Microfinance has many positives, but should never be confused or misnamed as a “poverty reduction” strategy. There is simply no way to reduce poverty through debt. Microfinance or microcredit or micro-lending or whatever the name has a value for the poor as a way to access minimal credit to create or improve livelihoods, but such livelihoods, usually in the informal sector are marginal and fraught with the same risks common to all informal work and small business for that matter. ACORN International’s experience around the world is also very clear that there should never be any confusion about whether or not many of these loans are charitable because in fact they are often simply predatory.
I say all of this to put in some context a confusing article in today’s Times entitled “Microcredit is Imperiled in India by Defaults” by Lydia Polgreen and Vikas Bajaj. The handwringing in the article painted the problem as a “subprime” crises because 80% of the money being lent in India comes from the state banks and in Andhra Pradesh the article says, “…almost all borrowers have stopped repaying their loans, egged on by politicians who accuse the industry of earning outsize profits on the backs of the poor.”
Indian politicians have deservedly earned a lot of skepticism and abuse for their probity and fairness, but in this case there’s a lot more to the story, and the politicians are right about this, as even some of the industry officials partially concede.
Here’s the real story in India in a nutshell. The microfinance industry is no longer your older brother’s microfinance industry of even a decade ago with small non-profits and NGO’s and do-gooders.
Fueled by private bank money, many private finance operations have swooped into this lucrative market for lending to poor families and poor workers. Microfinance is a major player in South Asia in India and Bangladesh particularly. Andhra Pradesh is leading the accountability parade because the penetration of microfinance in the lending market in that state now accounts for about 12.5% of the loans outstanding. Karnataka, where Bangalore is located is next with over 9%, Tamil Nadu, where Chennai (Madras) is the largest city has almost 5%, as does West Bengal, home of Kolkata (Calcutta).
This is big, big business and this was never clearer than when SKS Microfinance, which had operated a double-breasted private and NGO operation in microfinance, when public with an IPO, raised over $300 million USD, and saw its director and boss walk away with $13 millions USD and more. As you might imagine this has been raging wild, huge news in India, coupled with one SKS misstep after another when shortly after the IPO, the founder kicked out the CEO and in mid-October a borrower committed suicide because of the pressure of the loan in Andhra Pradesh where SKS is a major microfinance player.
Politicians in AP have been calling for a cap on usurious interest rates involved in microfinance. The state government had earlier asked the Reserve Bank of India (RBI) to cap interests, which on defaults scales up to 35%. The proposal from AP to the RBI has been to cap rates on microfinance at 24%, which is still predatory, but an improvement on the current predatory rates in practice. The RBI has refused to act as have the courts, claiming it was a state matter, and therefore pushing the ball back to Andhra Pradesh and in the lap of the local politicians, who have no taken up the cause.
It is important to understand that whether the lender is a big time microfinance outfit or an established brand like Citicorp, the pressure felt by the borrower is not simply a matter of sleepless night, but in fact can be broken bones and constant threats from the thugs employed by such banks to collect the debts. This is frowned on in India, but allowed, and the press is constantly full of stories of injuries, deaths, suicides and mayhem caused by brutal collection techniques. (Over the years I regularly sent copies of press clippings naming out Citibank from Bangalore for deaths resulting to brutal collection efforts, but there was no real response from New York – this has all been a scandal waiting to happen!) The politicians of Andhra Pradesh are also calling for regulation of the collection practices, and who would not support their call, which to date has fallen on deaf ears from financial institutions of all sizes.
The Times does quote an industry executive, Vijay Mahajan, who “acknowledged that many lenders grew too fast and lent too aggressively. Investments by private equity firms and the prospect of a stock market listing drove firms to increase lending as fast as they could, he said. ‘In their quest to grow they kept piling on more loans in the same geographies.’ He added, ‘That led to more indebtedness, and in some cases led to suicides.’”
North Americans and Europeans need to be careful about getting all starry eyed and gooey about microfinance. This is another story of a predatory attack on citizen wealth motivated solely by greed. Period.
An official of the well regarded SEWA is quoted in the piece as saying, “…the poor needed more than loans to be successful entrepreneurs. They need business and financial advice as well….” They need a lot more than that including justice which would provide them with fair and reasonable interest rates rather than the current predatory and usurious rates that dominate the industry not only in India but throughout the world, and they should be able to expect to live safely and out of harm as they attempt to repay these loans that are in some cases literally forced upon them.
The story of microfinance isn’t pretty, but it’s time for all of the truth to come out, and for politicians not only in Andhra Pradesh, but in all countries where such institutions are now playing a role, to demand and require accountability and protection for the poor.