India Microfinance Industry Faces Collapse

[Guest]

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[hejustlaughs]

http://www.nytimes.com/2010/11/18/world/asia/18micro.html?_r=1&src=me&ref=homepage

Microloans were once thought to be the paving stones of the road out of poverty, but in India, the mircolending industry is suddenly faltering in ways eerily reminiscent of the American mortgage collapse. The New York Times reports that anger over for-profit microlending companies that are raking in hundreds of millions of dollars in revenues has led some local leaders in India to encourage their constituents to default on their loans. As a result, "repayments on nearly $2 billion in loans in the state have virtually ceased. Lenders say that less than 10 percent of borrowers have made payments in the past couple of weeks." Now, officials are afraid microfinance will turn into an Indian version "of the United States' subprime mortgage debacle, in which a seemingly noble idea" is undermined by "a reckless, grow-at-any-cost strategy."

Interesting read. I believe Kiva doesn't have any partners in India though right?

[greg3912]

Billionaire Chandler-Backed Microfinance Firm Delays India IPO on Turmoil
By George Smith Alexander - Nov 19, 2010 5:05 AM ET

Share Microfin Ltd., backed by New Zealand billionaire Christopher Chandler, plans to delay an initial public offering after rival microfinance companies in India sought emergency funds to cope with rising loan defaults.

The lender, based in Hyderabad, had planned to raise 10 billion rupees ($221 million) in early 2011, Philip Vassiliou, managing director of Chandler’s Legatum Ltd., said in an interview in Mumbai yesterday. The company has also postponed a merger with another lender, said M. Udaia Kumar, Share Microfin’s managing director.

Repayment rates have fallen to less than 20 percent in Andhra Pradesh state for most lenders after the government in their biggest market clamped down on lending practices in mid- October, Kumar said. The state capped rates for micro-lenders, who typically offer loans starting at $100, and barred coercive collection methods following suicides by borrowers.

“The challenge for MFIs is to manage the liquidity crisis” with the new regulations, Kumar said. “Most of the MFIs, including Share, have stopped disbursing loans in the state of Andhra Pradesh because of the ordinance.”

The southern state’s new norms included requiring lenders to shift collections to a monthly basis from weekly, and ordering repayments to be made only at government-designated places. That’s led to a slump in cash flows this month and strained some lenders’ capital levels.

Collections have been further disrupted by politicians telling borrowers to abstain from payments as loan-waivers may be granted, Share Microfin’s Kumar said. The lenders’ staff have also been harassed by local village leaders, who prevented them from entering the areas or filed police complaints, he said.

The lender won’t consider an IPO until clients begin repaying debts and state and central governments deal with the current upheaval, Kumar said. Banks and the lenders’ staff also need to regain confidence in the companies’ operations, he said.

Harassed Staff

Microfinance companies are seeking 10 billion rupees from banks for an emergency liquidity fund, Vijay Mahajan, head of the Microfinance Institutions Network lobbying group, said on Nov. 16 in New Delhi. Shares of SKS Microfinance Ltd., the nation’s largest provider of small loans, have plummeted 40 percent since Oct. 15, when Andhra Pradesh introduced the rules.

‘Adequate Liquidity’

SKS has adequate liquidity and doesn’t need emergency funding, Chairman Vikram Akula said in an interview today in Hyderabad, where the company is based. ICICI Ltd., Axis Bank Ltd. and Kotak Mahindra Bank Ltd. are among eight lenders that provided financing to SKS in the last two weeks, he said.

The company, backed by George Soros, yesterday said 66 people among its field staff who had been arrested or detained in the state have been released. Andhra Pradesh accounts for about 26 percent of SKS’s loan portfolio.

Dubai-based Legatum, which had invested about 1 billion rupees in Share Microfin in 2007, currently holds a 61.5 percent stake, Vassiliou and Kumar said yesterday. Aavishkaar Goodwell, a company that provides financing to micro-lenders, owns 3.5 percent, employees hold 2 percent, and the remaining is held by Kumar and his family, they said.

Legatum isn’t “overly concerned” by the current crisis, Vassiliou said. Microfinance companies are essential for providing financing to people in India where banking services aren’t available, he said.

Still, rising delinquencies may lead smaller lenders to default on their loans to banks, Kumar said.

