ease if this is around 18% while state governments will like to see them in single digits. Besides, the Andhra crisis have whipped up so much controversy that opposition parties will aggressively oppose any Bill that leaves MF to pursue a business as usual operation. 

So even if the neo-liberals have their way, it is highly unlikely that such a bill will attract adequate political consensus to pass it as an Act. Accordingly, within the expected future policy environment, it is highly unlikely that the MF sector will be as lucrative and high growth as it was in the past. This means that the MF as a sector need to drastically re-rated in valuations as compared to current valuations. The indications to this effect are reflected in the following media report:

Bloomberg.com 02 Dec 

“Private equity companies may struggle to recoup almost $565 million in investments in India’s microfinance industry since 2006 after a regulatory backlash led at least two firms to delay initial public offerings.

Temasek Holdings Pte, billionaire George Soros and Sequoia Capital are among investors who’ve put money into the world’s largest market for micro-loans as lending and profits swelled. The boom culminated with the IPO of Sequoia-backed SKS Microfinance Ltd., which raised 16.3 billion rupees ($357 million) in August.

I don’t think private equity investors will recover their money at the rates they thought they would,” said Sanjay Sinha, managing director of Gurgaon, India-based Micro-Credit Ratings International Ltd. “The market is not as wonderful or as large as the investors made it out to be, and they paid far too high prices for their stakes.

Valuations for Indian microfinance companies, which focus on providing loans in areas largely shut out from traditional banking services, are three times the global median, based on private equity investments, the Consultative Group to Assist the Poor, a Washington-based policy and research canter that aims to help increase financial access, said in a report in March.”

CLAIM 6:  SCALE 

Raj: What are going to supplement that profitability are scalability and productivity gains. Our operating cost has come down from 12.7% to 10.4%. If you look at it, at the end of the day it’s separating men from the boys. The company with the strongest balance sheet, best management, best practices, adequate capital on the balance sheet and liquidity and also customer centricity is actually going to gain out of it.

The claim of SKS of having best governance practices in public eyes is plain bluster after the company sacked their CEO, Gurumani arbitrarily. So is the claim of customer centricity with charges of alleged suicides due to their coercive recovery practices. Besides customer centricity is best provided by smaller MFs than a nationally scaled one.

This leaves the strongest balance sheet, capital reserves and liquidity as seemingly sound arguments that validate SKS claims that these are what separate men (them) with boys (others). Now scalability is a two way sword. As long as there is growth, then all these SKS claims maybe probably true. But what if a MF of a size like SKS actually experience rapid negative growth? It is obvious that it can just as easily slip into bankruptcy in lightening speed. Particularly so as Mahajan points out that the only assets MFIs have are current (loans they disburse) with very little capital assets.

One of the major reasons why operational costs to delivery of credit are high is due to the high overheads of MFIs like SKS. The sacked CEO of SKS Microfinance, Suresh Gurumani, received an annual salary of Rs1.5 crore and gross remuneration of Rs2.45 crore in 2009-10 in addition to perks and benefits much more than this amount. In contrast the chairman of SBI, India’s largest bank receives just Rs 26.5 lakhs, the RBI Governor, a paltry  Rs 15 lakhs while his deputies - a relatively pittance amount of Rs 13 lakhs. This gives a glimpse of why all claims of operational cost cutting by SKS are just bunk. It is because it is all bunk; scalability in an environment of rapid negative growth rate can easily turn a curse. This would give SKS an equal probability of getting bankrupt as compared to any small sized MFI.

The vulnerability of MF as a sector is not only because of its highly skewed geographic concentration in Andhra Pradesh but also its high dependence on the government funds for its operational lending activities via public sector banks. This dependence is estimated at over 80% of all their lending and in the case of SKS, slightly lower. As a reaction to the crisis MFI’s first looked to infusion of Private Equity (PE) funds, even in exchange of equity. By first week of December, PEs though offering initial interest, expressed their unwillingness:

Bloomberg.com 2 Dec 

“No logical person would invest in microfinance right now, because there is no microfinance right now,” said Vineet Rai, founder of Mumbai-based investment company Aavishkaar Venture Management Services Pvt. “If all the big guys are facing the risk of not being around, you have to be very courageous or mad to invest. Aavishkaar’s funds invested $18 million in seven Indian micro-lenders including Spandana Sphoorty Financial Ltd.”

