The Barbaric Ways of Micro-finance

The ugly face of micro-finance was never in doubt. But now even the dark underbelly is coming out in the open. I wonder how much more evidence is required to put a stop to this barbaric activity that goes on unchecked in the name of empowering the poorest of the poor.

Yes, most MFIs operate in an inhuman and barbaric way. In fact, as you have read in these columns the entire concept of micro-finance is based on exploitation.

As a Hyderabad dateline news report in The Hindu (April 19, 2010) states: "Some Collectors sent reports about the harassment of borrowers, intimidation, manhandling, abusing and outraging the modesty of women and extreme punishment like making defaulters stand in the hot sun, tying them to trees and making them run in open grounds."

What more evidence is required.

We call these poor 'beneficiaries'. They fit into the classic model of exploitation that the late C K Prahalad envisioned. They are the "fortune at the bottom of the pyramid" which Prahalad very cleverly camouflaged in the guise of 'eradicating poverty' but actually provided a recipe for making huge profits. There may be some sensible suggestions that he gave, but rest of it was simply on how to exploit the poor and make money. No wonder, the crooks in business and trade have always held him in high esteem.

These poor have been earlier victims in the hands of private money lenders and now the organised class of highly educated (often hailing from the prestigious management schools) money lenders. They have suffered silently for years, and are now being subjected to all kinds of physical and mental torture by the MFIs. They live in perpetual mental agony, always under pressure to repay (on a weekly basis) the heavy compound interest on petty loans. As the report below states, 15 per cent flat interest rate at which the poor borrow, results in an effective rate of 33 per cent per annum on a declining balance.

What do you expect these poor people to do?

I will not be surprised if many of them eventually join the ranks of Maoists.

Here is the disturbing news report, under the seemingly less damaging headline: Andhra Pradesh -- State for de-recognition of MFIs. It says that the MFIs are accused of forcibly enrolling poor women in the rural areas. Some Collectors' reports cite intimidation, manhandling, and outraging modesty of women

Andhra Pradesh -- State for de-recognition of MFIs.
http://www.hindu.com/2010/04/19/stories/2010041960410600.htm

by Ravi Reddy

HYDERABAD: As the spectre of coercive recovery practices, lack of transparency and questionable acts of some micro finance institutions (MFIs) looms large once again after a gap of four years, the Andhra Pradesh government plans to approach the Reserve Bank of India (RBI) seeking their de-recognition.

Following reports of objectionable practices of MFIs in harassing borrowers in rural areas of in Khammam, Mahabubnagar, Warangal and several Coastal Andhra districts, the government has drafted a letter to the RBI seeking de-recognition of the erring MFIs, which will be despatched in a day or two.

The 40 MFIs operating in the State with total finance portfolio of Rs. 3,000 crore are accused of forcibly enrolling poor women in the rural areas even though a majority of them are already part of the carefully nurtured Self Help Groups (SHGs) under the banner of Indira Kranti Patham.

Principal Secretary, Rural Development, R. Subramanyam told The Hindu on Saturday that the MFIs were back to their old tricks forcing the government to act fast. “They (MFIs) are violating norms by enrolling SHG members and claiming them as their own. They are not disclosing the list of members and resorting to coercive recovery practices,” he said.

Some Collectors sent reports about the harassment of borrowers, intimidation, manhandling, abusing and outraging the modesty of women and extreme punishment like making defaulters stand in the hot sun, tying them to trees and making them run in open grounds.

The State had witnessed a similar situation in 2005-06, when borrowers, caught in the debt trap, ended their lives. This forced the YSR Government to appoint a one man committee headed by a senior IAS officer V.P.Jauhari. He had recommended the government to crack the whip on the MFIs for grossly violating the human rights of borrowers in the name of loan recovery and enactment of Money Lenders Act to rein in the MFIs.

Strange modus operandi

The modus operandi is to lure SHG members into taking loans ranging from Rs. 3,000 to Rs. 25,000 at 15 per cent flat interest rate, which results in an effective rate of 33 per cent per annum on a declining balance. There is no loan appraisal or analysis of the borrower's source of income and repayment capacity. Lending institutions are least bothered about pre-existing loans taken from banks, SHGs, other MFIs and unregistered moneylenders.