“Even if a single MFI defaults, it might have a trickle- down effect on the entire sector,” he said. “Institutions with stronger net worth have a possibility of survival for a period of time.”

http://www.bloomberg.com/news/2010-11-19/billionaire-chandler-backed-microfinance-firm-delays-india-ipo-on-turmoil.html

[tomviolence]

http://www.bloomberg.com/news/2010-12-28/suicides-among-borrowers-in-india-show-how-men-made-a-mess-of-microcredit.html

An interesting article on what happens when the profit motive jumps into the burgeoning microfinance industry.

"More than 70 people committed suicide in the state from March 1 to Nov. 19 to escape payments or end the agonies their debt had triggered, according to the Society for Elimination of Rural Poverty, a government agency that compiled the data on the microfinance-related deaths from police and press reports."

...

"Microcredit has become “Walmartized” by unrestrained selling of cheap products to the poor, says Malcolm Harper, chairman of ratings company Micro-Credit Ratings International Ltd. in Gurgaon, India. "

The age old question of how to do good without doing evil walks amongst us again. Does the demand to lend lead to loans that should not be made ? After all we are providing free capital for those who do charge interest, and in some cases very high interest.

[smz]

another news posts which I found

'We've never been accused of abetting suicide'
Sandeep Bamzai (India Today) November 4, 2010
http://businesstoday.intoday.in/bt/story/10126/1/weve-never-been-accused-of-abetting-suicide.html

Download Andhra Pradesh Microfinance Ordinance 2010 PDF
October 19, 2010
http://indiamicrofinance.com/download-andhra-microfinance-ordinance-908172.html

[waywardcats]

A thoughtful article (one in a series for those who are interested in this topic) regarding the current crisis in India's microfinance industry.

Under water: The very future of microcredit in India is in danger, which is a shame for the country’s poor

HER sobbing can be heard throughout her village, Nagaram, in the Indian state of Andhra Pradesh (AP). When visitors from Hyderabad, the state capital, some 80km (50 miles) away, cross the threshold of her bare little house, Narsama Anthaiah flings herself prostrate and wailing onto the dirt floor to touch their feet. Her theatrical grief is heartfelt. Two months ago her husband, aged 40, drowned himself. The AP government blames unlikely villains: microfinance institutions (MFIs), which have been expanding fast in the state. Microcredit—small loans to the poor, ideally to start a tiny business—has until recently been seen as one of best hopes for the three-quarters of Indians who still live on less than $2 a day. But the political fallout from such deaths has put paid, at least for now, to the industry’s expansion. It could even destroy it altogether in AP, and conceivably beyond.

The blame the MFIs shoulder is unfair. Farmer suicides are lamentably common in India. Anthaiah took his own life as a payment loomed on a 15,000 rupee ($333) MFI loan. Heavy rain had waterlogged his cotton crop and left the family struggling to pay the interest rate of 36% a year. But the couple, who had borrowed to build this house, also owed 34,000 rupees to a local moneylender, who charged over 50%.

Even so, Anthaiah’s name features on a government list of 85 MFI “victims”, who had taken their own lives by November 16th. The government has reacted by introducing an “ordinance” forcing MFIs to change their practices—cutting interest rates, changing from weekly to monthly repayments, etc. Opposition politicians, scenting votes, have encouraged borrowers to default. Not surprisingly, recovery rates for some lenders have plunged from close to 100% to around 20%.

This is a huge problem for Indian microcredit. AP is not so much the jewel in its crown as the crown itself. The country as a whole has seen a spurt in microcredit, overtaking, in the number of borrowers, Bangladesh, the global movement’s fountainhead. AP accounts for at least half India’s total, with more than 25m borrowers, up from 8m in 2007. Indeed, the MFIs’ very success in AP is the source of their present troubles.

There have been abuses. Chasing growth, MFIs seem to have piled into the same villages, lending to the same people. Some “recovery” methods have involved intimidation. In Godhumagudu, not far from Nagaram, Laxmi Peta is mourning her 16-year-old daughter Lalitha. The family ran up 66,000 rupees in debts from five MFIs to pay for the wedding of their elder daughter. Unable to meet a payment, they went away to seek help from the new in-laws, leaving Lalitha alone. An MFI officer arrived, along with the village head and the four other members of her mother’s “joint liability group”—fellow villagers who had taken collective responsibility for the debt. After their harangues, Lalitha drank pesticide. Her mother treasures a tattered suicide note. It advises her not to take out any more loans, except for her young son’s education.