With PEs willing in spirit but not in mind to invest further, MFIs survival revolves entirely around government’s mercy. Unfortunately for them, none has been forthcoming todate!

So we ask again. Logically, can SKS Microfinance buck the industry’s momentum to doom? You decide and re-rate SKS stock accordingly.

Muhammad Yunus, Banker of the Poor Exposed for Fund Diversion: The Documentary Trail

In a secret memo from 1998 beats the Norwegian Embassy in Bangladesh alarm: Peace Prize winner Yunus has quietly tapped the Grameen Bank -- the poor bank -- for 608 million aid dollars, and moved the money into a company that Norwegians have never heard of.

Burn-point documentary "Caught in the micro-debt" shows a completely different side than the microcredit Muhammad Yunus and his bank Prize-winning Grameen Bank portrays in public.

608 million dollar on aid balance - Focal Point - NRK

In the spring of 1998 was a very stormy period in the relationship between peace prize winner Muhammad Yunus and Grameen Bank on the one hand, and the Norwegian authorities on the other. The relationship has until now been unknown to the public and hidden in the confidential documents in NORAD archive.

But in Burn-point documentary "Caught in the micro-debt" now revealed how the 608 million kroner issued by Norway, Sweden and other countries with a stroke of the pen was transferred from the Grameen Bank to a newly established company with a completely different purpose than to provide poor women micro loans.

The transaction's purpose was, according to saute Laureate among other things that Grameen Bank would not have to pay taxes and to raise funds for the clean-profit corporations.

While NORAD tried to push the Nobel Peace Prize winner Yunus to reverse the transaction, selected Swedish aid authorities to sit still as a mouse to prevent the Grameen Bank's reputation was soiled.

HISTORY OF MONEY

Here is the detailed history of the conflict, based on a folder of secret stamped documents that Focal Point has been given access to the NORAD archive.

5. November 1997:

NOK 32.2 million transferred from Norad to the Grameen Bank, as the final figure, according to a series of agreements between the two parties.

This gives Norway a total of 400 million allocated to the "bank for the poor" in the period 1986-1997. Norway is one of the largest bistandsyterne the Grameen Bank and Muhammad Yunus, both of which ten years later in 2006 will be awarded the Nobel Peace Prize.

Later in the month discovers Officer Einar Landmark at the Norwegian Embassy in Dhaka, Bangladesh by chance a footnote to the accounts of Grameen Bank's annual report for 1996.

In the footnote it says that it made a deal to transfer hundreds of millions of aid compared with the Grameen Bank Grameen Kalyan, a company embassy never heard about.

The substantial amount involved in the transaction includes NORAD and other donor support to the Grameen Bank over many years.

3. December 1997:

The Norwegian Embassy in Dhaka called Muhammad Yunus to a meeting where the Prize winner will be asked to explain the transactions and the reasons for it.

Ambassador Hans Fredrik Lehne writes later in a confidential memo to Norad Director that peace award winner explanations and rationale for the transaction is not "clarifying and compelling." The ambassador pointed out the following:

"Yunus said that the main purpose of the transaction was to reduce tax abilities, and to secure funds for the members (...ed. REF note) of the Grameen Bank."

15. December 1997:

Embassy in Dhaka sends a letter to the Grameen Bank in which they ask for more ufyllende information and explanations. Again embassy a brief response "in a manner that was neither clarification or particularly trustworthy."

8. January 1998:

A letter signed Peace Prize winner Yunus, with various attachments, sent to the embassy in Dhaka. The letter reveals the scope and background to the transaction that the embassy by chance discovered:

A total of NOK 608 million assistance has been transferred from the Grameen Bank Grameen Kalyan, a company embassy never heard about. The money is taken from the so-called revolving funds of the Grameen Bank. These are funds that are created by development funds from Norad and other donors to provide mortgages and other types of micro loans to poor people in Bangladesh.

The agreement between Grameen Bank and Grameen Kalyan -- both companies led by Nobel Peace prize winner Muhammad Yunus -- was signed on 7 May 1997 and came into force with effect from 31 December 1996. On the same date as the transfer occurred, the same amount granted as a loan back from Grameen Kalyan Grameen Bank -- the bank for the poor.

