Sunday, October 17, 2010

The ugly underbelly of Microfinance

THE Microfinance Institutes (MFI) are the shaninighans of today, treacherously exploiting the rural in the name of extending financial services to reach millions of poor. Rather, they tighten the noose round the neck by strangulating them. For over six months Devinder Sharma has been exposing these MFI prankters and finally the media has woken up to it. Last week, Andhra Pradesh proposed an Ordinance to curb the malpractices that have become synonymous with MFI's forcing a large number of rural poor to take their own lives.

When i started to understand the logistics of MFI's and the articles exposing the creditanials of such MFI's I recieved flak and accusations from corporate associates who vociferously told me to correct my facts. Disgusting but true but these new age baniyas have ammassed a wealth of over 5000 crores, all by craftily robbing the poor!

Read on

The ugly underbelly of Microfinance by Roli Srivastava, Swati Bharadwaj-Chand & Partha Sinha, TNN, Oct 18, 2010, 05.07am IST

SKS Microfinance, India's 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 pandora's 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 don't 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 SKS's 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 can't 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 ethical values'

ANABARD-funded study says Vijay Mahajan's Basix Microfinance — with funding from Ford Foundation , Swiss Agency for Development and Cooperation and Sri Ratan Tata Trust — became the first MFI with a 'forprofit model' not only in AP but also India.

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."

Read more: The ugly underbelly of Microfinance - The Times of India

Thursday, October 14, 2010

Feedback "FROM SOIL TO SEED", a workshop recently conducted by Annadana Soil and Seed Savers

"From Soil to Seed" a three day sustainable agriculture workshop recently conducted by Annadana Soil and Seed Savers, had participants from all walks. It was interesting to witness the diverse range of professionals from doctor, scientist, engineers, IT experts, NGO's, journalist, marginal farmers and home maker come together to understand the source of their food and take charge of it. Enthusiastic participants came from Earth Trust, Ooty, to partake in it. Also, participants from the previous workshop attended to gain know-how in seed saving techniques, a skill being revived as its fast being lost.

The most significant highlight was Nature bestowing pleasant weather on all three days. Thus permitting the new age green guardians to be armed with knowledge. A few days prior to workshop continuous heavy downpours made the fields, pathways between raised beds most slippery and wet. It was uncertain whether the workshop would happen after all. Perhaps the charged energies of these eager participants was heard vividly by the universe. Soon after, to open the bottled floodgates of rain once the show had concluded. This rain was a welcome treat to cool the thirsty soil and overcharged minds....

Batch of Oct 2010 were all geared to observe, absorb, soil hands in making their own compost, making vegetable raised beds, nurseries, sowing, transplanting and saving seeds. The interactive course conducted by Annadana's senior agriculture technical expert Sasi Kumar was very well received. The ground work to establish all systems in place in field as in course material for learning was steered by the dedicated efforts of John Paul, an agriculture expert in charge of Ishana Farms, assisted by Pavithra Prasan, a young biotechnologist. Every now and again after a session, I would have a participant complement the outstanding organising capabilities of practical training material made available on field. Having been through many training workshops in agriculture myself, theory always over powered practicals. Hence, a conscious decision was taken to overcome this. The workshop programme was designed in such a way - half hour theory on each topic, re-instated by half hour film followed by a interactive hands on field practice until the technique was mastered.

To make such a workshop happen, one can only compliment the backbreaking efforts put in by this lovely spirited team. For the last three months both John Paul and Pavithra armed by an array of committed farmers have been prepared the field to facilitate the practicals for the participants. Which is why language has never been a barrier as these interactive practical sessions unravels each step. Images above is just a peek at the action.

The pouring compliments after the workshop especially the hands on approach in field were truly gratifying. Twenty five more trained to safeguard bio-diversity....hope this pace moves faster! The constructive feedback received from participants and well wishers of biodiversity is pasted below.

In solidarity

Sangita Sharma

Feedback from participants re workshop

Date: 11 October 2010 5:57:11 PM GMT+05:30

Hello Sangita and Sasi

As is expected from you, the course conducted over the weekend was excellent. Thanks again for your initiative.

You may want to conduct one more quick 2 day course in November just to catch those who could not attend. I know for sure that about 4 to 5 students could not attend this course last weekend. There may be more also.

Also, I again offer Panchagavya and EM to whoever wants the same. When you get all the email IDs documented, please do let them know that I can provide the same.

Once again thanks for the wonderful course. This time, I hope that I will not take ANY more seeds from your bank, instead, I have already made plans to save my own seeds from the packs you have given and maybe even return some back to you for your bank. Let’s hope I can live up to this promise, I have Ravi Koushik and Rajesh Thakkar copied to this message as witnesses to this statement.

I am also going to do the seed saving course for the 2 batches of basic course students of our NGO, sometime in November. I hope Sangita will grace the workshop this time without fail.

Also, I have sent 6 packets of Annadana seeds for the OFAI conference, Sarvadman Patel wanted to plant them and showcase them at the event. Ravi Koushik is going to Sarvadman’s farm and work there in November and can report to us on the progress.

Thanks and With Best Regards



Sent: Wednesday, October 13, 2010 8:17 AM

Dear Sangeetha/Sasi/John/Pavitra & Annadana Team,
1. The Soil to Seed workshop was very well structured, and absolutely well organized (thanks to endless coordination by Pavitra !)
2. This workshop was also hands-on, and very practical, instead of the general "theoritical" workshop programs
3. All the people assosciated with Annadana had that exceptional "glow" really showing their life in harmony with nature,people and everything
4. I also liked the passion people had with plants, trees and all organisms, instead of the western way of analysing plant behaviour from a botanical standpoint.
A few suggestions:
a) Given the fact that there are non-english participants from agricultural communities, it is better to atleast have a vernacular summary at the end of each session. We can get volunteers for this among the participants.
b) A brief allocated time for group interaction for exchanging experiences could be done at the end of morning and afternoon sessions
c)The third day on seed saving might be better with a bit of practicals
To all the participants:
It was wonderful meeting one and all of you, and without your dedicated and committed participation, all the sessions would not have been such fun. I am sure we shall be in constant touch, and keep sharing our experiences and enriching our knowledge..
Please convey my best regards to all the people on the ground like lakshmamma, ram charan and others....our deepest gratitude and love to all of them who actually make things work....and make the world better...
Wishing one and all the very best in all personal and professional endeavours,
Best Regards,
Sent : Wednesday, October 13, 2010 9:17 AM

From: "CS, Shobha" ,

Dear Sangita, Sasi and Annadana Team,
I echo Raghu's feedback. The training was concise, made as simple as one can get, enough scientific and practical.
Sasi's knowledge and his commitment to share what he knows is commendable. We felt the passion and hospitality in the entire Annadana team. It was not like going to a training institution and getting trained, it was like connecting with an extended family and learning.
Thanks to entire Annadana team for making it a great learning with joy. It was great to interact with all participants, would like to be in touch with all of you, and hear our experiences.


Dear Sangita,

I was very happy to learn about the workshop. Feedback is highly satisfying and participants liked the 'hands on approach'. Hearty congratulations to the team at 'Annadana'. Keep up the good work.

Om Rupela

former Principal Scientist, ICRISAT