Tanda Srinivas was lounging in the
yard of his two-room house in the southern Indian village of
Mondrai shortly after noon on Oct. 28 when his wife, Shobha,
burst out of the door covered in flames and screaming for help.
The 30-year-old mother of two boys had poured 2 liters of
kerosene on herself and lit a match. The couple had argued
bitterly the day before over how they would repay multiple
loans, including those from microlenders who had lent small sums
to dozens of villagers, says Venkateshwarlu Masram, a doctor who
called for the ambulance.
Shobha, head of several groups of women borrowers, was
being pressured to pay interest on her 12,000 rupee ($265) loan.
Lenders also were demanding that she cover for the other women,
even though the state had restricted microfinance activities two
weeks earlier, Bloomberg Markets magazine reports in its
February issue.
When Srinivas, 35, tried to snuff out the flames with a
blanket, his polyester clothes caught fire. Within three days,
both parents were dead, leaving their sons orphans.
Now, on this November morning, the boys’ ailing 70-year-old
grandfather and blind grandmother say they are caring for
Aravind, 10, and Upender, 13, in the farming village where many
men earn a living gathering palm extract to make alcoholic
beverages.
None of the boys’ relatives can support them full time,
says their 60-year-old grandmother, Saiamma, breaking into
tears.
India’s Microlending Hub
The horrific scene in Mondrai, 80 kilometers (50 miles)
from the city of Warangal, has played out in dozens of ways
across Andhra Pradesh, India’s fifth-largest state by area and
the site of about a third of the country’s $5.3 billion in
microfinance loans as of Sept. 30.
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.
Andhra Pradesh, where three-quarters of the 76 million
people live in rural areas, suffered a total of 14,364 suicide
cases in the first nine months of 2010, according to state
police.
A growing number of microfinance-related deaths spurred the
state to clamp down on collection practices in mid-October, says
Reddy Subrahmanyam, principal secretary for rural development.
“Every life is important,” he says.
Perverse Turn
On Nov. 8, police arrested two managers of lender Share
Microfin Ltd. on allegations of abetting another suicide, this
one of a 22-year-old mother. Share Microfin didn’t respond to
requests for comment on this story.
As India struggles to provide decent education, health care
and jobs to millions still locked in poverty, microlending --
the loaning of small sums to the world’s neediest people to help
them earn a living -- has taken a perverse turn.
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.
“Selling debt is like selling drugs,” says Harper, 75, the
author of more than 20 books on microfinance and other topics.
“Selling debt to illiterate women in Andhra Pradesh, you’ve got
to be a lot more responsible.”
Opposite Effect
K. Venkat Narayana, an economics professor at Kakatiya
University in Warangal, has studied how microfinance lenders
persuaded groups of women to borrow.
“Microfinance was supposed to empower women,” he says.
“Microfinance guys reversed the social and economic progress,
and these women ended up becoming slaves.”
India’s booming microlending industry is part of a global
phenomenon that began as a charitable movement but now attracts
private capital seeking growth and high returns.
Banco Compartamos SA, a former nonprofit that’s now the
largest lender to Mexico’s working poor, raised about $467
million in its 2007 initial public offering. The August IPO of
SKS Microfinance Ltd., India’s biggest microlender, drew further
attention to the industry.
SKS began operating in 1998 as a nongovernmental
organization led by Vikram Akula, 42, an Indian-American with a
Ph.D. in political science from the University of Chicago.
The company raised 16.3 billion rupees by selling 16.8
million shares at 985 rupees each. SKS shares peaked at 1,404.85
rupees on Sept. 15. As of Dec. 28, they’d fallen to 652.85
rupees.
Andhra Pradesh Crisis
On Oct. 15, the government of Andhra Pradesh imposed
restrictions that bar microlenders’ collection agents from
visiting borrowers and required companies to get local
authorities’ approval for new loans. The rules have crippled
lending and repayments. Loan collection levels in the state have
dropped to less than 20 percent from 98 percent previously,
according to an industry group.
The upheaval in Andhra Pradesh is a long way from the
vision of Muhammad Yunus.
The former economics professor won the Nobel Peace Prize in
2006 for his pioneering work in Bangladesh providing small sums
to entrepreneurs too poor to get bank loans.
Yunus, 70, discovered more than three decades ago that when
you lend money to women in poverty, they can begin to earn a
living, and most of them will pay you back.
Yunus started the Grameen Bank Project in 1976 to extend
banking services to the poor. Since then, it has lent $9.87
billion and recovered $8.76 billion; 97 percent of its 8.33
million borrowers are female.
