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Mainstream, VOL XLIX, No 1, December 25, 2010 (Annual 2010)

Making Money while Helping the Poor

Friday 31 December 2010, by Nirmalya Biswas

Introduction

Is it possible to make money while helping the poor fighting against poverty? In the last ten years or so, at least one business, micro-financing, appears to answer in the affirmative. Micro-finance has been a catchword for a few years now, a panacea for poverty eradication that the poor have all been looking for. It would carry away the poor out of poverty as if by swaying the magic wand of microfinance. The birth of the movement roughly coincided with the rise of the neo-liberal ideas in the late 1970s and early 1980s.

Even after fortyone years of nationalisation, the banks in India have failed to reach the people who survive on the economic fringes. Poor people have little access to formal financial services. Banking activities have belied the hopes of financial inclusion of the rural poor. In a liquidity-strapped society, there is always a demand for credit. The Micro-Finance Institutions (MFIs) take the opportunity to fill that gap. With the emergence of the MFIs a few years back, the expectations ran high. They lend money to millions of rural artisans, small traders, tiny manufacturers and women at around twenty-seven per cent to thirtysix per cent rates of interest, which are much lower than the exorbitantly high rates charged by the local money lenders. While the commercial banks charge anywhere between thirteen and sixteen per cent interest, applying for loan from them involves a lot of paper-work causing much harassment to the poor illiterate borrowers. They instead find it more convenient to approach the MFIs who avoid complicated documentation work for lending money but charge a higher rate of interest.

Listing in Stock Exchange and the Poster-boy of Microfinance

RECENTLY the MFIs in India having equity capital over rupees five thousand millions have decided to issue shares to the public for the first time through Initial Public Offering (IPO) as a measure to raise further capital. The overwhelming success of the Banco Compartamos, Mexico’s largest MFI, in issuing equity shares to the public through an IPO in 2007 and charging interest at an annual rate of cent per cent, about triple the global microfinance average, and with a return on equity exceeding three times the fifteen per cent delivered by Mexico’s conventional lenders, has encouraged the Indian MFIs to undertake a similar course of action.

Founded as a non-profit and non-govern-mental organisation in Hyderabad in 1998, the Swayam Krushi Sangam (SKS) or self-help organisation, the poster-boy of microfinance, lending to the poor borrowers, many of them women, had an enormously successful listing on the stock exchanges at a high rate of premium in 2010. Its IPO was over-subscribed thirteen times and had raised Rs 16,000 million. A share of Rs 10 of the SKS on listing attracted a premium of nearly Rs 1000 and such was the investors’ confidence, it touched a point of Rs 1500 in a couple of days. It had grown from having about 30,000 clients in 2004 to nearly four million in 2010. One of the fastest growing MFIs in the world, the SKS had disbursed a record amount of loan worth Rs 160,000 million and earned a net worth of Rs 10,000 million up to June 2010 with an excellent nineteen per cent on-time loan recovery rate.

Allurement of Profit

PUBLIC SECTOR UNDERTAKING banks have been providing term loans at lending rates ranging between ten per cent to twelve per cent to the MFIs which, on the contrary, charge interest rates anything between twentyseven per cent to thirtysix per cent. This is hugely profitable. The return on assets, a ratio used to measure the profitability of financial institutions, is approxi-mately seven per cent for SKS Microfinance, and five per cent to six per cent for some MFIs which are much higher than the banks, for example, nearly two per cent for the HDFC Bank and one per cent for SBI. For the MFIs it is now all about making profit and growing fast.

The SKS, which started as a not-for-profit MFI, in 1998, switched over to a for-profit NBFC in 2005. The company website claims to have some eight million borrowers in 2010. Over the years, profit has grown at a fast rate and attracted many prospective financers to enter into the lucrative business of microfinancing. As on March 2010, there are more than three hundred MFIs in operation in India. They cater to some 20 million people. Another 50 million are covered by women’s self-help groups (SHGs). Still about one hundred million people depend on local moneylenders for loans. It constitutes an extensive untapped market which itself explains why banks and non-bank financial institutions (NBFCs) are on the run for microfinancing. Moreover listing of the SKS allures other MFIs to earn profits more and more at the cost of the poor borrowers. A sector, that had once promised service to the poor, is now ruled by the money-mongers attracting private equity funds.

