micro sharks case study byanand
TRANSCRIPT
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Micro Sharks: Microcredit related suicides in India.
A case study.
By,
Anand
Faculty Member (Finance) & research scholar,
IBS Hyderabad (ICFAI University).
mailto:[email protected]:[email protected] -
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IT is the big moment. Couldn't be bigger, said Matthew Titus, of Sa-Dhan, an association of Indian
microcredit lenders, of the outlook for his members. He was not alone in seeing microcreditthe
lending of tiny amounts of money to people with even tinier assetsat the point of take-off in India
(Exhibit 1). A new report from the central bank, the Reserve Bank of India, tackled some of the
regulatory issues involved in expanding credit at the bottom of the pyramid. It argued, not just that
microcredit helps the poor, but it also allows banks to increase their business, enhance their profit and
spread their risk.
Microcredit was already a flourishing business working through Self-Help Groups (SHGs). These,
supported by banks, notably the government's National Bank for Agriculture and Rural Development
(NABARD), typically brought together about 15 women, who pooled their savings for a few months,
allocated them to members who needed small amounts temporarily, and were then eligible for a bankloan. The numbers of SHGs were expanding quickly especially after 2005 central government budget
support to this sector. In his budget speech in February, 2005, the finance minister, Dr. Palaniappan
Chidambaram, promised to promote microfinance institutions (MFIs), in a big way, and to help them
to act as intermediaries between banks and borrowers. He doubled, to 2 billion rupees, a fund devoted
to provide the MFIs with capital which was meant to help, for example, organise SHGs. He promised
new legislation that would give them an official status and a clear regulatory framework. He also
allowed them for the first time to borrow money from abroad.
With all these happenings, there seemed to be celebration times for all Micro Finance Institutions
(MFIs), especially for those operating in the rural parts of Indian state of Andhra Pradesh. A typical
example of this was Udai Kumars SHARE (Society for Helping Awakening Rural Poor through
Education), a private sector MFI without government support, which was also having the fare share of
this dream run. Everything was going right and almost all the firms were on a path of rapid growth and
expansion, projecting very bright prospect for this business. Therefore, quite naturally, going by the
projections, the common path adopted by almost all the MFIs came in the form of putting more and
more effort in strategic planning. For future growth, in a market where new and big players are
showing their increasing interest, it indeed appeared logical.
And then suddenly occurred the unfortunate shocking incidence, touching each part of the society, and
exposing yesterdays hero, MFIs, as an undercover villain, threatening the very survival of the whole
industry. The rosy picture turned gloomy and every player was now trying to defend its ground under a
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spate of allegations from all sections, making MFIs almost completely responsible for the sad
incidence.
The incidence
It all erupted with the tragic suicides by more than 60 self-help group members in Andhra Pradesh
during April, 2006.
Although the initial impact of these deaths was subsumed under the unending spate of farmer suicides
in the Vidharba region of Maharashtra but the hidden dimension of micro-credit revolution in the
country only begun to surface.
Reports indicate that the actual number of suicides may exceed 200 in the SHG-saturated districts of
Krishna, East Godavari, Guntur and Prakasam where intimidation of families by the Micro-Finance
Institutions (MFI) against reporting the matter to police had surfaced.
Reacting to what followed as protests staged by mourners and enraged borrowers, the district
authorities closed down 50 branches of two major microfinance institutions in the state. Further, in
March 2006, a top government official in Krishna district, seized and destroyed records of temporarily
shut down 50 branch offices of four MFIs, including that of SHARE, and told their borrowers not to
repay their loans.
The prima-facie MFIs were charged with exploiting the poor with 'usurious interest rate' and
intimidating the borrowers by forced loan recovery practices, combined effect of which drove debt-
ridden poor to embrace death.
An anguished Chief Minister of Andhra Pradesh Dr. Y S Rajasekhara Reddy lashed out saying that
MFIs were turning out to be worse than moneylenders by charging interest rates in excess of 20
percent. These gave rise to the fearthat the state government will try to regulate the lenders, perhaps
by capping interest rates at levels that could put them out of business.