The MFIs, however, are less abusive, as well as far cheaper, than traditional moneylenders. Their troubles in AP stem from a mixture of institutional rivalry, politics and ideology.

Among the MFIs’ biggest critics is Budithi Rajsekhar, boss of the Society for Elimination of Rural Poverty, an arm of the state government formed in 2000 to run its own microcredit programme. Set up with World Bank money, this involves a network of “self-help groups”, each of 10-15 women, who pool savings and then have access to bank finance. According to Mr Rajsekhar, there are now about 1m groups, with 10m members, covering 8m-9m households, or 95% of the state’s rural poor. The MFIs “poach” their clients for their smaller, five-member, borrowing syndicates, and “dump” unneeded loans on them.

The antipathy is mutual. For the MFIs, the government’s groups offer too little credit, too late. The MFIs offer an alternative to the old-fashioned usurer. But their success in AP has made them a political target—large numbers of voters owe them money. The main opposition Telugu Desam Party lost power in 2004 partly because it was seen as in thrall to the IT industry and foreign investors. Championing poor MFI borrowers was a cost-free way of burnishing its credentials with the rural poor.

Ideologically, many in India worry that large MFIs have become for-profit firms. The biggest, SKS, was launched by Vikram Akula as a charity, with (according to his divorced and embittered wife) donations from the guests at their lavish wedding. In July it floated on the stock exchange. The issue was 13 times oversubscribed and valued the company at $1.5 billion. It has a star-studded share register and board of directors, and a great appeal for those who like to think you can do well by doing good.

Saints and sinners

Even charitable microcredit, however, is less fashionable than it was. Other countries’ microlenders, too, have had crises. In Pakistan’s Punjab province, for example, it became fashionable in 2008-09 for politicians to encourage borrowers to default on microloans. And this week the movement’s patron saint, Muhammad Yunus, a Bangladeshi economist and Nobel laureate, was cleared of allegations of diverting Norwegian aid money from one arm of his Grameen bank to another. The film making the accusations also aired arguments that microcredit may do more harm than good. In fact, research suggests that it does work—for some people some of the time, as you would expect. It is not a magic bullet, but nor is it intrinsically harmful. In Nagaram, where Mrs Anthaiah still has to pay off the moneylender with only her own labour to sell, her self-help group is arranging a loan to tide her over. India’s problem is not too much microcredit, but too little, too narrowly directed.

***

Moderator note:  Two recent related topics have here been merged to bring together all posts on this topic under the "Microfinancing" section.

-Kerry-

[Skimmis]

http://www.kivafriends.org/index.php/topic,2685.10.html

[waywardcats]

Sacrificing Microcredit for Megaprofits
Opinion Piece By MUHAMMAD YUNUS published in the New York Times January 14, 2011.

IN the 1970s, when I began working here on what would eventually be called “microcredit,” one of my goals was to eliminate the presence of loan sharks who grow rich by preying on the poor. In 1983, I founded Grameen Bank to provide small loans that people, especially poor women, could use to bring themselves out of poverty. At that time, I never imagined that one day microcredit would give rise to its own breed of loan sharks.

But it has. And as a result, many borrowers in India have been defaulting on their microloans, which could then result in lenders being driven out of business. India’s crisis points to a clear need to get microcredit back on track.

Troubles with microcredit began around 2005, when many lenders started looking for ways to make a profit on the loans by shifting from their status as nonprofit organizations to commercial enterprises. In 2007, Compartamos, a Mexican bank, became Latin America’s first microcredit bank to go public. And this past August, SKS Microfinance, the largest bank of its kind in India, raised $358 million in an initial public offering.

To ensure that the small loans would be profitable for their shareholders, such banks needed to raise interest rates and engage in aggressive marketing and loan collection. The kind of empathy that had once been shown toward borrowers when the lenders were nonprofits disappeared. The people whom microcredit was supposed to help were being harmed. In India, borrowers came to believe lenders were taking advantage of them, and stopped repaying their loans.

Commercialization has been a terrible wrong turn for microfinance, and it indicates a worrying “mission drift” in the motivation of those lending to the poor. Poverty should be eradicated, not seen as a money-making opportunity.

