By Shishir Prasad| May 21, 2013
Mark Stoleson, CEO of global investment firm Legatum, tells Forbes India that what happened in the Andhra Pradesh microfinance sector was an aberration, but it almost killed off the entire sector
Designation: CEO of Legatum; has served with the firm for over eight years in various capacities, including head of group investments. Was corporate finance and M&A attorney with Akin Gump Strauss Hauer & Feld in Moscow and Dallas
Education: BA in International Relations, Occidental College; JD-LLM from Duke University School of Law
Career: US Department of Education
Interests: Family and friends, Legatum’s mission, travel and triathlon enthusiast
Q. How do you read the situation in India?
A: If you start at the basic question of “is business good? Is free enterprise good?” then Legatum’s view is based on experience, and it shows that yes, it is good and is moral and the free enterprise system is the most pro-poor system there is.
Q. Do you get challenged on this view more often now, especially when you come to countries like India?
A: I think less! Because all other ways have been totally discredited. The centrally planned statist approach leads to poverty. Free enterprise is the most dignified system of the economy because it allows people to serve each other. Business, at its very heart, is about service. I give you goods or service, and you pay me. The money you give me is more valuable to me than the goods or service I’m giving you and the goods you’re getting is more valuable to you than the money you’re giving me. It’s a system of voluntary exchange. In India, we see that the components of a healthy economy are alive and well, but there are challenges.
You need entrepreneurs and good businesses. India has plenty. More than its fair share, and they are spread out all over the world. Go to Silicon Valley and the leading entrepreneurs come from here. India has a great gift to share with the world.
You need capital. There’s no shortage of capital. It will only go where it is welcomed. A good question for policy makers is: Is capital welcome in this country? Look at what’s happened to FDI in India—it’s not heading in the right direction.
You need a good environment for business. In the past few years, not just direct investors but the global investment community has probably paused to watch what is happening with India and microfinance.
Q. Is India an exception in the global microfinance industry? What if what happened in India is an aberration?
A: Yes, it was an aberration, and not only globally but also within India. Today, there’s only one state that has taken action against microfinance organisations. That state’s actions have had a country-wide negative impact. Basically, what it has done is kill off almost the entire sector. As believers in business, we believe in competition, and therefore don’t place a lot of value on monopolies or crony capitalism. One of the many unintended consequences of the Andhra Pradesh government’s action is that we are left with fewer microfinance organisations and [the government] has effectively created a virtual monopoly in the area of lending to the poor. That’s not good for that demography.
Q. A lot of people also say that what happened there was also their own doing because they took on the government?
A: So business shouldn’t take on the government? This was the conflict between business and the government? Well, you’d be correct because in Andhra Pradesh one of the under-reported facts wasn’t necessarily that microfinance was doing anything wrong, but that the government has its own microfinance operation. The bill that was passed applied to private providers, not the government provider. That’s called unhealthy competition, that’s called crony capitalism. Fundamentally, it doesn’t help the poor.
Q. When you tell this to Indian policy makers, what do they tell you?
A: In private or in public? Most people we’ve met are some of the most talented and committed we’ve met anywhere in the world. These are skilled people. They completely understand the perspective that microfinance is the key to financial inclusion. The only other real alternative is the village money lender, which is not good. Or charity. Charity is a good approach. It’s low-cost capital.
The problem is there’s no scale. By our estimates it will take $20 billion in equity capital to service the 400 million unbanked people in India. Where is that going to come from? From charity? No. From the government? No. From social venture capital? No. There’s only one place that can provide that quantum and that’s commercial capital from the private sector, probably foreign capital as well. To attract that kind of capital you have to have a healthy, welcoming business environment. So, if you care about development, you need to embrace business.
Q. From an investing perspective, what have learned when you put risk money into India? Are the rules different here?
A: The dynamics are the same as anywhere in the world. Capital flows to where it’s welcome. The challenge investors face is that at some places and at some times, it’s unclear whether capital is welcome or not, and microfinance is a clear example of that. There’s a significant amount of capital, which could serve 400 million people, that’s waiting in the sidelines. It’s not clear what the government will do. Only it can decide when, and at what scale, the capital can come in.
Q. So, when the industry was in boom mode and now that it’s in a pause mode, how many people would have been left out as a result?
A: Prior to the Andhra Pradesh act, which was about preserving the government’s competitive advantage in microfinance, there was more than Rs 5,000 crore that was dispersed around the state alone. Today there’s less than Rs 300 crore. You have to ask yourself, “Has the demand for and access to capital gone down?” No, it has not. So, where will that capital come from? People are getting it from their village money lender. We’ve turned the clock back 15 to 20 years by one single state government’s act.
Q. There’s a belief among many people that this explosive growth in microfinance was uncalled for, that people were taking one loan to pay for something else and then rolling over loans. Because microfinance guys were chasing customers, there was no prior experience with credit and they got themselves in situations they otherwise wouldn’t have.
A: The argument from the government is that microfinance resulted in suicides. The exact opposite is true. We analysed the government’s suicide records in Andhra Pradesh and found that in places where there is microfinance, the suicide rate is lower than where there isn’t. The government said there was a connection between microfinance lending and suicides. We had 98 to 99 percent repayment rates, so clearly people were able to repay their loans and the government’s allegations about suicides were patently false. In India, every other state where they have microfinance, the rates are the same. You don’t see a nationwide suicide problem. You see a crisis in Andhra Pradesh, where they’ve taken microfinance away.
Q. Despite myths being countered by companies, why does the sector have the image of cowboys who just walked in without knowing what they were doing?
A: There are lots of myths about economic phenomenon. There’s a myth that banks caused the financial crisis in the US, along with the housing sector. Banks had a role to play, but the rules were set not by the banks but by the government. Go back to the Carter and Clinton administrations, and the policies were promoting home ownership and the governments were pushing banks to make loans to people who couldn’t afford them. The banks were happy to suit, funds were happy to buy securitised pools of mortgages and it ended up ballooning. But the rules were created by the government, which is quick to blame the banks but very slow to take a hard look at itself.