Vijay Mahajan’s morning walks are interrupted by neighbours who question him about the recent controversy around MFIs. They want the man regarded as the father of microfinance in India to explain why there are so many suicides related to MFI lending. “I feel like my whole life’s work is turning to ashes. I’ve spent the last two weeks, just running to regulators and government officials, defending microfinance,” says the founder and chairman of BASIX, India’s first microfinance company, and president of the Microfinance Institutions Network (MFin).
He is not often given to words as strong as these. But then the microfinance sector hasn’t seen times like these. From one angle, these are the best of times. Microfinance is as hot as the tech sector was 10 years ago. Valuations are crazy. It’s poster child SKS Microfinance has just listed on the stock exchanges at a handsome premium. Investors want a piece of any half-decent microfinance outfit if ongoing capital-raising is any indication.
These are also the worst of times. Officials and the media in Andhra Pradesh, the largest MFI market in the country, have whipped up themselves into frenzy over a sudden spate of what might be MFI-related suicides amongst poor borrowers. Last week, Chief Minister K. Rosaiah warned MFIs against charging usurious interest rates and passed stringent rules governing their behavior. Add to this, a statement from the union finance ministry that a cap on MFI interest rates is being considered. The Reserve Bank of India has also formed a committee to examine if loans from banks to MFIs ought to remain classified as priority sector. “Forget all three, if even one of these policies comes through, it could be a huge setback for the MFI sector,” says Mahajan.
Alok Prasad, CEO of MFin, a group of 44 profit-oriented microfinance companies put it succinctly when he told Financial Times, “The operations of the microfinance institutions have come to a grinding halt. They cannot lend, and they cannot collect repayment. They are dead in the water.” There is every possibility that this will create chunks of bad loans and can cripple many microfinance companies.
The stock market isn’t taking to these developments kindly. Already SKS has fallen from the high perch that investors gave it at the time of listing. Adding to the external problems is the company’s own troubles, chiefly the mystery surrounding the unceremonious dismissal of its CEO, Suresh Gurumani. As a result, the several IPOs that were expected to follow SKS, including those of Spandana and SHARE Microfinance, have been delayed.
For many, the ouster actually signals the wider problem with the aggressive business model that SKS had chosen.
“We’re not a listed entity but we might go in for an IPO in 3-4 years time and this is a good learning lesson so we don’t have such kind of issues when we get into those spaces,” says Suresh Krishnan, MD, Grameen Koota, a Bangalore-based MFI.
Poster Boy to Problem Child
And to think that SKS, the model MFI until yesterday, would be the source of much of this embarrassment. Founded as a non-profit in 1998, SKS (Swayam Krushi Sangam) is the largest MFI in India and one of the first to show private capital could be used as a means to reach the poor. It reaches over 7.3 million women and has 2,226 branches in 100,000 villages in 19 states across the country. It has a 99 per cent on-time repayment rate, a disbursement record of over Rs. 16,000 crore and a net worth of Rs. 1,016 crore (in June) and is of one of the fastest growing MFIs in the world. Much of the growth came after it changed to a for-profit enterprise.
BusinessWeek named SKS as one of the top five emerging and influential companies in the world in 2009 and last year, rating agency CRISIL ranked SKS as first among the top 50 MFIs in India. Its IPO was over-subscribed 13 times. “The performance of the company is not only solid but spectacular,” says the company’s founder and chairman, Vikram Akula.
Despite all its success, many of its peers feel SKS’ aggressive growth has put them on a back foot. Its for-profit image is making regulators deeply uncomfortable. SKS is intriguingly eroding its own messianic image before the world. The controversial decision by its board to sack its CEO barely two months after the IPO has only added to its woes.
“Somewhere they have got lost and they need to revisit their soul,” says Ela Bhatt, founder of Self Employed Women’s Association (SEWA). Former employees agree. “It seems as though the dream Vikram started out with is rapidly turning into an illusion,” says Anna Somos Krishnan, a former SKS executive and now executive director of Planet Finance India, an international NGO for the development of microfinance.
Private Capital and Culture Change
Market of the Poor
(This story appears in the 05 November, 2010 issue of Forbes India. To visit our Archives, click here.)
