Profit from the poor

Fifty-four suicides in Andhra Pradesh have blown the lid off the social posturing by microfinance companies. Before the news of the deaths sank in, the country feted Vikram Akula, head of SKS Micro-finance, as the new messiah of microcredit. A 273 per cent growth in loan disbursement and returns to investors made him a national hero. India’s micro-finance institutions claim they followed the fabled Grameen Bank model of Bangla­desh. In reality, they went against its principles. And the government did not do enough; regulations are fleeting and they don’t touch where it hurts most: the high interest rates.

Richard Mahapatra reports from Andhra Pradesh. Arnab Pratim Dutta charts the growth trajectory of India’s microfinance institutions

By Arnab Pratim Dutta, Richard Mahapatra
Published: Tuesday 30 November 2010

Profit from the poor

imageEga Mounika was born into debt, lived in debt and died with debts. The college-going 20-year-old of Warangal’s Karimabad village immolated herself on September 25; three days later, she died.

“My daughter wanted to release us from debt,” said her father Laxmi Narayan who sustained burn injuries trying to rescue her. He owns a paan shop and always had debts, which is why no bank found him worthy of a loan.

So five years ago, when a microfinance institution (MFI) approached her mother, a beedi roller, offering a loan of Rs 10,000, Mounika was quick to say yes. She bought a sewing machine with the money, started a tailoring business, dividing her time between studies and the new machine.

“Things were fine for two weeks,” said Narayan, “then we began to default.” Loan repayment is usually weekly in microfinance.

That was how the family entered a labyrinth of debts; nobody knew the way out. They borrowed afresh to pay off old debts and sank deeper.

The only way they could avoid default was by taking yet another loan. “We took four loans worth Rs 80,000 from four different companies,” Narayan said. But that was hardly a solution. The family earned Rs 4,500 a month and had to repay loan installments of Rs 10,000 a month.

With five loans on their head, Mounika’s family had a loan installment to repay almost every day. Then there were the three emergency loans of Rs 5,000 from moneylenders at 120 per cent interest in the past three years.

Every day for five years, MFI collection agents would come to their house and get rough. “There was no peace any more, the family was ruined,” Narayan said.

On September 25, the collection agents told Mounika’s mother, sell your daughter to the flesh trade and repay. Mounika chose to die.

Even before the family could come out of shock, the agents were back at their door. When Narayan asked for time, they refused saying the business model of microfinance companies does not allow that.

Had the borrower committed suicide, in this case Mounika’s mother, the lending company could have claimed the sum from the insurance company as all loans are insured. No wonder, people have alleged MFI agents abet suicide (see ‘How the noose tightens’,).

  If I am not creditworthy why did four MFIs give me loan? I need both credit as well as support to help me set up business that will be viable  
  MANJULA GIRABENI, MFI customer, Warangal, Andhra Pradesh  
Some 20 km away, Mohammad Saif of Jawahar Colony feels lucky. His mother attempted suicide on October 20 but survived.

She got loans worth Rs 2 lakh from four companies. But even after paying for over 400 weeks, the outstanding amount is around Rs 1.5 lakh.

Saif said he sold his autorickshaw; the small hotel they ran is shut down.

In 2006, his mother along with 13 other women in the neighbourhood, had formed a self-help group (SHG).

Under the state government’s Indira Kranthi Patham programme—linking SHGs to banks for loans based on group savings—they saved money every month for a year to get a bank loan.

Only three women got a loan from the SHG as regulations stipulate revolving loans. A year of saving and ensuring that everybody complies took time.

“I withdrew. Then a microfinance company came to my doorstep and gave me Rs 14,000,” said Sarojini Rathipilli, a resident.

She set up a sari shop but with a sale of one sari in three or four days, she had to take another loan to repay the first one.

In four years she accumulated four loans and weekly repayment that was 10 times her earning.

“Repayment takes away everything, even the business set up with MFI loans,” said Matapalli Radhika, a borrower.

No business started with loans from MFIs has survived in Jawahar Colony, where almost every family has taken a loan.

Now as they try to revive the SHG, the past default doesn’t qualify them to access loan from a bank. The alternative: moneylenders.

Village after village in Warangal only confirms that the rural credit business has undergone a suicidal makeover. There is great need for credit that is in short supply from benign sources like public sector banks. It becomes clear that every borrower from a microfinance company has suffered acutely because of the failures of other public credit programmes.

Advantage MFIs

Bhagyalaxmi Mahila Multi-aided Cooperative Society in Enugallu village in Warangal’s Parbutagiri block has a public credit programme that has not failed its borrowers. It has several SHGs as members and gets loans from nationalised banks showing group savings.

The repayment rate has been encouraging at 80 per cent. The cooperative society, unlike microfinance companies, distributes profits among members; this year it gave a dividend totalling Rs 3 lakh and set aside Rs 5 lakh as revolving fund to attract more bank loans. “The 15 per cent interest is heaven compared to 36 per cent of the MFIs,” said Turi Laxmi, president of the cooperative.