‘Wrong Direction’
Yunus says he’s not against making a profit. But he
denounces firms that seek windfalls and pervert the original
intent of microfinance: helping the poor.
The rule of thumb for a loan should be the cost of funds
plus 10 percent, he says.
“Commercialization is the wrong direction,” Yunus says,
speaking in a telephone interview from Bangladesh’s capital of
Dhaka. “An initial public offering is the triggering point for
making a lot of money personally as well as for the company and
shareholders.”
David Gibbons, chairman of Cashpor Micro Credit, a
nonprofit microlender to the poorest women in India’s Uttar
Pradesh and Bihar states, says public, for-profit lenders face a
conflict.
“They have to decide between the interests of their
customers and interests of their investors,” he says.
‘Can’t Be Done’
Gibbons, 70, says he learned that lesson when he tried to
raise 4 million pounds ($6.2 million) from two wealthy London-
based nonresident Indian investors in November 2006.
Talks failed because of differences over expectations for
returns on equity and other contract terms, he says.
“That’s what made me think this just can’t be done,” he
says.
Indian microlenders differ from Yunus’s Grameen Bank in key
ways. To protect depositors’ money after bankruptcies among
nonbanking financial companies in the early 1990s, India’s
Reserve Bank in 1997 made it more difficult for them to meet the
requirements needed to take deposits from the public. Only 36
microlenders are registered as nonbank financial companies,
according to information supplied by the Reserve Bank.
‘I Feel So Sad’
Indian microlenders themselves borrow from banks at 13
percent or more on average and extend credit to the poor. They
charge interest rates that can rise to 36 percent, says Alok Prasad, chief executive officer of the Microfinance Institutions
Network, which represents 44 microlenders. He says all 44 firms
are registered with the Reserve Bank.
SKS Microfinance gets funds at about 12 percent interest
and lends at 24.52 percent in Andhra Pradesh, spokesman Atul Takle says.
In Bangladesh, Grameen Bank got a banking license in 1983,
which allowed it to take deposits. It charges 5 percent for
education loans and 8 percent for housing loans. Beggars can
borrow for free, and interest on major loans is capped at 20
percent, Yunus says.
“Microfinance has been abused and distorted,” he says. “I
feel so sad because that’s not the microcredit I have created.”
Indian microfinance has roots in decades-old informal
community financing.
Nongovernmental organizations pioneered cooperative
lending, known today as self-help groups, with seed money from
the National Bank for Agriculture and Rural Development.
Encouraged by these projects, the state-backed bank worked to
tie borrowing groups to local bank branches in 1992.
For-Profit Companies
Nonprofit organizations subsequently got involved as
middlemen between the banks and the borrowers. By 2005,
nonprofits such as SKS and Share Microfin had turned themselves
into profit-making enterprises.
Akula’s SKS attracted investors such as Khosla Ventures,
Sun Microsystems Inc. co-founder Vinod Khosla’s venture capital
firm.
Capital flowed into the new industry from commercial banks,
venture firms and private equity.
Sequoia Capital, in Menlo Park, California, and Bangalore-
based Infosys Technologies Ltd. Chairman N.R. Narayana Murthy
were among the backers. George Soros’s Quantum Fund has a 0.37
percent stake in SKS.
Private-equity investors alone have put $515 million into
Indian microfinance companies since 2006, research service
Venture Intelligence says.
‘Explosive Growth’
More than half of the 66 Indian microlenders tracked by
Micro-Credit Ratings are for-profit firms. Some 260 microlenders
had 26.7 million borrowers and 183.44 billion rupees of loans
outstanding as of March, according to the Microfinance India
State of the Sector Report 2010.
“Over the last two years, we’ve been seeing explosive
growth,” says N. Srinivasan, who wrote the report. “Microfinance
institutions found that it’s easy to make money. Not that making
money is bad, but when you go overboard and say you require
money for growth, you get into problems.”
Polelpaka Pula, a mother of two, says she saw microlenders
rushing into her village of Pegadapalli to compete for business
-- with tragic results.
Her husband, Prakash, a painter who made 250 rupees on a
good day, first borrowed from a group of villagers to build a
house. Each participant of the so-called chit fund contributed
1,000 rupees a month and took a turn collecting the entire sum.
Microfinance officers from L&T Finance Ltd., Spandana
Sphoorty Financial Ltd., Share Microfin and SKS began offering
loans in the village starting in 2004, she says.
