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The Ugly Underbelly Of Microfinance......Roli Srivastava,Swati Bharadwaj-Chand & Partha Sinha
Microfinance institutions have made loans accessible to the poor.But at what cost The power tussle at SKS has brought the sector under scanner.While these cos are known to charge high interest rates,some are allegedly using strong-arm tactics to recover dues
SKS Microfinance,Indias largest microfinance player,arrived with a bang with its hugely successful IPO in August.However,the recent sacking of its MD and CEO Suresh Gurumani has opened up a pandoras box that is now threatening to expose the ugly underbelly of the sector which,many allege,is teeming with players who are no better than moneylenders but have so far been able to operate under the pious garb of poverty eradicators.
TOI spoke to a cross-section of people associated with the sector and found that most are of the opinion that far from pursuing their socalled vision of eradicating poverty and being poor-friendly,private MFIs are actually in it just for profiteering as they are lending to the poor at interest rates as steep as those charged by moneylenders,or Pathaani Vyaaj,a sobriquet derived from the ruthless moneylenders of Afghan origin who operated during the early 20th century.
Those familiar with the functioning of MFIs point out that the lending model of for-profit MFIs is not exactly pro-poor.While offering a loan,they often quote a 10% flat rate of interest,which,on the face of it,appears like a good deal.However,there is a catch.This flat rate of interest means that it will not be calculated on reducing balance.It implies that even after the borrower has paid a few installments,the interest would still be calculated on the initial sum borrowed,and not on the balance loan amount.The result is a (hidden) final rate of interest of 24-30 %,or even higher for the poor who can barely afford a square meal a day.Microfinance,as practised by MFIs is unethical to the extent that it evades the truth in lending, said R Balakrishnan,a financial market veteran turned independent adviser.The high rate of interest is also leading to defaults and fraud.Recently,there has been a spurt in suicides in Andhra Pradesh and Orissa,allegedly due to harassment by MFI agents who started resorting to strong-arm tactics to recover loans as chances of default rise.M Subba Rao,of NGO Masses,who trained under Grameen Bank founder and Nobel prize winner Muhammad Yunus in Bangladesh,describes the cases of alleged harassment by MFIs as the result of irresponsible lending.There is high pressure on the staff (of private MFIs) to lend.They have targets to meet and they dump money (on people), said Rao.
Consider this: The loan outstanding,according to the latest estimate by Microfinance Institutions Network (MFIN),the organization of 40 MFIs,is about Rs 30,000 crore with about 3 crore poor banking on MFIs for their financial needs.While the four southern states of AP,Tamil Nadu,Karnataka and Kerala account for a chunk of this borrowing,West Bengal and Orissa too have rural poor relying on MFIs.Besides,the sector is also on an uptick in UP and Haryana.
SKS Microfinance founder and chairman,Vikram Akula,is at great pains to ensure that everything is above board in the company.And more so due to the bad publicity the company got after its board sacked Gurumani.We believe there is a right way to do microfinance and we have been practising it over the past 13 years with not a single case of unethical practice against us. The company,Akula said,clearly communicates to the borrowers that though the loan was at a flat rate of 12.5%,it effectively works out to over 26% because there is an extraordinarily high cost of doing microfinance.Since most of its lenders dont understand rate of interest,SKS agents communicate to its borrower how much they have to pay in terms of rupees per week.
Akula,whose company is the largest MFI in the country with over 73 lakh customers,also denies the possibility of its staff using strongarm tactics or misleading borrowers.Instead,he blames the bad name that the sector is getting to new MFIs jumping into the fray sensing a lucrative business.
Of course,eradicating poverty through the MFI route,for some,is a lucrative business.The IPO document by SKS disclosed that Gurumani was drawing an annual salary of Rs 1.5 crore,an equal amount or more as performance bonus,and also a one-time bonus of Rs 1 crore.Akula is entitled to up to 1% of SKSs net profit,in addition to ESOPs.
Not surprisingly the success of some of the MFIs and the mega-listing of SKS recently have stunned even seasoned bankers.When asked about the success of the MFI business in India,during a recent interview with TOI,SBI chairman O P Bhatt said even he was surprised by their numbers.He wanted to go deeper into their finances and business model to understand how MFIs,which borrow from banks including SBI,can make profits which these very banks cant make.After all,like mobile tariff plans,no financial product is protected by patents and IPRs and the uniqueness of any new and lucrative one cannot last for more than 24 hours.