There are allegations of high interest rate resulting in high profit for the MFIs, high personal gain for the CEOs, high valuation, over-lending and nearly cent per cent repayment rate through coercive methods. Promoters and managers of the MFIs are reported to have earned more money within a year or two than they possibly would have in their entire career. These are people who once found a sustainable way of alleviating poverty through microfinancing and so on. What is confusing to many is whether it is possible to have concern for the poor borrowers while earning enough profit to keep the stakeholders of the MFIs happy as well. People suspect this. A sense of strong reservation against the much hyped mission and vision of the MFIs is building up.

Debt-trap

Of late, the MFIs have come under a cloud. One can find no reason against giving loans to the poor. It may initiate favourable change in the financial position of the poor borrower. But the successful cases are few in number and cannot be generalised. The MFIs charge interest at such a high rate knowing well that no business can generate profits to match it. Clearly, the intention is to keep the poor and the vulnerable in a vicious debt-trap.

Over the years the microfinance scheme has proved to be a curse to many poor borrowers who have failed to pay off their dues in time. They often repay the loan either out of the proceeds of distress sale of whatever little disposable family belongings they have or out of the fresh loan taken from usurers. The borrower-turned-entrepreneur becomes a borrower again and in the process steps into perpetuity of the debt-credit-debt cycle. It is alleged that the MFI agents harass and at times coerce the defaulting borrowers. Unable to bear the humiliation the weak borrowers even commit suicides.

Government’s Response to Growing Public Resentment

DOES the government not know the modus operandi of the MFIs? Isn’t it an open secret that micro-financing charges very high rate of interest? Hasn’t the incidence of the borrowers’ harassment been on the rise? The government can neither plead ignorance nor absolve its responsibility.

Resentment is mounting against the activities of the MFIs. The MFIs’ for-profit agenda has eaten into its pro-poor image. The industry’s rapid growth brings back the allegation of its aggressive collection policies. Over the years the MFIs have desperately built up the myth making pretence that they are doing social service and not business. They serve the poor and at the same time make huge profit.

Women’s protestors have raised the demand for the government to decide upon a cap on the interest rate and regulation to ensure recovery of loan by the MFIs only through valid means preventing harassment of the poor, defaulting borrowers. The growing public resentment against ‘usurious interest rates’ and ‘forced loan recovery’, the combined effect of which has forced the debt-ridden poor to commit suicide finally has prompted the State Government of Andhra Pradesh, the epicentre of the worst crisis faced by microfinance in India, to promulgate the Microfinance Institutions Ordinance in October 2010. The ordinance has made it mandatory for the MFIs to register themselves with the district authorities, besides providing details about the interest rates being charged. It also sets certain restrictions on the loan recovery practices by the MFIs. The State Government has suggested the Centre to come out with a comprehensive law to regulate the MFIs in the country.

The issue of capping the lending rates of the microfinance institutions (MFIs) has come to the fore. The Central Government has instructed the banks to monitor the interest rates being charged by the MFIs to the eventual beneficiaries, so as to ensure that the benefits of lending by the banks percolate at reasonable rates to the marginal sections of society. The Finance Ministry has apparently instructed the banks to ensure that the MFIs to whom they lend do not charge more than twentyfour per cent interest to the small borrowers. It is reported that a suitable legislation putting a cap on the interest rate to be charged by microfinance companies is under consideration of the Union Finance Ministry. Given the mushrooming of the MFIs, it is high time for the Reserve Bank of India to come out with more stringent guidelines to control the microfinancing activities. Needless to say, the MFIs are opposed to this proposal. The stock market has obviously not taken to these developments lightly. Already the SKS has lost much of its attraction to the investors. As a result, several IPOs, which are there in the pipeline including those of Spandana and SHARE Microfinance, prefer to keep their issue in abeyance.

