Some days back, the New York Times had in a report Indian Microcredit Faces Collapse From Defaults (Nov 17, 2010) stated: "But microfinance in pursuit of profits has led some microcredit companies around the world to extend loans to poor villagers at exorbitant interest rates and without enough regard for their ability to repay. Some companies have more than doubled their revenues annually.
Now some Indian officials fear that microfinance could become India’s version of the United States’ subprime mortgage debacle, in which the seemingly noble idea of extending home ownership to low-income households threatened to collapse the global banking system because of a reckless, grow-at-any-cost strategy."
The NYT had blamed the borrowers in one of India’s largest states for the collapse. Accordingly, they have stopped repaying their loans, egged on by politicians who accuse the industry of earning outsize profits on the backs of the poor. If this is true, I am very happy.
MFIs deserve to be kicked out, the sooner the better for the poor.
Dainik Jagran, the largest selling newspaper in India (it is in Hindi), has carried today (Nov 27, 2010) an interesting report that should serve as an eye-opener. It says that the Ministry of Finance had a couple of days back held a discussion on microcredit in which a document detailing the profits earned by the MFIs was placed before the members. The details are shocking, and show how the MFIs have been extracting their pound of flesh in the name of poverty eradication.
An analysis of 13 major non-banking MFIs shows that the profits these firms accumulated by charging exorbitant interest from the poor borrowers had swelled from Rs 677.3 crore in 2007-08 to Rs 3776.93 crore in 2009-10. In other words, their profits had multiplied by 5.5 times over a period of two years. Since the MFIs have failed to expand the borrower base, it is quite evident that the profit increase is based on the interest amount they have managed to garner.
So while the poor took the fatal route to escape the humiliation that comes with coercive recovery of outstanding loans, the MFIs have made it rich. Bandhan Microfinance has broken all records. Its profits swelled by 34 times in two years. Some of the other players -- SKS Microfinance, Ujjivan Microfinance, BSS Microfinance, Share Microfinance, Sampada Safurti, and Grameen Financial -- have also managed to collect huge profits. Further investigations are on.
MFIs Interest Profit (in crore rupees)
SKS Microfinance 170.1 958.92
Bandhan 6.56 222.11
BSS 7.03 155.38
Share Microfinance 113.08 475.27
Grameen FS 82.65 327.35
Samdana Safurti 127.45 724.09
Ujjivan 36.37 372.89
(Note: Rs 1 crore=Rs 10 million)
The above chart is self-explanatory. It tells us how lucrative is the microfinance business. If you are foreign educated, and have lost your job in the wake of US recession, it is time to head home and set up an MFI. You can make money from the laudable objective of helping the poor. Many of the stalwarts in the MFI business have done it like this.
And don't worry, you will have a huge support from an equally indifferent educated from the middle class who would call it a 'win-win' situation. Many iNGOs, who also thrive on lending for the poor, would back you up to the hilt. Mainline economists are always there to justify such financial crimes.
You make your profits by sucking the blood of the poor. The resulting social cost would be picked up by the poor.