The problem seems to be with the business model,and not the approach.In India,there are three kinds of MFIs: The government-supported self-help groups,non-profit NGOs and the private for-profit firms.While private MFIs say that the smaller entities have earned the sector a bad name,social workers and industry veterans at the grassroots say that bigger players with bigger targets have led to such incidents.In many instances,multiple MFIs lend to the same clients,resulting in repayment problems and eventually to defaults.
MFIs have lost their ethical values
ANABARD-funded study says Vijay Mahajans Basix Microfinance with funding from Ford Foundation,Swiss Agency for Development and Cooperation and Sri Ratan Tata Trust became the first MFI with a for-profit model not only in AP but also India.Soon after Basix,Share - which has been working as a non-profit society since 1989 registered as an NBFC in 2000.Spandana,which too was a nonprofit body working since 1998,registered as an NBFC in 2003,while SKS went private in 2005.
Industry observers point to a trend: Register a company under Section 25 of Companies Act,1956 as a not-forprofit entity,use grants local as well as foreign and do social lending to build a book,buy an NBFC (preferably a dormant one),do a reverse merger and become a for-profit MFI.Says the head of a financial services company : The problem starts when shareholders of forprofit companies put pressure for return. While SKS has tapped public money through its recent IPO,several others have raised money by selling stakes to private equity and venture funds.You can do the MFI business with a social motive under a for-profit structure as long as there is little pressure from the shareholders, the official added.
Surely that is not happening.And the way things are going in this sector,it has raised the hackles of even Ramon Magsaysay award winner and Sewa founder Ela Bhatt,considered a pioneer in the Indian micro credit field.She cautioned against painting the entire MFI sector with the same brush,but came down hard on the big 3-4 for-profit MFIs affecting the credibility of the entire sector.Not all MFIs are profit-oriented.Those who are doing the business for profit and loss cannot claim that they are eradicating poverty, Bhatt said.She felt the nobility associated with microfinance has given way to cynicism.Though MFIs were built on ethical values,somewhere it has got lost.This is affecting the credibility of the entire sector.When a woman works hard and her repayment goes abroad,it is not good for the country and the poor woman is the biggest loser, she explained.The ground reality is that a large number of investors have put money in some of the bigticket MFIs and have found returns from MFIs lucrative : A case of the rich banking on poor.
It could be mere coincidence that a spate of suicides in Andhra Pradesh and Orissa happened just when the Gurumani controversy broke out.But the fact is that the suicides could just be the beginning of a crisis in AP,considered the mecca of microfinance.Over 27 suicides in the last two months have been attributed to high interest rates and harassment by MFIs.Although MFIs deny arm-twisting borrowers for recovery and also claim that their rates are the way they are because of high cost of funds as well as the high costs they have to incur on enrolling clients and collecting repayments,the fact is that the state government has been forced to bring in an ordinance that would put a curb on MFIs.Whats more that even the central government is thinking on the lines of the AP government ordinance.
The AP government move is causing a lot of heartburn among registered MFIs.Alok Prasad,CEO,MFIN,pointed to some flyby-night,small-time moneylenders who are working under the garb of MFIs and giving the sector a bad name.These are unregistered players who are not RBI-regulated NBFCs.The government should go after them rather than come after registered MFIs, Prasad said.
He recommends strong action if any registered MFI is found indulging in such incorrect or coercive practice,and he feels the ordinance is ill-advised and would create hurdles for the MFI sector that is growing at 50% per annum.Instead of letting market forces play out and letting customers exercise their free choice,the ordinance will end up limiting customer choice and make it more difficult for them to access finance, adds Prasad.
Akula agrees.We welcome any steps that will prevent unethical practices by MFIs.It is the responsibility of the government to hold accountable those MFIs indulging in unethical practices, he said.
The government might have to do a tightrope walk on this.While there is no denying the fact that MFIs and SHGs play a major role in eradicating rural poverty,it also has to control and separate the wheat from the chaff.Even banks,which for the most part,have played it safe as far as lending in the rural areas is concerned,will probably need to change their ways.So far most bank,which wanted to reach out to the rural poor along with their urban-centric activities,have chosen to fund MFIs for further lending to the rural poor.But industry veterans point out that this attitude of banks needs to change.The faster it happens,the better it is because it could also bring in competition for the MFIs in terms of quality of service and lower lending rates for those for whom a square meal a day is a struggle.