Monday, February 14, 2011

MFIs: Market forces muddying the system

Sankar Ray / Kolkata

Success stories are fading away as profit-greedy operators have taken the centre-stage....

Gonuguntla Mariamma was born into a poverty-stricken agricultural labour household in Andhra Pradesh. Her mother died of severe malnutrition when Gonuguntla was eight year-old .She had to drop out of school to look after the household. .Matters worsened when she was married off to a relative with a ten-member household when she was ten. They had two acres of dry land that depended wholly on monsoon. She craved for an alternative for sustenance and approached the local Mahila Mandal (Women's Association) in her neighborhood, learned to sew and bought a sewing machine with micro-credit of Rs 3400 to buy a buffalo and then a seasonal loan of Rs 1700 for grass and fodder. All this helped her keep from an wolf at the door, although one buffalo died. Refusing to be disheartened , she went ahead in her war against poverty and he overcame it. With the help of her husband the dry land is now a small orange orchard. Today Gonuguntla owns four buffaloes, one calf, and 17 goats. She has a telephone and a television. She can sign her name, count money, and read a little.

But success stories like Gontugunta’s ’s are fading away as profit-greedy operators posing themselves as welfarists are into the micro-finance arena . . India’s rapidly progressing micro-finance industry is in a grave crisis . The principal reason for this is high rate of interest with an average minimum of 28 per cent per annum. An additional deterrent is hyper-activity of vested political interests in the way of smooth repayment mechanism . Nearly Rs 1700 crores are blocked due to breach in repayment in AP alone. Accusations of coercion against micro-finance operators or loan-recovery agents are true as over 100 loan recipients committed suicide.

Public anger against exploitative trends is expanding. It was evident during the recent initial public offering by SKS Microfinance, India’s largest for-profit microlender, with the backing of like George Soros and Vinod Khosla, a co-founder of Sun Microsystems.

Obviously the expectation that the Nobel laureate Mohd Yunus-scripted model of Grameen Bank will open up new possibilities of micro-finance in areas where the national banking network has failed to reach –for whatever reasons – is probably ending up in a myth.

Signs of collapse are manifest at many places. After all, Soros is not expected to wear the robe of benevolence unlike Prof Yunus. Public anger is spreading against exploitative aspects of micro-finance in contrast to welfare objectives based on which the Grameen Bank saga was built. SKS founder chairman Vikram Akula defends the high rate of interest. The break-up of 28.3 p.c, interest his concern used to charge, spelt out by him is as follows : the cost of funds -8.5, salary and incentives for staff- 6.4, overhead and administrative costs 4; loan-loss provisioning 1.5%, ; a corporate tax 2.8%) and profits 5.1%.

But doubts remain. How could the company slash the rate to 24 p.c. Questions are raised against the Financial Inclusion Network and Operations (FINO), set up by the ICICII as a provider of an electronic technology services ostensibly to help micro-credit system. It runs through a network of some 10,000 bandhus (friends) to convey welfarist and human message . These bandhus are human ATMs where no electronic teller machines exist as each bandhu carries a small, handheld biometric device for transactions with clients, who access banking services through smart cards. Balance transfers, deposits and withdrawals are through the smart card system.

FINO was to create a platform to facilitate "technology-enabled financial inclusion," claims Rajiv Sabharwal, ICICI Bank executive director. But implicit objective was money-spinning. Which was why it roped in investors like including ICICI Bank (19 p.c. stake ), Intel Capital and IFC (15 p.c each ), Life Insurance Corporation (8 p.c. ) and public sector banks (22 p.c. together). It had never addressed the economically weaker sections which are under the yoke of usurers.

The international jamboree of micro-finance organisatiuons – the Global Microcredit Summit –is scheduled to take place 2011 in Valladolid, Spain between 10 and 17 November next year. Over 2000 delegates from 100 countries are expected to attend and deliberate there. Sam Daley-Harris, chief of national host committee in Span set out the motto of the summit. “When Prof. Yunus lent a grand total of US$27 to 42 desperately poor Bangladeshis in 1976, it turned out to be much more than just an economic transaction. One of the 42 borrowers was Sufia Khatum, a stool maker who struggled to survive on 2 cents a day. That was all that was left after she borrowed money from the money-lender to buy the bamboo to make her stools and then sold the finished product back to the money-lend at a price he set. The price he set barely covered the cost of the bamboo. Her profit each day—just two cents. As Prof. Yunus has said, he was ashamed to live in a country where people could work so hard and only make 2 cents a day.

But with her loan of less that US$1 from Prof. Yunus, Sufia Khatum was able to pay off the money lender, buy her raw materials, make her stools, and then sell the stools to the highest bidder. Her profit soared 60 fold, from 2 cents a day to $1.25 a day. Prof. Yunus talks about how surprised he was that such a small amount of money could make 42 desperately poor people so very happy. It freed them from the money-lender. It freed them from debt bondage. And I would add it unleashed the human spirit. It is not only a story of economic transformation but of spiritual transformation. This is the story we must tell and must contrast with those going down the profit maximizing fork in the road.”

Does FINO or SKS have even the semblance of this commitment. Absolutely no. There are valid criticisms against Grameen Bank model. One of them is that it appears to offer a capitalist answer to development without asking for increased aid. Another criticism is that microfinance’s inaccessibility to people below the poverty line. But there are some positive elements as well. Some 67 p.c of its deposits belong to women who were benefited by substantial financial empowerment. On the other hand, the model that dominates in India is stripped of welfare objectives. It has been hijacked by profiteers.

Nonetheless. there are really micro-experiments operating in southern Bengal and western parts of India. The interest rate is within 20 p.c, much below the usurious 120 p.c. which thrives on political backing. Kolkata-based Durbar Mahila Samanway Samiti, an NGO working among sex-workers and their offprings, runs a successful micro-finance scheme, USHA, a cooperative of 7000-plus sex-workers.It transacts Rs eight crores a year and got award from the state cooperative department.

There is no room for pessimism. But the path is tough and meandering.

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