Miseries behind High Repayment Rate

UNLIKE the corporate borrowers of nationalised commercial banks who, in connivance with the higher echelons of the banks’ administration, refuse to repay loan in time the microfinance borrowers seldom enjoy any such concession from the seats of power. The repayment rate in microfinancing touches a record high, nearly cent per cent. As if the poor borrowers have all become successful entrepreneurs to earn surplus sufficiently enough for repaying their loan obligations.

Behind the achievement of the high repayment rate the tale of microfinancing being used as a ploy to exploit the labour of the poor, remains untold. The agents of the MFIs go to the doorsteps of the borrowers’ residence to ensure collection of their dues dot on time without fail. The MFI collection agent usually gets around fiftyfive per cent of his salary as incentive if the collection meets the target.

The MFIs form joint liability groups (JLGs) to keep the joint liability pressure strategy. The entire group of borrowers is held responsible to keep a watch upon each other to ensure repayments strictly as per schedule. Moreover agents use different means to coerce the defaulting borrowers. The incidence of default is forcefully reduced to an exceptional few. A higher recovery rate quickens the turnover of capital of the MFIs and results in a higher rate of profit.

Things look fine for the poor borrowers for the first few weeks after the loan is taken. Then start the sleepless nights of the borrowers always in anxiety for the cash inflow to meet the instalment obligation. The family enters into a maze of debts. Nobody knows the way out. They borrow afresh sometimes simultaneously from different sources to pay off old debts. But that is hardly a solution. They sink deep and deep into the sea of debt. The family is ruined.

The borrowers sometimes choose to die. In such tragic events even before the mourning period of the deceased’s family is over, the instalment-collecting agents are back at their door. Any plea for time is refused. The business model of the MFIs does not allow that. If the borrower commits suicide and the family cannot pay off, the lending MFI claims the unrealised sum from the insurance company since all loans are insured. To the surprise of many, who once found reason to hope that microfinancing would be an effective tool in liberating the poor from the clutches of the usurers, they rediscover it as no less oppressing.

Silent Appropriation of Surplus

MICROFINANCE borrowers come from different walks of life. They are street hawkers, artisans, rickshaw or cart-pullers, weavers, blacksmiths, fishermen or women tailors, cobblers, milk-men or maids and others. The spouse, the old parents and even the children of the borrower join hands to extend support to the borrower to speed up production. The borrowers do not usually engage either paid managers or labourers from outside the family. The siblings do all the domestic chores. They stop going to school. They forget their childhood. With the pressure of work they grow older than their age. The work is sometimes done by the members of the borrower’s family. The surplus thus created by utilising their own labour free of cost is appropriated by the MFIs as interest on loan. Provisions of health care and welfare of the workers, restrictions of employment of women and children, payment of minimum wages, bonus, overtime wage, holidays and leave are all a dream to them.

Return of Capital

A minimum reasonable period is required to reap the fruits of investment, be it in agriculture, trading, manufacturing, or the service sector. Again there are risks and uncertainties in every business. Goods and services may not always be sold and even if sold may not earn surplus. The income of a trader or a service-provider fall sharply in the lean season due to recession, drought, flood, law and order problem and other contingencies beyond anyone’s control. But the MFIs do not wait. Instalments usually follow weekly interval. It includes interest which starts accruing from the day next to the borrowing. In the micro-financing programme interest is charged in advance against surplus which is yet to be earned. Interest is normally defined as ‘return on capital’. But for appropriation of surplus in advance by the MFI, the interest may be redefined as the ‘return of capital’. The poor borrower is effectively deprived of utilising a portion of the loan-bearing interest before it is recovered as instalments fall due soon after the loan money is handed over to the borrower. The effective rate of interest exceeds the rate officially quoted.

Lacking Entrepreneurial Skill

ACCESS to credit alone does not eradicate poverty. Credit is only one factor in generation of income. There are other complementary factors, crucial for making credit productive. Among them, the most important is the recipient’s entrepreneurial skills. The poor need loan at low rate of interest in order to have a reasonable chance of being successful. Most poor people are not equipped with the knowledge of handling the nitty-gritty of today’s business. Microfinancing targets the poor who may not have either the skills or the market opportunity to create a viable enterprise.

