In India, microcredit faces uncertainty

From Myanmar Times -

NAGARAM, India – Her sobbing can be heard throughout her village, Nagaram, in the Indian state of Andhra Pradesh.

When visitors from Hyderabad, the state capital, some 80 kilometres away, cross the threshold of her bare little house, Narsama Anthaiah flings herself prostrate and wailing onto the dirt floor to touch their feet. Her theatrical grief is heartfelt. Two months ago her husband, aged 40, drowned himself. The Andhra Pradesh government blames unlikely villains: microfinance institutions (MFIs), which have been expanding fast in the state.

Microcredit – small loans to the poor, ideally to start a tiny business – has until recently been seen as one of best hopes for the three-quarters of Indians who still live on less than US$2 a day. But the political fallout from such deaths has put paid, at least for now, to the industry’s expansion. It could even destroy it altogether in Andhra Pradesh, and conceivably beyond.

The blame the MFIs shoulder is unfair. Farmer suicides are lamentably common in India. Anthaiah took his own life as a payment loomed on a 15,000 rupee ($333) MFI loan. Heavy rain had waterlogged his cotton crop and left the family struggling to pay the interest rate of 36 percent a year. But the couple, who had borrowed to build this house, also owed $752 to a local moneylender, who charged over 50pc.

Even so, Anthaiah’s name features on a government list of 85 MFI “victims” who had taken their own lives by November 16. The government has reacted by introducing an “ordinance” forcing MFIs to change their practices – cutting interest rates, changing from weekly to monthly repayments. Opposition politicians, scenting votes, have encouraged borrowers to default. Not surprisingly, recovery rates for some lenders have plunged from close to 100pc to around 20pc.

This is a huge problem for Indian microcredit. Andhra Pradesh is not so much the jewel in its crown as the crown itself. The country as a whole has seen a spurt in microcredit, overtaking Bangladesh, the global movement’s fountainhead. AP accounts for at least half India’s total, with more than 25 million borrowers, up from 8 million in 2007. The MFIs’ success in Andhra Pradesh is the source of their present troubles.

In Godhumagudu, not far from Nagaram, Laxmi Peta is mourning her 16-year-old daughter Lalitha. The family ran up $1460 in debts from five MFIs to pay for the wedding of their elder daughter. Unable to meet a payment, they went away to seek help from the new in-laws, leaving Lalitha alone. An MFI officer arrived, along with the village head and the four other members of her mother’s “joint liability group”– fellow villagers who had taken collective responsibility for the debt. After their harangues, Lalitha drank pesticide. Her mother treasures a tattered suicide note. It advises her not to take out any more loans, except for her young son’s education.

The MFIs are less abusive and far cheaper than traditional moneylenders. Their troubles in Andhra Pradesh stem from a mix of institutional rivalry, politics and ideology.

Among the MFIs’ biggest critics is Budithi Rajsekhar, boss of the Society for Elimination of Rural Poverty, an arm of the state government formed in 2000 to run its own microcredit program. Set up with World Bank money, this involves a network of “self-help groups”, each of 10-15 women, who pool savings and then have access to bank finance. According to Mr Rajsekhar, there are now about 1 million groups, with 10 million members, covering 8m-9m households, or 95pc of the state’s rural poor. The MFIs “poach” their clients for their smaller, five-member, borrowing syndicates, and “dump” unneeded loans on them.

The antipathy is mutual. For the MFIs, the government’s groups offer too little credit, too late. The MFIs offer an alternative to the old-fashioned usurer. But their success in Andhra Pradesh has made them a political target – large numbers of voters owe them money. The opposition Telugu Desam Party lost power in 2004 partly because it was seen as in thrall to the IT industry and foreign investors. Championing poor MFI borrowers was a cost-free way of burnishing its credentials with the rural poor.

Ideologically, many in India worry that large MFIs have become for-profit firms. The biggest, SKS, was launched by Vikram Akula as a charity, with (according to his divorced and embittered wife) donations from the guests at their lavish wedding. In July it floated on the stock exchange. The issue was 13 times oversubscribed and valued the company at $1.5 billion. It has a star-studded share register and board of directors, and a great appeal for those who like to think you can do well by doing good.

But even charitable microcredit is less fashionable than it was. Other countries’ microlenders have also had crises. In Pakistan’s Punjab province, it became fashionable in 2008-09 for politicians to encourage borrowers to default on microloans. And earlier this month the movement’s patron saint, Muhammad Yunus, a Bangladeshi economist and Nobel laureate, was cleared of allegations of diverting Norwegian aid money from one arm of his Grameen Bank to another.