The couple, already contributing to their village fund,
took five more loans totaling 64,000 rupees. That saddled them
with payments of 7,300 rupees a month, more than Prakash’s 5,000
rupee maximum monthly income.
Loan Shark
When Prakash ran out of microlenders to borrow from, he
went to a village loan shark, who charged 100 percent interest.
With no way out and debt from multiple lenders ballooning,
Prakash hanged himself in November 2009, his wife says.
The small house he’d dreamed of was never completed. Only
the foundation stands next to the home of his parents, a tiny
structure with a roof of palm leaves.
Spandana says that neither of the couple’s names is in its
database. The company says the media wrongly attribute
harassment cases to microfinance, especially when Spandana is
mentioned.
“The trigger factors for suicide are manifold, such as
stressful situations at home,” the company said in an e-mail
response to questions about the death.
Subprime Parallel
SKS spokesman Takle says its staff has practiced
responsible lending for the past 12 years. Its employees are not
paid based on the loan size or repayment percentage.
“This ensures against giving out larger loans than what a
borrower can repay,” Takle says. A spokesman for L&T Finance
declined to comment.
Overlending in Andhra Pradesh calls to mind the U.S.
subprime crisis, says Lakshmi Shyam-Sunder, director of
corporate risk at International Finance Corp. in Washington,
which invests in microlenders.
“Subprime lending was initially seen as extending
homeownership to poorer people, doing good,” Shyam-Sunder says.
As the industry expanded, making a profit became more
important to some lenders, she says. “Tension arises when you
work on activities with both social goals as well as commercial
interests,” she says, adding that it’s important to strike the
right balance.
Companies chasing profits amid poor corporate governance
are undermining the intent of microfinance, Cashpor’s Gibbons
says.
‘Lending Gone Wild’
During the past five years, the number of microloans in
India has soared an average of 88 percent a year and borrower
accounts have climbed 62 percent annually, giving India the
world’s largest microfinance industry, Micro-Credit Ratings
says.
“This is unrestrained consumer lending gone wild,” Gibbons
says. “It’s not about poverty reduction anymore.”
Sumir Chadha, managing director at Sequoia Capital India
Advisors Pvt., says that without a profit motive it’s hard to
find anyone who will lend to the poor.
“Capitalism doesn’t have to be a bad thing,” says Chadha,
whose firm has a 14 percent stake in SKS. “If you can’t profit
off the poor, it means that no companies will service the poor
-- and then they will be worse off than earlier.”
Chand Bee’s Tale
For Chand Bee, a 50-year-old who led three borrowing groups
in Andhra Pradesh, too many loans almost became her undoing.
She says she ran away from home after collectors began
harassing her. She took out multiple loans beginning in 2005,
and she names Spandana as one of the lenders.
Some of the money paid for the funeral of her eldest son.
When she fell behind on payments, she says loan officers
threatened to humiliate her in front of neighbors and pressed
her to sell her small grandchildren into prostitution.
She left her slum in Warangal, where she lived with her
deaf husband, some of her eight grown children and more than a
dozen grandchildren.
After living as a beggar for a year, Chand Bee returned
home in early November when family members told her that the
state ordinance that went into effect on Oct. 15 had suspended
some collections. A Spandana spokeswoman says none of the
company’s four customers in the district with the name Chand Bee
has had trouble repaying.
Almost every household in the slum of 250 people -- where
barefoot children play in lanes between rows of dilapidated
shacks -- has taken several loans. So many microlenders ply
their trade that residents refer to them by the days they
collect: Monday company, Tuesday company and so on.
Debt Free
Rabbani, a widow with four children, is one of the few
women who are debt-free. She started a spice shop with two
loans, which she repaid with her small profit. After seeing her
neighbors’ pains, she vowed never to seek another microloan.
SKS says 17 of its clients have committed suicide, none
because of loans being in arrears or harassment.
“Suicide is a complex issue,” Akula says.
Sitting in the second-floor conference room of SKS’s seven-
story headquarters in Hyderabad, where posters of smiling women
running handicraft and tailor shops decorate the doors of
elevators, Akula says there’s nothing wrong with seeking
profits.
“What does it matter to a poor woman how much an investor
makes?” says Akula, dressed in his trademark knee-length kurta
shirt from Fabindia, a seller of ethnic clothes made by rural
craftsmen. “What matters to her is that she gets a loan on time
at a reasonable rate that allows her to earn higher income.”
Commercial Venture
Turning SKS into a commercial venture allowed the firm to
tap an unlimited pool of funds from private investors. That, in
turn, let the company grow and reduce rates, Akula says.