With a burden of huge interest the borrower cannot make that much of net gain to be partly ploughed back as owned capital and partly spent for meeting the financial needs of the family. In contrast, those who really can benefit from credit are the people already well-off in some moderately successful venture. The great microfinancing paradox is that the poorest people can do little productive with the credit, and the ones who can do the most with it are those who don’t really need it. They are in search of a larger amount with easier credit terms. Definitely microfinancing has not done what the enthusiasts claim it can do—allowing its poor borrowers to graduate from impoverishment to entrepreneurship.

Empowering Markets Instead of Women Borrowers

WHERE do the microfinance borrowers-turned-entrepreneurs sell their products? In the market which goes global. Who rules the market? None else but the giant national and multinational corporations. They avail the economies of large-scale production and practise aggressive marketing strategies. The lilliputian entrepre-neurs are no match to them.

Many are impressed with the notion that microfinance empowers the women. Women borrowers are on the contrary disempowered as they are obliged more to the terms and conditions set by the MFIs and gradually succumb to the pressure of the market, the new ‘Avatar’ of the neo-liberal regime. They are to accept that market is the only hope for them to improve their economic position. Today, as intended, they are not to organise trade unions, go for collective bargaining but are just to forget all forms of movement against exploitation of the state. It is the market that is being empowered, not the women. Microfinance thus goes along with a deliberate misinterpretation of what it is intended for.

Microfinance in Contrast with China’s Experience

MICROFINANCING may be explained as a neo-liberal development paradigm of alleviating poverty without challenging the existing economic system and state structure. It explains poverty as a problem of the individual. The state is considered to be in no way concerned with it. Muhammed Yunus, the proponent of Micro Credit, wrote in his autobiography: “I believe that ‘government’, as we know it today, should pull out of most things except for law enforcement and justice, national defence and foreign policy, and let the private sector.... take over their other functions.”

Does credit really initiate economic growth? Probably not. Consider the case of China. Economic development did not depend there on the poor people having access to credit. It is the state-controlled macro policies, not microfinancing, which have been the prime mover to eradicate poverty from the land of the highest population in the world.

Growth of finance and banking capital

STRUCTURAL-ADJUSTMENT PROGRAMMES promoting trade liberalisation, deregulation and privatisation have brought greater poverty and inequality to most parts of the developing world over the last quarter century, and have made economic stagnation a permanent condition. The problem of unemployment has reached a boiling point. The agriculture sector ceases to generate new job opportunities. Employment of workers in the manufacturing sector is cut down. The market is passing through recession. The service sector alone cannot absorb all who are refused employment elsewhere. When new investment opportunities in any of the three major sectors of the economy are woefully low, capital finds out its new ally in finance capital. The recent phase of capitalism witnesses the growth of finance and banking capital. In microfinancing lending money to the poor borrowers ensures higher repayment and lucrative return. The MFIs target the poor who have been systematically exploited over the years by the usurers.

Rural India’s subprime crisis

THE current crisis in microfinancing may be interpreted as the Indian chapter of the subprime crisis in the US in 2006. It resembles a similar unsustainable model of credit involving high margin at high risk. In subprime banking non-banking institutions gave loans to people with poor credit worthiness. They lured many to take multiple loans. In the US the giant financial institutions faced the worst consequence while in the southern States of India the poor borrowers get perished.

Conclusion

MICROFINANCING resembles a compassionate peaceful unavailing way-out in capitalism for the poor to cope up with poverty. It has impressed upon the ill-clad, half-fed marginalised section of the society to keep faith in capitalism which can as if work for the rich as well as for the poor.

Microfinancing made no perceptible impact on either the quality of food or on measures of health and education of the slum dwellers. Poverty will remain there the same as before to keep the microfinancing scheme running if the country’s development plan relies on micro-financing for removing poverty. Any significant change in the prevailing financial condition of the poor calls for mobilisation of resources to initiate a radically different development paradigm with direct state intervention.

The author is an Associate Professor in Commerce, Bankim Sardar College affiliated to the University of Kolkata.

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