10. February 1998:

Embassy in Dhaka, by Ambassador Hans Fredrik Lehne, turn the alarm about Grameen Kalyan case in a confidential memo to Norad's then director Tove Strand Gerhandsen. The paper summarized the transaction as follows by the ambassador and officer Einar Landmark:

"It has thus been made a bookkeeping transaction where the Grameen Bank has donated funds made available from donors and then to borrow them again. Ownership of the funds has thus shifted from the Grameen Bank Grameen Kalyan, Grameen Bank and .... debts to the Grameen Kalyan"..... .

In the secret memo makes it explicit that the Norwegian assistance has disappeared from the Grameen Bank is about 300 million.

The Norwegian branch represents almost half of the total on 608 million. Other donors who have been affected by the transaction, nobody knew about are SIDA, Ford Foundation, IFAD, CIDA, Kfw and GTZ.

But not enough. Embassy finds out that the purpose of Grameen Kalyan, among other things is to make loans and invest in companies both inside and outside the Grameen family. Through the agreement, Grameen Kalyan received income from interest payable by the Grameen Bank, and had the opportunity to demand repayment of the loan.

Drain money from the Grameen Bank has already come multinationals to good, turn Lehne and Landmark stuck in his note to the Strand Gerhardsen:

"Grameen Kalyan (have) been able to pull funds out of the Grameen Bank and using them for purposes other than they have been allocated by donors, and for other purposes than the Grameen Bank has an opportunity to provide these loans. Grameen Kalyan has already granted BDT 300 million (approximately NOK 50 million) from these funds (...) to partially finance the project to the cellular Grameen Telecom/ GrameenPhone."

DIVIDENDS TO TELENOR

50 million words had already gone to the GrameenPhone case officer at the embassy when the transaction is discovered in a footnote in the 1997. The same year, GrameenPhone was launched with great fanfare on the National Day of Bangladesh on 26 March.

The company, owned by Norwegian Telenor and Yunus, Grameen Telecom Company, has since been a tremendous success and the money machine for Telenor.

According to the Norwegian telecom giant Telenor, GrammenPhone has given a dividend of NOK 855 million over the past eight years.

In the note other than the public to Norad director, the Norwegian Embassy in Dhaka is clear in its ruling:

"Through the agreement with Grameen Kalyan, Grameen Bank transferred outline, and the ownership of these funds for Grameen Kalyan, and the revolving fund for mortgage ceased to exist. This is not acceptable."

Ambassador Lehne and Officer Landmark is not impressed or convinced by the arguments Muhammad Yunus provides for the establishment of the agreement between Grameen Bank and Grameen Kalyan.

CONSTRUCTION TAX

In the letter dated 8 January 1998 Yunus writes in part that the Grameen Bank in 1998 no longer enjoy tax exemption, and that the bank would have paid 40% tax on profits if not agreement with Grameen Kalyan had been signed in 1997.

The tax argument commented as follows in the secret note to NORAD Director:

“At the time, support was granted a wild one from the Norwegian side hardly have accepted organisational structures to prevent the ordinary taxation of possible future economic gains.”

The embassy also writes that Yunus leaves "a confusing impression of the Grameen Bank's management's view of itself." The reason is as follows:

"Grameen Bank's management says it that it is possible that they will not exercise sufficient financial discipline to demand loans granted by the Grameen Bank (to the poor, ed REF note) to be repaid.

Consequently, they have found it expedient to give up the funds, and borrow them again, so that Grameen Kalyan that they borrow from, which is controlled by themselves, can exert the necessary force on themselves as leaders of Grameen Bank to be responsible in handling of loans. The argument may leave a question about repayment of loans of Grameen Bank is about to develop into a problem for management. When the need for the agreement is justified in terms of repayments of loans from Grameen Bank, can also be tempted to ask: Takes place in the re-organisation as an easy, almost selvbedragersk diversion to create the illusion of them even though it has been done about a big problem that requires a very different labor-intensive approach?"