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As the government began in-depth enquiry into suicide deaths and the MFIs launched themselves into
damage control measures, many affected families were left wondering if the government had not
played ignorant to the modus operandi of MFIs.
MFIs Argument
The lenders say they are being defamed, in a row that raises questions about their future in the state.
Given the fact that the commercial banking system has little regard to the bottom-of-the-pyramid group
as being creditworthy, the MFIs have enjoyed primary position in this area. Taking shelter behind
these facts, the MFIs have requested the government not to pursue the matter further as it was
detrimental to the interests of the poor. Also, having been in the business of creating self-help groupsand promoting micro-credit institutions, the government cannot absolve itself from being in the thick
of the fatal crises.
On a different plane, proponents of the market forces always argue in favor of profit driven idea of
MFIs, saying that, it is fundamental to wealth creation in the rural areas on a sustainable basis. And if
used otherwise, micro credit will only create a charity mechanism and will not enable and empower
poor.
In many ways, micro-credit justifies the ongoing processes of decentralization too. As poor take
control of their destiny through soft loans, it becomes convenient for the government and the
commercial banks to absolve themselves of their primary responsibility towards the poor. As Kumar
claims success on this front by insisting that, about 50% of them areout of poverty.
Udaia Kumar, says that, in fact, its loans cost about 21.5% a yearnot excessive, since its cost of
funds is 11% a year, the administration of a portfolio of more than 800,000 small loans in Andhra
Pradesh is expensive, and not all loans are repaid (Exhibit 3, 4 and 5). It is also less than half the rate a
moneylender would charge or what a poor borrower would end up paying for a bank loan in view of
corruption.
Even then, Mr Kumar says, that SHARE's own average outstanding loan was only 4,000 rupees and
SHARE has since agreed to cut its rates by about four percentage points.
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The success factors behind the high recovery rate of SHARE, as Udai Kumar puts out, was the
understanding which made it very clear that in order to be in business we need to have high
repayment rates. And since we are not a grant driven program we have to see that we build up
efficiency and see that the repayment rates are very high. Now, what contributes to high repayment
rates? Number one, committed staff members, good training, the delivery mechanism which will give
money and collect money without any leakages. So, these are all important in order to see that the
repayment rates are very high. And our MIS Management information systems also is considered
to be one of the best in the word.
The Problem
Easy credit in rural areas, indeed, brought about significant turnaround in lifestyle, however, at least insome instances, at the cost of plunging poor households under debt. As poverty gets directly co-related
with reduced cash flow, providing easy credit through host of lending institutions created an illusion of
feel good amongst the rural poor. There were a number of cases which suggested that a large
proportion of micro-credit clients were worse off after accessing loans. Since higher interest rates on
micro-credit did not provide scope for savings as also for investing, the dominant risk-covering factors
for the poor, micro-credit seldom propelled poor out of poverty. Further, there were no businesses that
could have generated any profit after paying an interest of 24-36 per cent on capital invested, which
was the usual cost of financing through micro credit.
To add to this problem, as some news reports suggested (Sharma, Sudhirendar Micro credit becomes
death-trap: The New Nation; Tue, 22 Aug 2006, 09:01:00), private MFIs usually paid very little
attention to the core concerns of the poor. For them the critical concern was to sustain and grow
services against emerging odds in a full of opportunity environment. Viswanatha Prasad of Bellwether,
a fund that finances microcredit-providers, blames indiscriminate expansion for this tragedy.
On the rate of financing front, almost all the private players were restricted by their cost of funds and
operating costs, which pushed the overall cost of financing so high so, it no longer remained a
productive proposition in most of the cases. Even though the diversified source of fund, operational
efficiency, and a good track record helped SHARE reduce its cost of borrowing and financing (exhibit
4), it was still not favorable for any productivity based enabling initiative earning a moderate return.
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To add to this, realizing that MFIs can serve as a good vehicle for penetrating rural population, the
commercial banks flushed them with fund in order to push their agenda of acquiring hold of rural
market, diversifying risk and serving rural economy. Consequently, far from helping people in
generating wealth, easy credit was being used to encourage primary producers at the farm level, to
become distributors and consumers of consumer products and durables. Howsoever, this
commercial initiative ignored the possible severe implications, which could have adverse impact on
the livelihood security, financial vulnerability, and ultimately, on the very lives of poor people.