“Interest rates have come down over time,” he says.
“Because it works, she comes back year after year,” he says of
his customers.
His autobiography, “A Fistful of Rice” (Harvard Business
Review Press, 2010), provides a glimpse of the expansion drive.
Akula, a former McKinsey & Co. consultant, studied
McDonald’s Corp. and Burger King Holdings Inc. in 2005 to learn
about their speedy training of unskilled workers. He devised a
two-month course to train as many as 1,000 new loan officers a
month.
“I now had one goal for SKS; to grow, grow, grow as fast as
we could,” he writes. “We could practice microfinance in a way
that would serve more poor people than anyone had ever thought
possible.”
Akula says the commercial model of microfinance isn’t the
only way.
Returning to ‘Roots’
“It’s an important complement to other forms of finance,”
he says. New microfinance companies don’t spend time to build
trust, Akula says. “As an industry, we need to go back to our
roots,” he says.
The Reserve Bank is scheduled to report on the industry in
January. The finance ministry is planning new rules.
Sequoia Capital’s Chadha says he’s concerned about
“regulatory uncertainty” created by the state ordinance and
prefers federal regulation. Nationwide rules would prevent
individual states from damaging credit discipline by waiving
loans, Microfinance Institutions’ Prasad says.
“It is no different than needing good regulation for stock
investing or starting a manufacturing facility,” SKS investor
Khosla says.
‘People, Not Profit’
From Yunus’s perspective, it’s essential that the industry
move away from seeking maximum profits and get back to focusing
on the poor.
“If not, you are not helping poor people’s lives,” he says.
“You are not patient. You are not restrained. You don’t have
empathy for the people. You are just using them to make money.
That’s what blinds you when you are in the profit-making world.
We need to see the people, not profit.”
Any such changes would be too late for Atthili Padma and
Shivalingam, a young couple in Andhra Pradesh’s cotton-farming
village of Chennampalli.
Padma, a 22-year-old mother of two, walked out of her house
on Oct. 7 with her 18-month-old son and 4-year-old daughter,
according to Maruthi Prasad, a superintendent at the police
station in Shankarampet.
Padma’s Death
Instead of heading to her parents’ house as she often did,
she walked 2 kilometers in the opposite direction. She came to
an old Hindu temple where villagers worship Lord Shiva, the god of
destruction. Padma continued until she stood in front of a well
once used to irrigate crops, her father-in-law, Pochaiah, says.
There, with no one to dissuade her, she jumped into the well
with her children.
The day before she died, Padma had visited her parents
after arguing with her husband over loans they couldn’t repay,
according to Mangamma, the couple’s neighbor.
Their marriage five years ago was arranged by their parents
and the couple had become close and hadn’t fought before that
day, Mangamma says. The loans totaled 20,000 rupees, Pochaiah
says.
Padma’s death is recorded as a microfinance-related suicide
in the list by the Society for Elimination of Rural Poverty.
‘Sad Day for Microfinance’
Police arrested Padma’s husband, Shivalingam, on Oct. 13
for allegedly abetting Padma’s suicide. They also alleged that
he’d harassed her to provide money to marry him, which is
illegal in India, according to Narayana, a constable at the
Shankarampet police station.
Police made two further arrests on Nov. 8: Share Microfin
managers Sriram Raghavender, 27, and Polapalli Kumaraswami, 22,
also for allegedly abetting the suicide, according to
superintendent Prasad. The two managers and Shivalingam have
been released on bail and are awaiting a court hearing, Prasad
says.
Advocates and investors such as Khosla say microfinance --
when it works correctly -- is the best way to give the rural
poor a shot at better lives.
The tragedies in India present the worst possible outcome,
says Cashpor’s Gibbons, whose Nov. 15 speech opened a morning
session of the annual Microfinance India Summit in New Delhi.
“This is a sad day for microfinance,” said Gibbons, who has
promoted the movement for the past two decades.
“Often people asked me, ‘What are you doing here?’” he told
the audience. “I’ve been always proud to say, ‘I’m doing
microfinance.’ Now, when people ask, I feel embarrassed. I feel
like hiding somewhere.”
To contact the reporters on this story:
Yoolim Lee in Singapore at
yoolim@bloomberg.net;
Ruth David in Mumbai at
rdavid9@bloomberg.net
To contact the editors responsible for this story:
Michael Serrill at
mserrill@bloomberg.net;
Philip Lagerkranser at
lagerkranser@bloomberg.net
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