The film making the accusations also aired arguments that microcredit may do more harm than good. Research suggests that it does work – for some people some of the time, as you would expect. It is not a magic bullet, but nor is it intrinsically harmful.

In Nagaram, where Mrs Anthaiah still has to pay off the moneylender with only her own labour to sell, her self-help group is arranging a loan to tide her over. India’s problem is not too much microcredit, but too little, too narrowly directed. – The Economist

Microfinance revisited

By Mahfuzur Rahman, The Daily Star Bangladesh -

The founder of microfinance reportedly called them loan sharks. Newspaper reports looked on them as debt-traps for the poor. Some leading politicians of the country described them in much worse terms. It is a little hard to believe that it is microfinance institutions themselves — or at least some of them — that are being so unflatteringly described.

After all institutions that give very small loans to very small entrepreneurs were hailed not so long ago as a great big hope in fighting poverty, and continue to receive a great deal of praise. The finance minister, one of the more articulate members of the present government, and an ardent supporter of small loans, is said to have acquiesced to the suggestion that microfinance was not a panacea. What is going on?

The immediate trigger to such denunciation and defensiveness is reports that microfinance institutions of the country have been charging their clients very high rates of interest. Such reports are, of course, not new but have gathered a momentum of their own in recent times. The wide coverage given in the international media to a broadly similar situation in the Indian state of Andhra Pradesh may also have reflected on the state of microfinance in its birthplace.

Among the Indian states, microfinance has spread the widest in Andhra Pradesh, and a large number of suicides allegedly linked to high indebtedness to some of these institutions have created uproar and have led to calls to cap interest rates charged by microlenders. The uproar for a time led to a standstill in lending. In Bangladesh the outcry over the allegedly usurious rates of interest has led the authorities to cap interest rates.

This is not how things were supposed to be. To be sure, the focus on exorbitant interest rates in microfinance should not obscure the broader picture. The idea of small loans, given without collateral, has spread. Globally, lending by microfinance institutions are now worth tens of billions of dollars, and their clients counted in tens of millions. Value is being created by people with small means or none at all who would otherwise be unemployed or underemployed. Thanks to availability of small loans some women in the poor strata of society have turned into small entrepreneurs and attained a degree of respect in society so often denied them.

It is both easy to deny the achievements and to exaggerate them. That is because a comprehensive study of what microfinance has achieved is hard to come by. Microfinance institutions reel off statistics to show how their membership, loan disbursements, and outstanding loans, for example, have grown over the years. Anecdotal evidence of success is often presented, much in the manner of sales promotion. But little has been done to assess the impact of microfinance on eradication of poverty, its lofty goal.

On the other hand, the odd academic studies made so far seem to suggest that the role of microfinance in poverty eradication has been quite negligible. It seems there is a lot for the proponents of small loans to be defensive about. The recent outcry over high interest rates charged by microlenders has certainly not helped.

Let me air my thoughts very briefly on this rather murky subject with the aid of some economics and a bit of common sense. It is well-known that Professor Muhammad Yunus, the founder of microfinance, does not much care for text-book economics, which he once denounced as an “exclusive playground for blood-thirsty profit-seekers” and topped this with the suggestion that the “seeds of poverty are planted firmly in the pages of economic text-books.” But even text-book economics can help in understanding microfinance.

We know from economics that real rates of return on capital are high in capital-scarce countries. We know, without help from economics, that poor countries are short of capital. Rates of interest are, therefore, high in these countries, often extraordinarily high. Bangladesh is no exception.

Small entrepreneurs would thus normally be willing to borrow money at high rates of interests to use it in investments that promise commensurately high rates of return. It requires no genius to envision people willing to borrow money at high rates of interest in that situation.

That text-book scenario provided the rationale for microfinance: Grameen Bank, pioneered by Professor Yunus, started out on the premise that small entrepreneurs would find it profitable to borrow money even at fairly high rates of interest. It is to the credit of Professor Yunus that he devised an institutional arrangement that Grameen now stands for.

It is hard, a priori, to dispute that the rates of interest charged by microfinance institutions are high. The majority of effective rates of interest charged by microfinance institutions in Bangladesh probably range between 25 and 40%. This is roughly 2 to 3 times as high as rates of interest charged by commercial banks to their best clients. There is little reason to be coy about accepting that small loans are expensive.

On the other hand, small borrowers do repay their loans with a remarkable degree of regularity, reflected in Grameen’s loan “recovery” rate of well over 90%. This, in effect, means that income from ventures financed by microlenders is enough for the average borrower to at least break even. Some may even earn enough to escape extreme poverty.