Further, the profit maximizing mindset resulted in a rampant distribution of loans without
understanding the feasibility of the purpose. The problem was aggravated due to the aggressive
competition and failure to share information among MFIs about creditworthiness of a borrower, which
meant some people were in hooks to numerous lenders (Exhibit 2).
As a result, when the farmers were not able to pay their dues, these companies allegedly used different
kinds of unethical and illegal approaches to get the dues back. As reported in almost all the major news
mediums, the brewing crisis in Andhra Pradesh not only exposed the unreasonable practices by MFIs
but it also raised serious questions about the regulatory measures available and applicable to them.
Another allegation was that some microcredit lenders were charging interest rates on the full amount of
a loan, rather than the declining balance. Fortunately for Udai Kumars SHARE, they were not in the
thick on this front as they were charging a flat rate per annum (Exhibit 5).
The root of the dispute, as Mr. Kumar says, is competition between non-governmental MFIs and a
subsidised microcredit scheme, financed by the state and central governments and the World Bank.
According to the bank, some 30% of SHARE's clients overlap with government-supported self-help
groups. And this gives another dimension to the problem, as described above, the information about a
borrower is not shared among different micro finance institutions, which, in turn, results into a
borrower taking multiple loans, (loans from different MFIs) far exceeding his credit bearing and
servicing capabilities (Exhibit 2). This overlap is especially serious as the government supported
initiatives are generally finance at comparatively low rates and may not have the profit considerations
while the private MFIs bank on the productive utilization of their funding and require a very high
interest. Also a project which may look profitable if financed by government aided MFIs may not
remain so if financed through private MFI route.
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Mathew Titus of Sa-Dhan, sees the row as a battle of ideasbetween the non-government sector and
those ideologically opposed to its working with the poor.
Future Ahead
Now as the problems of MFIs are surfacing and a question mark has been put at the very justification
of the MFIs operations, at least in its current form, all the MFI heads including SHAREs Udai
Kumar, wonder what exactly went wrong? Were they always heading for this disaster, looking back at
the modus operandi they followed? Could it have been avoided? If so, then, how? And the million
dollar question about how to revive its image and business back, given that the damage has been done?
Also, what initiatives to take to avoid any such happening in the future, given its financing and
operational limitations?
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Exhibit 1
Microfinance in India
The story of the Indian microfinance is associated with both governmental and NGO initiatives that
took place in the mid-Eighties and early Nineties. It incorporated lessons from the microfinance
movement in Bangladesh and similar participatory development programmes in India. The Self Help
Group (SHG) -bank linkage programme of the NABARD accelerated the growth in the latter half of
the Nineties. Now the SHG-bank linkage programme is one of the largest microfinance programmes in
the world with 10.79 lakh SHGs covering nearly 167 lakh poor families till March 31, 2004.
As anywhere in the world, a sample analysis of MFIs has concluded that nearly 78 per cent of the
membership of MFIs is rural and almost 95 per cent of the members are women, the categories that
have previously been underserved.
Microfinance has enabled the poor to have a greater access to financial services, particularly credit. It
has achieved several social development objectives like gender sensitisation, empowerment and
poverty alleviation by diversifying their livelihoods and especially contributed largely towards raising
their incomes. It has also allowed the poor to accumulate assets and has contributed towards their
security. In areas with sound microfinance programmes, the quality of life of the poor has improved
significantly.
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Exhibit 2
Multiple borrowings from different MFIs due to lacklending information sharing;
Exhibit 3
SHARE Microfin Limited (SML)
Established as a non-profit society in 1989 by Udaia Kumar, SHARE transformed itself into a public
limited company SHARE Microfin Limited (SML) in 1999, partially due to some tax consideration.