Chandra Babu Naidu ex- Chief Minister who toured the Ranga Reddy district, addressed several micro finance victims and advised them to just pay the principal and not the interest thereupon. He also told them not to make any payments until the government agreed to extend Pavala Vaddi scheme to the Micro Finance. Telling them to tie those who came to their houses for collection of micro debts and throw them in a room, the former chief minister said that his party would then take care of them. Join the Campaign and ban MFIs. If they want to profit from the blood of the poor, lets give them a taste of their own medicine. Vikram Akula of SKS Microfinance is our mascot What's wrong with Micro-finance Institutions? Practically everything as the case of SKS illustrates. http://devconsultgroup.blogspot.com/2010/10/whats-wrong-with-micro-finance.html
on Nov 3, 2010Nowadays i think MFI are creating problem for the poor people: The main problems are...as follows: 1-the interest rate(taking(50 to 80%) 2-coercive method of recovery. 2-other charges like LPF, insurance,other products etc...if you calculated all these expenses then it is nearly about 80%...which is more for poor people. 4-their process of lending is not clear yet. 5-they are cheating poor people. 6-their business should be stopped. Otherwise the suicide issue will be more pathetic for govt as well as for others, 7-they are taking some hidden charges, which are not ethical in nature. 8-make them out of country. -Bulu (Orissa)
on Oct 29, 2010In my point of view, actually its not the MFI sector but WE, who are failing the system, and by WE i mean all of us - from stack holders to the end users. I think: 1. Govt can take conclusive action to rectify the situation especially the MARKUP point which is too high there in India (as highlighted in the para). - However keeping in view the current price hikes/ inflation issues/ expenditures and many more, the interest rate could be revised but through the regulatory body and not by the stack holder;s will. 2. Stack holders should be harnessed at a level of profit only. -- closing the MFI sector would creat a malignant financial problems to those who could not go to other commercial banks, however reforming the sector would be much more effective.
on Nov 3, 2010I request to the AP govt. about MFIs issue 1-To stop the business of MFI as soon as possible...other wise they will kill the poor people..they need regulation..by this the moneylender will hamper the rural people..the same problem is in ORISSA, BIHAR, CHATTISGARH, BENGAL, MAHARASHTRA...etc..due to no control on mfis. 2-they are taking much more interest beyond the expectation. Nearly 80%. I survey the system followed by BASIX in orissa: if u take loan @15000/- then u have to deposit advance the following: -LPF (loan processing fund)-500/- - security 10% of the principal adbds - product cost 450 which is a fake product So its 500 1500 450=2450 in advance Then come to recovery process: They taking 1800 in the form of interest, 1000 for insurance chager=2800/= after taking the loan. In an aggregate they are taking 2800 2450=5250/- with out any investment. The borrower are taking loan 15000 and taking 10000 to home and have pay the installment for 15000/- They are collecting monthly...still their is no reduction in interest. Thats why i am requesting u to stop MFI instead of making a regulatory body for them. Give chance to bank to reach to the poor instead of these moneylenders. They doing this lending business in a smart way...they are very smart.they are killing poor people,farmers of our country BIJAYA (Orissa, Anugul)
on Oct 29, 2010It will be necessary for all MFI that they provide support and training to develop new small business for their clients beside finance so that actual goal will be fulfilled of invention of MFI.
on Oct 28, 2010I agree to Hemant's point of view keeping in view the problem in MFI sector in India. MFIs are the segment which are reaching to the base level people who could not enter the commercial banks or don't have security bonds/ references etc. What is needed is to re-structure the MFI ordinance in India to cope the situation.
on Nov 3, 2010When we started out in development a couple of decades ago, we instinctly targeted to reduce the influence of money lenders, if not eliminate them completely. Why? They were the traditional oppressors and exploiters in society. But today, we find MFIs have filled up the vacuum. MFIs believe that "having access to expensive credit is better than no credit" on one hand and "the observed rate is where demand equals supply". The result is an "Animal Farm" situation where we are now not able to distinguish between "pigs" and "humans" and vice versa. In fact, money-lenders have got a face-over by packaging themselves as MFIs. A good example is Mohd Yunis of Grameen Bank comes from a traditional money-lending caste. And of course, he got the Nobel Prize for Peace while the Nobel Committee to date have yet to confer the prize to Mahatma Gandhi, the apostle of Peace! The IPO of SKS, one of the largest MFIs in India, saw it over-subscribed by 15 times; their Ten-Rupee share was priced at a premium of Rs 975 - showing how much the market had confidence on their profitability while "banking with the poor". PMFIs argue that they have to charge high rates to maintain profitability. Profitability, which even private banks couldn't match! Profitability that permits SKS to pay Rs 1 crore as bonuses to their just fired CEO! And how do they attain profitability? A month ago, SKS in the state of Andhra Pradesh was accused of a series of farmer suicides that prompted the state government to introduce new restrictions on the micro finance industry by seeking to cap lending rates and end coercive means of recovery. Last week alone, Andhra Pradesh police arrested three loan agents of SKS Micro finance and Spandana Sphoorty Financial Ltd. after borrowers complain that they were illegally pressured by the agents to repay their small loans around $1,300. The state's share of outstanding micro finance loans represents nearly 40% of the sector's total portfolio, according to ratings agency CRISIL, a credit rating agency. Now if MFI is all about access to the poor, we can ask the question, why the clamour to be concentrated in a state which belong to top-five in development in the country? We would have thought they would have gone to the five lying at the bottom rung of the country. But no, they avoid it like plague. It is easy to see they do this on repayment potential of states. The interests MFIs pursue are interests of self sustenance and their own growth. The poor is hardly in the radar except for rhetoric. The sooner MFIs are seen as profit enterprises, the better. The longer they pretend they are pro-poor, the longer they discredit the NGO sector who gave birth to a Frankenstein.
on Oct 28, 2010