Mr. Subramanyam said the government had set up district-level task force headed by the Collector to look into each case of coercion. “Harassed borrowers can call up 24X7 Call Centre (number 155321) to report their woes,” he added. Apart from this, the government plans to identify at least three mandal level SHG federations and ten Village Organisations in each district for bulk loaning to provide relief to the poor women.

Banks make big money from the poorest

Samuel Ighagbon watching employees at his piggery. He has defaulted several times on loans from LAPO. The overriding question facing the industry, analysts say, remains how much money investors should make from lending to poor people, mostly women, often at interest rates that are hidden. -- NYT photo

Sharks come in different sizes. 'Loan sharks' too are available in different shapes and sizes. But when the going gets tough, the smaller among the 'loan sharks' start crying foul. This is a usual phenomenon.

It is therefore amusing when Muhammad Yunus, who won a Nobel Peace prize in 2006, cries foul. The New York Times (April 14, 2010) quoted him saying: “We created microcredit to fight the loan sharks; we didn’t create microcredit to encourage new loan sharks,” According to NYT, Mr. Yunus was recently addressing a gathering of financial officials at the United Nations. “Microcredit should be seen as an opportunity to help people get out of poverty in a business way, but not as an opportunity to make money out of poor people.”

Look who is talking?

The man who started Grameen Bank, which is a pioneering institution for organised money lending, and is making tonnes of money by exploiting the poor, is now howling. The problem is that bigger 'loan sharks' have taken over, and that is worrying Mr Yunus. No wonder, after the successful marketing of mobile phones in the name of the poor, he is now venturing into providing the poor with cheaper Adidas shoes. This is what is called diversification. A smart and shrewd businessman is always looking to diversifying his business.

The New York Times report "Banks Making Big Profits From Tiny Loans" only endorses what we have been saying in these columns. It is not only banks elsewhere which make money from the poor. In India too, it is in many ways the poorest of the poor who sustain the banks. So the next time you see a similing CEO of ICICI Bank Ms. Chanda D. Kochhar, you should know the reason.

I still can't overcome my anger when I recall the statement her predecessor KV Kamath had made some years back: "There is enough money to be made from rural areas." I thought Mr Yunus should have been the first one to slam Kamath for saying this. But then I forget, birds of the same feather flock together.

Let us look at some of the salient points made in the New York Times report:

-- Drawn by the prospect of hefty profits from even the smallest of loans, a raft of banks and financial institutions now dominate the field, with some charging interest rates of 100 percent or more.

-- Te Creemos, a Mexican lender has some of the highest interest rates and fees in the world of microfinance, analysts say, a whopping 125 percent average annual rate. The average in Mexico itself is around 70 percent, compared with a global average of about 37 percent in interest and fees, analysts say.

-- Making pots of money from microfinance is certainly not illegal. CARE, the Atlanta-based humanitarian organization, was the force behind a microfinance institution it started in Peru in 1997. The initial investment was around $3.5 million, including $450,000 of taxpayer money. But last fall, Banco de Credito, one of Peru’s largest banks, bought the business for $96 million, of which CARE pocketed $74 million.

-- Compartamos, a Mexican firm that began life as a tiny nonprofit organization, generated $458 million through a public stock sale in 2007, that investors fully recognized the potential for a windfall, experts said. Compartamos charges an average of nearly 82 percent in interest and fees.

-- You can make money from the poorest people in the world — is that a bad thing, or is that just a business?” asked Mr. Waterfield of mftransparency.org.

You can read the full report at: http://www.nytimes.com/2010/04/14/world/14microfinance.html?scp=1&sq=microcredit&st=cse

Microfinance also kills

My colleague from Hyderabad, Dr G V Ramanjaneyulu, has sent me this case study from a report prepared by the Centre for Sustainable Agriculture (CSA) on farmer suicides. It makes for shocking reading, especially to know how the modern Shahukars, no different from the dreaded and despised moneylenders of yesteryears, scoop down to extract their pound of flesh.

I am aghast to read that in this particular case, the MFIs had descended to collect the EMI while the dead body of the farmer lay in the courtyard. This is not an exceptional case. You get to hear similar stories everywhere.

