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!
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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 http://www1.timesofindia.indiatimes.com/business/india-business/The-ugly-underbelly-of-Microfinance/articleshow/6766589.cms#ixzz12gP3qm8A
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"Disgusting but true but these new age baniyas have ammassed a wealth of over 5000 crores, all by craftily robbing the poor!"
ReplyDeleteWell encapsulated.
Interest rates: The Poisonous Fangs of MFIs
MFIs were touted to provide the poor access to affordable credit, reduce poor people’s need to use moneylenders and indebtedness. In short, provide a much kinder, cheaper alternative to the village loan shark. Instead, they evolved as the new class of institutionalized loan sharks which neo-liberals gave respectability to. MFIs did improve access to micro loans but failed in their touted mission to provide affordable and gentler credit and above all, one that lifted people from the clutches of poverty. Objects of institutional financial sustainability exhort them to charge interest rates and fees high enough to cover the costs of their lending and other services.
MFIs argue that they need a spread apart from all costs to provide for contingencies and growth. Fine but the moot question is how much should be this spread.
MFIs argue that economies of scale and competition will drive interest rates down. This remains only a theoretical argument. “Mexican micro-finance institutions charge such high rates simply because they can get away with it”, said Emmanuelle Javoy, the managing director of Planet Rating, an independent Paris-based firm that evaluates micro lenders!!
If at all, the average Indian MFI interests rates appear more benign than in Latin America or Nigeria, then it simply because other than factors internal to the MFI industry, the sector faces strong competition from governmental and NGO SHG micro-saving programmes in the absence of which, these MFIs would have formed a cartel. Past angry public and government reactions that resulted in a backlash against them, which included the arrests of MFI top leaders, like Uday Kumar of Share Microfinance Ltd as in 2007, keeps their profiteering impulses under check.
The sooner MFIs are seen as profit enterprises, the better. The longer they pretend they are pro-poor, the longer they discredit the NGO sector that gave birth to a Frankenstein. By 2014, they target to reach 110 million borrowers. Remarkably, despite two decades of operations, if statistics are to be believed, these MFIs only reach just 20 million people in the country, a good proportionate of them, multiple counted. Yet, they succeed in gaining an attention, so disproportionate to this minuscule reach. Act now to prevent they becoming an epidemic in the country. Act now, when they are most vulnerable.
And how do know they are vulnerable? Because Vijay Mahajan, the father of MFIs in India tells us so:
“We are facing collapse. Unless something changes on the ground, the industry as we know it is basically gone. ”
Mahajan, we have news for you. The day when the likes of you are gone, that will be the turning point for the fight against poverty!
What’s wrong with Micro-finance Institutions? Practically everything as the case of SKS illustrates.
Read More: http://devconsultgroup.blogspot.com/2010/10/whats-wrong-with-micro-finance.html