Oct 25, 2010

MFIs are loan sharks, not saviours of the poor

LAST WEEK, the 2010 Global Hunger Index placed India in the pit. Except for Bangladesh, India fared much below all the other South Asian countries. The same week, Andhra Pradesh proposed an ordinance to curb the malpractices that have become synonymous with microfinance institutions (MFIs) forcing a large number of rural poor to take their own lives. Coming in the wake of disturbing news reports of a seemingly unending serial death dance by small borrowers, the AP Ordinance, for the first time, tries to regulate the plethora of MFIs and is likely to provide a debt-swap arrangement. “What started off as an initiative for social and economic upliftment of rural poor has now morphed into a highly competitive business with the sole aim of making profits,” said Chief Minister K Rosaiah. “People are getting caught in debt traps and they see no way out.”

No wonder, the business has grown manifold. India Microfinance Report 2009 tells us that the portfolio of MFIs has grown by 97 percent, and the number of beneficiaries has gone up by 60 percent. The unprecedented growth is in a way shifting the game from the hands of the villains of the story, the sahukars or moneylenders, to a sophisticated, media-friendly organised class of neo-moneylenders. These are not the usual banias but a highly educated class who literally rob the poor. And they have done it remarkably well.

Take the case of this woman from Karimnagar district in AP, who escaped a suicide attempt. Harassed for not being able to repay a Rs. 4,000 loan, she was being forced to sell her house. Another woman lost her husband, and while the body awaited cremation, the MFI goons were at her door demanding their pound of flesh. While the RBI remains a mute spectator, the finance ministry too is unwilling to act.

The reason is simple. For the banks, microfinance has come as a saviour. It is a highly profitable business with assured and timely returns. Without making any effort, all that banks and other donors need to do is to provide refinance at roughly 12 percent interest. The MFIs do the rest, including timely repayments. These intermediaries add another 10-12 percent, and therefore end up charging the borrowers anything above 20-24 percent, which effectively comes to 36 percent on cumulative terms. With more than 98 percent assured returns, the banks couldn’t have asked for more. Realising that there is money in exploiting the hapless poor, private banks and companies like Monsanto, Citicorp, Infosys, ABN Amro, ICICI, and even the United Nations and donors like Ford Foundation have joined to earn profits from poverty.

The debt-swap that the AP government is trying to bring in is unlikely to stem the rot. From what appears in the media, it is designed to let the crooks off the hook. While the recent spurt in suicides in AP and Odisha should have landed many of the MFI CEOs in jail, all that the ordinance is trying to do is to pass on the burden to nationalised banks by forcing them to take over the loans. While they will come under an unmanageable financial burden, the MFIs will emerge the true beneficiaries. In reality, what was once intended to be a charitable activity has now turned predatory. It has resulted in multiple borrowings and defaults, thereby adding on to the hunger index.

What is needed is to provide the poorest of the poor with loans not exceeding an annual interest of 3 percent. Like the Society for the Elimination of Rural Poverty in AP, which provides such loans to self-help groups (SHGs), the banks are directly linked to the poor borrowers. The remaining interest is subsidised by the state. By eliminating the middlemen, the SHGs have built a corpus of Rs. 5,000 crore.

From Tehelka Magazine, Vol 7, Issue 43, Dated October 30, 2010
http://www.tehelka.com/story_main47.asp?filename=Ne301010Proscons.asp

3 comments:

payday loan said...

Great Info… always need to know what to do, or not to do, with our valuables!!!

Rajan Alexander said...

I hope Devinder, you continue to campaign against MFIs.

When we started out in development a couple of decades ago, we instinctively targeted to reduce the influence of money lenders, if not eliminate them completely. Why? They were the traditional oppressors and exploiters in society. Micro-savings and revolving loans worked very well until the most fancied MFIs burst into the scene. MFIs operate under these two beliefs: “Having access to expensive credit is better than no credit” and “the observed rate is where demand equals supply”. These two beliefs were ironically the very same fulcrum the traditional money-lenders operate with.

The result is an “Animal Farm” situation where we are now not able to distinguish between “pigs” and “humans” and vice versa. In fact, money-lenders have got a make-over by packaging themselves as MFIs. A good example is Mohd Yunis of Grameen Bank comes from a traditional money-lending caste. And of course, he got the Nobel Prize and so did Al Gore & Pachauri. Thank God the Nobel Committee did not confer Gandhiji the same distinction, by clubbing him with these scamsters.

The IPO of SKS, one of the largest MFIs in India, saw it over-subscribed by 15 times; their Ten-Rupee share was priced at a premium of Rs 985 - showing how much the market had confidence on their profitability while “banking with the poor”. The promotors of SKS became multi-billionaires over-night! MFIs argue that they have to charge high rates to maintain profitability. Profitability, which even private banks couldn’t match! Profitability that permits SKS to pay Rs 1 crore as bonus to their just fired CEO!

And how do they attain profitability?