You can read the concerned section on microfinance in the report below. Please overlook the grammatical errors. Probably this has been translated from Telgu:

10.30 PM on November 5th, 2009 was a nightmare to Rajamma and her two sons. Bojanna, a 35-year old farmer, was a resident of Losra village and mandal in Adilabad district was committed suicide by consuming poison.

Bojanna survived with wife and two sons, Elder son Gangaprasad is studying intermediate second year in a Private college in same village and his second son Prashanth is studying 7th class in a Govt.school.

He owned 5 acres which has no irrigation source. Apart from this, Bojanna leased in 7 acres from villager at the cost of Rs.1500 per acre per year. He cultivated Cotton in 11 acres, and Paddy in one acres .After first picking he was completely upset as he could able to reap only 7Q from 11 acres. Previous year he had had harvested only 3Q from 11 acres, which is much worse than present year.

He possesses two milch animals, which is the other source of income, and a pair of draught animals, which were used to plough their own land. Rajamma, the widow of Bojanna, also earn Rs.40-50 per a day by beedis making/rolling.

He had borrowed money from microfinance institutes viz.,Spandana, Basix and Swayamkrushi, and also private money lenders. Now his family has to pay Rs.3.5 lakh to microfinance institutes and money lenders at an interest rate of 24 percent per annum.

These microfinance institutes are very particular in collection. It is inhuman part of one of the microfinance institute that they have collected EMI when Bojanna’s dead body laying in front of his home on day he had committed suicide.

The borrowed amount was invested on Agri-inputs purchase viz., Cotton seed (18 packets @ rs. 750 per packet). Pesticides (4 sprays @ Rs.11000 per spray), Synthetic fertilizers (Rs.10000) and on weeding (Rs.20000). Thus, the total cost of cultivation was Rs.87, 500.

All the inputs purchased on credit from local dealer and as an understanding the harvest has to sell to the “all in one dealer”. From 7Q of cotton he could able repay only Rs.18900. “There is no scope for further harvest” said Rajamma.

Raja Reddy was a member in Rythu Mitra Group. He had no extension contact and did not receive subsidy on any agricultural inputs. All the crop inputs were brought from a private shop on credit at interest rate. He did not receive any training and had no awareness on organic farming. He was a social drinker.

According to his in-law, he committed suicide, because he felt guilty for not repaying the debts. High investment on the crops, house construction, continuous crop failure due to climatic vagaries for the past 3 years were the reasons for his death.

Microfinance -- The bubble bursts. Time to book the culprits.

I was never in doubt. Microfinance is a loot, and it must stop.

Even the Economic Times in its front page report "Goldrush over for microfinance" (and carried over inside to a full page report Conflict of Interest), Mar 8, 2010, has exposed the scam. Read this blurb:

"A woman who takes a Rs 10,000 loan from a microfinance institution has to pay Rs 225 every week. If she is unable to make this payment or has another emergency in the house, she will take a loan. The existing lender will not give you a fresh loan till the old one is at least 35 weeks old, so she will borrow from another MFI.

That's another Rs 225 every week. Weighed down, she will take a third loan in a matter of months. Now she has to pay Rs 675 every week ! And so, a fourth loan....I feel sorry when I see these women borrowers. They are forever wondering where their next instalment will come from. Some are working as far labour to repay loans. If they are unable to fully repay, they sell cattle, land or jewellery."

-- Says Susheela

Resident of Ibrahimpur village, off the Hyderabad-Karimnagar highway in Andhra Pradesh

What Susheela says is the truth, a stark reality. The MFIs are ofcourse in a denial mode, and for obvious reasons. After all, what is stake is a loan book of around Rs 11,700 crore. Who would like to accept that this money has been raised, as Susheela says above, by unfair means. Denials notwithstanding, multiple borrowings, more often to repay the earlier loan, are rising alarmingly. 

It is high time the racket is burst. This can only happen if you pick up your pen and write to the Governor of the Reserve Bank of India (RBI). Copy your letter to the Finance Minister Pranab Mukherjee. You can get their contact details from their respective websites. 

Meanwhile, here is the link to the ET report on microfinance: http://epaper.timesofindia.com/APD26302/PrintArt.asp?SkinFolder=ETD&artType=Article