With an outstanding loan portfolio of USD 37.3 million (as on February 28, 2005), SML was the
largest microfinance organization in India in terms of size of the loan portfolio. It was also ranked 30th
in 2005 MIX (The global information exchange for the microfinance industry:
http://www.mixmarket.org/) Global top 100 on the basis of total gross loan portfolio. It fared even
better in the ranking on the basis of number of borrowers per staff where it stood on 14 position
Further, it was ranked 4thin the ranking of the Biggest gains in borrowers served in South Asia in a
MIX survey (Stephens,Blaine and Tazi, Hind ; 2006, pp.24). The organization had around 0.4 million
members who had availed of microfinance services. As on March 31, 2004, women members owned
over 98.4% of the equity of the company, making it a truly community-owned organization. SHARE
essentially used adapted version of the Grameen model. It sustained its growth momentum over the
years, through innovative fund mobilization efforts using partnership models with private sector banks
and structured deals like securitization. The organization also planned to source cheaper funds through
bond issues and external commercial borrowings. The success of SML attracted funding from venture
capitalists and commercial banks in the microfinance sector.
Leander I Leander II
Leander IVLeander III
Borrower
MultipleLending
Lack ofinformation
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Exhibit 4
SHARE (SHARE Microfin Ltd.)
GENERAL INSTITUTIONAL INFORMATION AND LEGAL DATA
Name of MFI SHARE Microfin Ltd.
Region South Asia
Established in (year) 1992
Current legal status Non-Bank Financial Institution
Regulated Yes
Institution's Mission SHARE's mission is the reduction of poverty by providing financial & support services to the poor, particularly women
for viable productive income generation enterprises enabling them to use their skills and reduce their povertyBackground and Main Challenges SHARE (Society for Helping, Awakening Rural poor through Education) is a Micro Finance Institution registerd under
the Societies Act as a Service Organization in the year 1989. Then transformed into 'SHARE Microfin Limited', a NonBanking Financial Institution since 2000. SHARE's operations are mostly in the rural areas of Andhra Pradesh and inChhattisgarh and Karnataka.
Products SHARE extends small loans to poor people for self-employment projects that generate income, allowing them to carefor themselves and their families. It focuses essentially on women as clients of micro credit to ensure that thebenefits of increased income accrue to the general welfare of the family, and particularly the children. Loans Training and Consulting
Percentage of operations comprised by microfinance 91-100%
Other services provided Business Development Services
Main Funding Sources Loans Shareholder capital
Largest funder Small Industries Development Bank of India (SIDBI)
INVESTMENT OPPORTUNITIES
Looking for Equity investments Loans in US$
Loans in local currency
OUTREACH & IMPACT
OUTREACHINDICATORS
31/03/06 31/03/05 31/03/04 31/03/03 31/03/02 31/03/01 31/03/00 31/03/99 31/03/98 31/03/97 31/03/96
Outreach Indicators
Number ofPersonnel
2,456 2,006 1,004 906 688 267 273 140 129 40 28
Loan
Number of ActiveBorrowers
814,156 368,996 197,722 132,084 85,644 48,868 30,629 14,155 7,637 2,155 1,185
Avg Loan Bal. perBorrower (US$)
101 109 96 79 68 72 78 73 78 107 57
Loans< $300 (%) n/a n/a n/a n/a n/a 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
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WomanBorrowers (%)
100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Avg Loan Bal.perBorrower/ GNI perCapita-%
n/a n/a 15.42% 14.85% 14.41% 15.67% 17.43% 16.63% 18.60% 25.38% 13.85%
Saving
Number of Savers 0 0 0 0 n/a 0 0 17,910 9,130 3,875 1,495
Avg Savings Bal.per Saver (US$)
n/a n/a n/a n/a n/a n/a n/a 7 6 4 4
Avg Savings Bal.per Saver/ GNI perCapita (%)
n/a n/a n/a n/a n/a n/a n/a 1.65% 1.47% 0.86% 0.90%
Targeting as of 31/03/2002
Does the institution specifically target very poor clients (clients earning lessthan US$1/day or population in the bottom half living under the poverty line)?
Yes
Description (if Yes) Villages with a high concentration of low caste people.
Does the institution use any targeting tools such as Means Test, ParticipatoryWealth Ranking, Housing Index, etc...?
Yes
Description (if Yes)Means Test designed by Cashpor with the following eligibility criteria: 1) total assets