Finally, concludes the note from the embassy in Dhaka to Norad Director Strand Gerhardsen that Norway should demand that the agreement between Grameen Bank and Grameen Kalyan void, that the amounts in the hundreds of millions returned to the Grameen Bank and that a revolving fund for mortgage restored.

3. March 1998:

Legal department in Norad write a memo -- stamped except public -- about the Grameen Kalyan case. Head of Section Sverre Melsom expresses his disbelief over the embassy has narrated in his note to Norad Director:

"Like the embassy, we are very surprised that no submission in advance for Norad (and any other donors) and also without the following information has been such significant change (...). It is outrageous that Norad even have to read to such changes by Century Studies in the audited financial statements that were first received long after the changes had taken place."

Section leader writes that the Legal Section supports the embassy's conclusions and claims to the Grameen Bank:

"However, one must not forget that the agreements regarding the assistance is between Norway and Bangladesh, so we consider it very important that the Ministry and the Finance, Economic Relations Division, will be apprised of and involved in the case at an early stage, and that collect their comments on the changes in management and organisational structure that Grameen Bank seems to have unilaterally implemented."

16. March 1998:

In line with the recommendation from the Legal Department held a meeting between the Norwegian Embassy in Dhaka and representatives from the Ministry of Finance in Bangladesh. In the confidential minutes from the meeting concludes Embassy with the following:

"After the presentation of the case of the embassy and in-depth discussion it was agreed that the agreement between Grameen Bank and Grameen Kalyan was in breach of the agreements between Bangladesh and Norway for support to the Grameen Bank."

Meanwhile, the embassy also warned the Swedish aid agencies (SIDA) on Grameen Kalyan case and asked Sweden to be with the requirement that all money should be returned from Grameen Kalyan Grameen Bank.

17. March 1998:

In a fax from Franck Rasmussen at the Swedish Embassy in Dhaka makes it explicit that Swedish aid agencies (SIDA) has supported a total of Grameen Bank with 210 million SEK during the period 1989 to 1993. Of these, 190 million earmarked for the revolving funds, and consequently transferred from the Grameen Bank Grameen Kalyan with Norad money and other international support.

Rasmussen writes, however, that SIDA is not going to support Norad's claim that the money be returned because it could damage the reputation of the Grameen Bank and the good thing:

"No one wants two make a big thing of this as It might angry the creditability of the Grameen family and pray that would detrimental to the whole cause."

18. March 1998:

The Norwegian Embassy in Dhaka writes a confidential letter to the Ministry of Finance in Bangladesh, where they maintain the criticism of the agreement between Grameen Bank and Grameen Kalyan.

Ambassador Hans Fredrik Lehne concludes by asking the authorities take the necessary steps for the return of the 608 million crowns were transferred to Grameen Kalyan.

1. April 1998:

A new meeting will be held in Dhaka between the embassy and Yunus and other leaders of Grameen Bank. The meeting is being held on the initiative of the Grameen Bank, which a week earlier learned about the embassy's letter to the Ministry of Finance in Bangladesh.

Nobel Laureate Yunus disagrees that Grameen Kalyan case represents a breach of the agreement between Norway and Bangladesh, while the embassy maintains its view.

According to the confidential meeting minutes, however, the embassy stressed "the long-term and good cooperation between the Embassy/NORAD and the Grameen Bank, and maintained that the matter should be resolved as soon as possible so that it would not be known and used to damage the Grameen Bank":

"It was underscored by the embassy site that consideration for confidential treatment had also been underlined in a meeting with Secretary, ERD (in Bangladesh, ed. REF note)."

THE NORWEGIAN EMBASSY IN DHAKA

Muhammad Yunus is now so worried about Grameen Kalyan case that same day he sends a personal letter to NORAD director begins as follows:

Muhammad Yunus wrote letters to the NORAD director and asked for help. In the letter, Yunus writes that there is confusion between Norad/the Norwegian Embassy in Dhaka and the Grameen Bank, and that he hopes Strand Gerhardsen can meet him when he is going to Oslo later this month.

Otherwise, Yunus most concerned that the Embassy has informed the authorities of Bangladesh on the matter, and that this can create major problems for the Grameen Bank if the case is known:

608 MILLION DOLLARS ON AID BALANCE-FOCAL POINT -NRK

"This allegation goodwill Create Object a lot of misunderstanding within the Government of Bangladesh. If the people, within and outside government, WHO are not Supportive of Grameen, get hold of this letter We'll face the real problem in Bangladesh."