But things are changing.

Banks have suddenly stopped loans to the cooperative; they lend directly to SHGs. Bhagyalaxmi is an innovation.

It has been recommended by many high-level government panels on rural credit. “The average loan amount with an SHG is not adequate. But banks refuse to recognise us,” said T Yugandhar of Sanghatitha Mahila MACS Federation, Andhra Pradesh, the apex body of such cooperative societies with over 2,174 SHGs as members. The cooperative got its last bank loan in April 2008. “Without immediate loans we will not be able lend to the rural poor. This obviously leaves space for MFIs to capture,” he said.

Rural India’s subprime crisis

Warangal’s story repeats itself in And­hra’s 22 other districts; it is constricted by a rural credit crisis. Around 75 per cent of India’s MFIs are located here.

The current crisis in Andhra Pradesh is the rural Indian version of the subprime crisis in the US in 2006. It started at the same time and with a similar unsustainable model of credit that involved high risk and high profit. In subprime lending, organisations give loans to people with poor credit worthiness. In the US, subprime lured many to multiple loans. But these loans had mortgages like the house or the car borrowers bought with the loan. MFIs adopted the same model but without a collateral. In the US lending companies took the hit while in Andhra Pradesh borrowers were crushed.

imageAccording to information submitted by MFIs on October 29 to the state government, 50 per cent of rural poor households in the state have taken multiple loans. The interest rate ranges from 21.2 per cent to 60.5 per cent.

Down To Earth accessed these MFI submissions and found more than 80 per cent borrowers are from non-farm sectors. The majority of the rural poor sought loans to sell vegetables, run a dairy or do scrap and steel business. MFIs lend close to Rs 200 crore every week to non-farmers. According to a confidential report prepared by the Society for Elimination of Rural Poverty (SERP), state government body linking SHGs with banks for credits, of the 54 suicides in the state recently, allegedly due to harassment by MFI agents, 45 were by landless. “Most MFI borrowers are landless. And unlike the last spate of farmer suicides five years ago, mostly non-farmer and first time borrowers died in the current wave,” said Narasimha Reddy, journalist with Eenadu.

SHGs slow but steady

A survey found that only three per cent of rural borrowers were confident of getting a bank loan. Thus the SHG-bank linkage is a bonanza. Women first save—usually Rs 30-40 a month per member in a group of 14—for close to a year. The banks treat the savings as the collateral and lend an equal amount or more at 14-15 per cent interest. The SHG re-lends at around 16-24 per cent interest after assessing the borrower’s ability to pay back. Since 2006, under the Pavalla Wadi scheme SHG members pay an interest of three per cent while the state government bears the rest.

  On one hand you are for profit so that you can attract capital from the market. On the other, you are under pressure from investors to grow fast. It is now all about making profit  
The state has the country’s largest number of micro-credit groups—975,362 SHGs with 11 million members. The number of SHGs has increased 10 times in the past decade covering almost 90 per cent of the state’s rural women.

An impact assessment by the Centre for Economic and Social Studies in Hyderabad, published in May this year, shows that while the micro-credit did help many, the sum was grossly inadequate. It found SHG members sourced 71 per cent of their credit demand from informal sources (read, moneylenders and relatives with interest rates ranging from 60 to 120 per cent).

Around 100,000 SHGs are yet to be linked to banks and thus to credit. “This probably explains why nationalised banks are lending less to SHGs and doing bulk lending to MFIs. This has been the trend since 2005,” said Kurapati Venkatanarayana, professor of economics with Kakatiya University, Warangal.

Another problem is the 12 per cent subsidy on interest. People pay the 15 per cent interest to the bank; after it certifies the SHG has repaid all loans, the government directly reimburses the 12 per cent in the SHG account. But there is a catch. “Banks delay the certification and it takes one to two years for the subsidy money to come through,” said Rama Jyothi, an independent observer.

Time is another factor. It takes an SHG three to four months to get a bank loan and another month to disburse. “Many banks don’t allow SHGs to lend their savings. This brings down the credit available,” admitted B Rajsekhar, chief executive officer of SERP.

  The poor can handle credit, but it must be provided at a moderate interest rate. The current microfinance institutions tilt towards extreme profitability  
  VIJAY MAHAJAN, president, Microfinance Institutions Network  
Given this widening gap in supply people turn to MFIs for credit. “These companies tapped into an organised captive market,” said Vijay Mahajan, president of the Microfinance Institutions Network (MFIN), a self-regulatory body of for-profit MFIs. An MFI loan is with the borrower in three days. With no collaterals there are two ways to ensure repayment: form a joint liability group (JLG); if one member defaults the group is responsible. The other is coercion. An MFI collection agent gets around 55 per cent of his salary as incentive if collection meets the target.

Close to 80 per cent of SHG members have taken MFI loans. Andhra Pradesh is a pointer to the future. As MFIs scale up in the rest of India they will most likely deliver similar distress on a wider scale.

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