There are serious practical problems with treating microcredit as an ordinary profit-maximizing business. Instead of creating wholesale funds dedicated to lending money to microfinance institutions, as Bangladesh has done, these commercial organizations raise larger sums in volatile international financial markets, and then transmit financial risks to the poor.

Furthermore, it means commercial microcredit institutions are subject to demands for ever-increasing profits, which can only come in the form of higher interest rates charged to the poor, defeating the very purpose of the loans.

Some advocates of commercialization say it’s the only way to attract the money that’s needed to expand the availability of microcredit and to “liberate” the system from dependence on foundations and other charitable donors. But it is possible to harness investment in microcredit — and even make a profit — without working through either charities or global financial markets.

Grameen Bank, where I am managing director, has 2,500 branches in Bangladesh. It lends out more than $100 million a month, from loans of less than $10 for beggars in our “Struggling Members” program, to micro-enterprise loans of about $1,000. Most branches are financially self-reliant, dependent only on deposits from ordinary Bangladeshis. When borrowers join the bank, they open a savings account. All borrowers have savings accounts at the bank, many with balances larger than their loans. And every year, the bank’s profits are returned to the borrowers — 97 percent of them poor women — in the form of dividends.

More microcredit institutions should adopt this model. The community needs to reaffirm the original definition of microcredit, abandon commercialization and turn back to serving the poor.

Stricter government regulation could help. The maximum interest rate should not exceed the cost of the fund — meaning the cost that is incurred by the bank to procure the money to lend — plus 15 percent of the fund. That 15 percent goes to cover operational costs and contribute to profit. In the case of Grameen Bank, the cost of fund is 10 percent. So, the maximum interest rate could be 25 percent. However, we charge 20 percent to the borrowers. The ideal “spread” between the cost of the fund and the lending rate should be close to 10 percent.

To enforce such a cap, every country where microloans are made needs a microcredit regulatory authority. Bangladesh, which has the most microcredit borrowers per square mile in the world, has had such an authority for several years, and it is devoted to ensuring transparency in lending and prevented excessive interest rates and collection practices. In the future, it may be able to accredit microfinance banks. India, with its burgeoning microcredit sector, is most in need of a similar agency.

There are always people eager to take advantage of the vulnerable. But credit programs that seek to profit from the suffering of the poor should not be described as “microcredit,” and investors who own such programs should not be allowed to benefit from the trust and respect that microcredit banks have rightly earned.

Governments are responsible for preventing such abuse. In 1997, then First Lady Hillary Clinton and Prime Minister Sheikh Hasina of Bangladesh met with other world leaders to commit to providing 100 million poor people with microloans and other financial services by 2005. At the time, it looked like an utterly impossible task, but by 2006 we had achieved it. World leaders should come together again to provide the powerful and visionary leadership to help steer microcredit back on course.

Muhammad Yunus, the founder of Grameen Bank, received the Nobel Peace Prize in 2006.

[Skimmis]

http://www.kivafriends.org/index.php/topic,5569.0.html
http://www.kivafriends.org/index.php/topic,2685.0.html

[Peter S]

Depressing January 13th article in The Times of India under the headline:

Microfinance Crisis: MFIs with sizeable presence in Andhra Pradesh on the brink of closure

This is it. We have cash till the end of February or early March. If collections do not pick up by then, we will have to shut down." This doomsday scenario is prophesised by Shiv Narain, chief financial officer of Spandana Sphoorty Financial, India's second largest microfinance institution. . . .

. . . If that's the plight of India's second largest MFI, half of whose portfolio is locked in Andhra, how are smaller MFIs with an equal or larger exposure to the state doing? Even worse. They could tip over anytime. "Our money for repayment of bank loans will run out in January," says Kishore Kumar Puli, managing director, Trident Microfin, 70% of whose Rs 160 crore loan portfolio is in Andhra. . . .

. . . Star MicroFin Society is a small NGO-MFI, with a loan portfolio of Rs 20 crore in Kurnool and Ananthapur districts in Andhra. It has 35,000 borrowers, 100 staff members and 11 branches. "In our 15 years, we always had 100% repayment," says Hassain. "Now, our repayment is down to zero in urban areas and 2% in rural ones." . . .

-Peter

[Skimmis]

http://www.30df.org/search.do?searchType=localEntrepreneur

is still going on with new loans