MUHAMMAD YUNUS

The letter ends with Yunus apologize for taking up these issues with NORAD director, but that he no longer has other ways out.

Norad and held tight. The letter from Yunus to Strand Gerhardsen, and virtually all other documents in the case that Focal Point has found in Norad's archives, is stamped "made public."

29. April 1998:

A note from the Acting Director of Norad, Kjell Storlokken, referring from the meeting with Muhammad Yunus, who is on a visit to Oslo.

NORAD maintains still that there is a breach of the agreement between Norway and Bangladesh, and that money must be returned from Grameen Kalayan Grameen Bank.

Yunus, who, according to the note is accompanied by Arne Fjortoft in the World View and Helge Dietrichson, Telenor will not respond to the request "above board."

Instead orients Peace Prize winner and his entourage of "their plans/ ideas related to the opportunities for continuing and further developing the technology as the mobile technologies introduced in Bangladesh."

5. May 1998:

A few days after Yunus was in Oslo and the situation was totally stuck, something has happened. In an urgent letter from the Norwegian Embassy in Dhaka to Norad -- even excluding the public -- write ambassador Lehne that one of Muhammad Yunus's close associates have contacted the embassy with a proposal for compromise:

"He has asked whether it can be accepted as a final solution that the funds that Norway put into the revolving fund for mortgages under the two agreements of 1993 and 1994 (...) be traced back to the Grameen Bank, against the remaining funds allocated to the Grameen Bank for further loans and revolving funds remain in the Grameen Kalyan own."

AMBASSADOR LEHNE, DHAKA

The Ambassador requested authorization to accept the compromise and justify it that it is not legally possible to claim that all Norad money of 300 million will be reversed:

26. May 1998:

Embassy in Dhaka writes letters to the Nobel Peace Prize winner Yunus where the embassy confirming that they accept the compromise proposal. It is that 170 million is returned from Grameen Kalyan Grameen Bank.

The remaining approximately 130 million kroner of Norway's total support to the Grameen Bank of 400 million, which also demanded that Norway should be returned shall be in accordance with the current compromise of Grameen Kalyan.

Embassy concludes his letter to Yunus as follows: "The Embassy looks forward to continued good cooperation in future."

In 1999 NORAD created a team together with Grameen Bank to evaluate the total Norwegian aid to the bank for many years. In the evaluation report (the Grameen Bank 20: Impact and Future Challenges) is not a word about Grameen Kalyan case and the conflict between the Norwegian aid authorities and Nobel Peace Prize winner Yunus.

Autumn 2010:

Neither SIDA nor other donors has since Brennpunkt knowledge demanded the return of aid funds that were transferred from the Grameen Bank Grameen Kalyan.

Of the 608 million NOK to the Norwegian Embassy in Dhaka by chance discovered that had been drained from Grameen Bank, was in other words, only 170 million returned to the Grameen Bank, after pressure from Norway.

The remaining NOK 438 million remained in Grameen Kalyan, the company that the Norwegians had not even heard of. Three-quarters of the amount, which really was given as assistance to the revolving fund of the Grameen Bank for lending to the poor, has thus remained in Grameen Kalyan, a company that has a completely different purpose.

No responsible within the Ministry of Foreign Affairs or Norad -- neither those who worked on it the time or management today -- have been willing to comment Brennpunkt.

22. August 2010:

Grameen Bank has been detailed questions from the Focal Point of the transaction which, according to Norwegian and Bangladeshi authorities were in violation of the assistance agreement between Norway and Bangladesh. Grameen Bank responds cards in the form of two points in an e-mail dated 22 August this year.

Grameen Bank established Grameen Kalyan to engage in welfare activities of the bank employees and borrowers, subject to approval by the Board of Directors. However, in agreement with the Norwegian Embassy in Dhaka has become the means back to the Grameen Bank.

Grameen Bank never transferred the money to the Grameen Kalyan to avoid paying tax. The Bank has since its establishment in 1983 been exempt from the requirement to pay tax.