A month ago, SKS in the state of Andhra Pradesh was accused of a series of farmer suicides that prompted the state government to introduce new restrictions on the microfinance industry by seeking to cap lending rates and end coercive means of recovery. Last week alone, Andhra Pradesh police arrested three loan agents of SKS Microfinance and Spandana Sphoorty Financial Ltd. after borrowers complain that they were illegally pressured by the agents to repay their small loans around $1,300. For those of us in the field, this conduct of MFIs is no surprise.

MFI research puts irinterest rates between 25-30%. But my experience (and this is my 30 years in the field) put this figure several times higher. Even if we take this range which they described as the lowest in the world, the only benefit of such loans is for working capital and not capital formation. What is the kind of subsidies Rata Tata gets to produce a one lakh car? We all are aware that a mere 0.5% rise in banking rates can crash the stock market, so sensitive is their profitability linked to interest rates. Compare this with those the poor is asked to bear.

AP’s share of outstanding microfinance loans represents nearly 40% of the sector’s total portfolio, according to CRISIL. Now if MFI is all about access to the poor, we can ask the question, why the clamour to be concentrated in a state which belong to top-five in development in the country? We would have thought they would have gone to the five lying at the bottom rung of the country. But no, they avoid it like plague. It is easy to see they do this on repayment potential of states. The interests MFIs pursue are interests of self sustenance and their own growth. The poor is hardly in the radar except for rhetoric. In fact, it is on the blood and coercion of the poor, MFIs like SKS can giveaway Rs 1 crore as bonus to the CEO.

The sooner MFIs are seen as profit enterprises, the better. The longer they pretend they are pro-poor, the longer they discredit the NGO sector that gave birth to a Frankenstein. Rather than regulate MFIs, I for one will welcome the day of their demise.

Rajan Alexander said...

When we started out in development a couple of decades ago, we instinctively targeted to reduce the influence of money lenders, if not eliminate them completely. Why? They were the traditional oppressors and exploiters in society. Micro-savings and revolving loans worked very well until the most fancied MFIs burst into the scene. MFIs operate under these two beliefs: “Having access to expensive credit is better than no credit” and “the observed rate is where demand equals supply”. These two beliefs were ironically the very same fulcrum the traditional money-lenders operate with.

The result is an “Animal Farm” situation where we are now not able to distinguish between “pigs” and “humans” and vice versa. In fact, money-lenders have got a make-over by packaging themselves as MFIs. A good example is Mohd Yunis of Grameen Bank comes from a traditional money-lending caste. And of course, he got the Nobel Prize and so did Al Gore & Pachauri. Thank God the Nobel Committee did not confer Gandhiji the same distinction, by clubbing him with these scamsters.

The IPO of SKS, one of the largest MFIs in India, saw it over-subscribed by 15 times; their Ten-Rupee share was priced at a premium of Rs 985 - showing how much the market had confidence on their profitability while “banking with the poor”. The promotors of SKS became multi-billionaires over-night! MFIs argue that they have to charge high rates to maintain profitability. Profitability, which even private banks couldn’t match! Profitability that permits SKS to pay Rs 1 crore as bonus to their just fired CEO!

And how do they attain profitability?

A month ago, SKS in the state of Andhra Pradesh was accused of a series of farmer suicides that prompted the state government to introduce new restrictions on the microfinance industry by seeking to cap lending rates and end coercive means of recovery. Last week alone, Andhra Pradesh police arrested three loan agents of SKS Microfinance and Spandana Sphoorty Financial Ltd. after borrowers complain that they were illegally pressured by the agents to repay their small loans around $1,300. For those of us in the field, this conduct of MFIs is no surprise.

MFI research puts irinterest rates between 25-30%. But my experience (and this is my 30 years in the field) put this figure several times higher. Even if we take this range which they described as the lowest in the world, the only benefit of such loans is for working capital and not capital formation. What is the kind of subsidies Rata Tata gets to produce a one lakh car? We all are aware that a mere 0.5% rise in banking rates can crash the stock market, so sensitive is their profitability linked to interest rates. Compare this with those the poor is asked to bear.

AP’s share of outstanding microfinance loans represents nearly 40% of the sector’s total portfolio, according to CRISIL. Now if MFI is all about access to the poor, we can ask the question, why the clamour to be concentrated in a state which belong to top-five in development in the country? We would have thought they would have gone to the five lying at the bottom rung of the country. But no, they avoid it like plague. It is easy to see they do this on repayment potential of states. The interests MFIs pursue are interests of self sustenance and their own growth. The poor is hardly in the radar except for rhetoric. In fact, it is on the blood and coercion of the poor, MFIs like SKS can giveaway Rs 1 crore as bonus to the CEO.

The sooner MFIs are seen as profit enterprises, the better. The longer they pretend they are pro-poor, the longer they discredit the NGO sector that gave birth to a Frankenstein. Rather than regulate MFIs, I for one will welcome the day of their demise.