Oct 13, 2010

MFIs: The growth of 'blood money'

Naomi Campbell dogged the headlines sometimes back when the model admitted she was given 'blood diamonds' by the former Liberian ruler Charles Taylor who was accused of funding a brutal and bloody war carried out by rebels in Liberia's neighbouring Sierra Leone.

Well, before you ask me as to why I am talking of 'blood diamonds' today, let me explain. If diamonds become 'blood diamonds' when used to fund a war, I have been thinking what should we name the tiny amounts of 'money' (better known as micro-finance) that is given on credit at exorbitant rate of interest to the poorest of the poor, and which more often than not turns into a killer. Shouldn't the micro-finance therefore be called as 'blood money'?

In the last few days, at least 24 women who received micro-finance have committed suicide in Andhra Pradesh alone. This is only the visible tip of the invisible iceberg of misery that micro-finance inflicts.

In Asia, micro-finance institutions charge an annual interest rate varying between 36-70 per cent. In India alone, MFIs have provided finance to 20 million people. This is of course much less than the 100-125 per cent interest charged in Mexico and other Latin American countries. While the poor die or are driven to despair, such punitive rates of interests have created an opulent class of organised moneylenders who wield tremendous power, money and political clout. They also know the best way to buy media silence is to provide the newspapers with a continuous supply of advertisements.

I am therefore not surprised when the pink newspapers carry full-page interviews of people heading the MFIs, most of whom in my opinion should be in jail. If the Special Task Force chasing the naxals in the trouble-torn tribal regions of central India by mistake gun down a couple of civilians, the media cries hoarse. Nothing wrong, I accept. But when the MFIs force people to take their own lives, no disturbing questions are asked. Why as a society do we refuse to stand up, and question the killing ways of the MFIs? If the policemen can be sent to the jail, why shouldn't the rich CEOs of the MFIs that bank on the sweat and blood of the poor be held accountable for the deaths of the poorest of the poor?

A crime after all is a crime.

Yesterday, we watched a news clip in a regional news channel in Andhra Pradesh. It showed a poor women from Karimnagar district who escaped death from suicide telling how she was being coerced by the MFI goondas to sell her house for her inability to repay a paltry loan of Rs 4,000 (not even $ 100) [The killing ways of micro-finance: http://devinder-sharma.blogspot.com/2010/10/killing-ways-of-micro-finance.html]. On the other hand, the Economic Times (Oct 13, 2010) in an oped piece: 'Micromanager to the core', tells us that the 47-year-old ousted chief executive of SKS Microfinance Suresh Gurumani was entitled to a 'whopping salary of Rs 1.5 crore (Rs 15 million) per year' besides a one-time bonus of Rs 1 crore (Rs 10 million) and a performance bonus of Rs 15 lakh (Rs 1.5 million) per year.

In another report, Sucheta Dalal, India's leading investigative journalist in corporate affairs, says that SKS Micro finance gets an annual salary of Rs 2 crore (Rs 20 million). In any case, we are only talking of the salary and perks of the CEO. What about the other senior MFI functionaries? They too receive bountiful salaries, all derived from the sweat and blood of the poor. Isn't this 'blood money'?

Now you know, whose livelihoods do the MFIs secure.

Ever since Muhammad Yunus got the Nobel Peace Prize for developing the concept of micro-credit and micro-finance, the world has blindly followed the approach. Although Yunus blames the bigger sharks for discrediting the pious intentions behind the micro-credit phenomenon, the fact remains that there were fundamental flaws that we refused to look. Even in Bangladesh, despite the claims to the contrary, micro-credit has failed to make any appreciable dent in addressing poverty and hunger. Since it is politically incorrect to question the efficacy and penetration of micro-finance, the World Bank. UNDP, Asian Development Bank and the international NGOs have all eulogised a faulty informal banking system. In tune, The Reserve Bank of India (RBI) has even gone to the extent of legitimising the exorbitantly destructive interest rates.

I am shocked when I read distinguished economic writers like Swaminathan Aiyar pleading: Don't cap microfinance lending rates (Economic Times, Sept 22, 2010). In case you missed it, here is the link: http://economictimes.indiatimes.com/articleshow/6604369.cms?prtpage=1 Another paper by NA Fernando for the Asian Development Bank too justifies the high interest rates. Numerous other papers on similar lines are routinely presented at various micro-finance summits and conference. The more I read them, the more I realise that there is no convergence between common sense and economic sense.

The Executive Director of the National Bank for Agriculture and Rural Development (NABARD) Mr Prakash Bakshi is perhaps the lone and saner voice that has questioned the MFIs claim. And I am sure you will agree that Mr Prakash Bakshi should know what he is talking about. After all, he heads the biggest public-sector banking support system for agriculture and rural development in India.

In a debate in the inner pages of Economic Times today Oct 13, 2010), Prakash Bakshi states: "In a static village economy , there is little scope to have too many petty traders. Two-thirds of the villagers directly live on non-cash-crop agriculture, and another 20% are small-time artisans.

The cycle of economic activities for these people range from about six months to one year. None of them generate income to meet weekly repayments, and none of these activities generate a rate of return to afford interest rates of 20-40%.

And if they borrow — and many are compelled to borrow at such interest rates because banks have failed to provide them with credit that they deserve at affordable interest rates — they would never be able to rise from their levels of poverty, and very often just go back a few years in their economic status."

Prakash Bakshi is absolutely right. None of the micro-finance activities that we read in the MFI brochures (including that of Grameen Bank) can generate a rate of return to afford interest rates of 20 to 40 per cent. The claims that are being made by MFIs are therefore fraudulent, and are merely a cover up for a generation of policy makers and planners who rarely go to the field.

Micro-finance is one of the biggest financial swindles that goes on in the name of the poor and hungry. It suits the vested interest of the funding agencies, including international financial institutions, and now some multinationals like Monsanto, Citicorp, ICICI and the likes who have pumped in money to generate more profits. They are all playing with 'blood money'.

And as Prakash Bakshi sums up in a milder way: The result is multiple borrowings, multiple defaults and, in the end, agrarian distress, notwithstanding the so-called prompt repayments received by the MFIs.

You can read his full comment at: http://economictimes.indiatimes.com/opinion/et-debate/Poor-cannot-afford-the-interest-rates/articleshow/6739419.cms


Anonymous said...

MFIs are one more example of "Inclusive Gowth" in this system . Atleast NABARD Head Prakash Bakshi speaks the truth which is saying a lot these days under this dispensation.

Warm regards
Vishnu Bhagwat

Anonymous said...

Whether MFIs are making or already made a "POVERTY DERIVATIVE" out of microfinance/microcredit....?!!!

How many are going fall victims to these blood money / Poverty Derivatives...Let us watch what is unfolding..Waiting to see Regulators/Super Regulators role play..