Yet there is little hard evidence to suggest that microfinance has become a significant vehicle for fighting poverty. The evidence of progression of the micro-borrower, from her chicken coop to her cattle pen — no derision intended — and onward, still remains very largely anecdotal; and the stories of those stuck right where they began remain largely untold. It should be the policy of microfinance institutions themselves to end their own poverty of evidence about their success in fighting economic poverty.

There are some rather obvious limitations to the power of microfinance. Small is not always beautiful. That goes both for borrowers and for lenders. The types of small business financed by the microlenders rarely lend themselves to innovation, the vital motive force of economic growth. And small loans are costly to administer, calling for high rates of interest.

On the other hand, economic growth still remains the best vehicle to alleviate poverty. Talks of the tide of growth lifting all economic boats have come to be disdained in recent times. Yet many of the powerful ideas of traditional economics of growth and development remain valid today. No amount of hyperbole over microfinance should cloud them.

Mahfuzur Rahman is a former United Nations economist and an occasional contributor to The Daily Star.

More succides gives to a microfinance

Indian microfinance: How did the saviour of the poor become enemy number one?

From France 24 -

Microfinance institutions, which give micro loans to poor people in developing countries, have been hit in India by charges of profiteering and causing farmer suicides. Now authorities are taking action and local people are fighting back.

Ground report: Why is MFI model falling apart

From Money Control -

Microfinance was once the idol of those preaching financial inclusion. How did this dream of successful financial inclusion sour so completely? How did this once flourishing industry come to a dead end? CNBC-TV18’s Appaji Reddem travelled to a village in Warangal district which reported one of the many suicides in the state.

Here is a group of women from Jawhar colony of Gopalpuram village in Warangal district. They’ve been accessing microfinance since past ten years from different microfinance institutions. And now, unable to bear the torture from collection agents, two of the women attempted suicide. Let’s find out, what they have to say about their experience in their words.

Fatima Bi, a hotel owner said, “Initially I took Rs 25,000 and paid them another Rs 10,000 and paid it too. Later, they gave Rs 40,000 and now I paid half of it and the rest is yet to be paid.”

Fatima was a good customer till her hotel business started dwindling and her spends on education and health increased. Habituated to borrowing, she managed for a while, but finally reached a point where she realised the debts cannot be repaid. Her desperate attempt to commit suicide was averted by the neighbours.

Fatima Bi added, “I took several loans just to pay earlier loans from MFIs. In the process, I had to pawn all the silver and gold that I have. And now there is a lot of pressure on me.”

Fatima’s is not the typical MFI borrower. Most repay their loans, over 90% do. However, a small but growing number are defaulting either due to business failures, unproductive expenditure or greed to consume more. The MFIs too don’t come out looking good.

Most are guilty of zero due diligence. Fatima, for instance has loans from SKS, Spandana, Trident, Sharada, L&T and Pragathi. The exact interest rates are never explained to the borrowers. Nor are they told how steeply the rate goes up when they default. Villagers say the MFIs charge 36% – 50% interest rate apart from 7.5% advance deduction from each loan for insurance, registration and passbook which are hidden charges.

Lakshminarayana, a borrower, needed time to repay which he was denied. So he had to take private loan at 3,600% interest.
E Lakshminarayana said, “We took all pains to pay the money. I even took money from private lenders by paying Rs 100 interest for Rs 1,000 per day.”

Lakshminarayana’s case also shows the extent of pressure that the collection agents can put on customers. Using abusive language and putting peer pressure are not uncommon. Lakshiminarayan’s daughter took the extreme step when she heard the threats of the collecting agents. .

E Lakshminarayana added, “That day, they demanded us to bring gold and other things if not they would stay back at home throughout the whole night. They abused us using bad language and spoke ill of our daughter saying she is beautiful and she can earn money through other means. Unable to bear such torture, she had immolated herself.”

With the spate of unfortunate events and state government’s MFI ordinance, there seems to be a sort of realization in both the customers as well as the MFIs. While customers are understood to have decided to think before taking more loans which are freely offered, the MFIs associations have decided to insist on due diligence and bringing down interest rates.

Microfinance companies under lens as suicides soar

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Amid a spate of suicides by borrowers in Andhra Pradesh, micro finance companies has came under lens with the state promulgating an ordinance to check their activities and RBI announcing setting up of a panel to study their functioning. About 30 persons have committed suicides in the past 45 days.