After a promising start, the microfinance story became one of desperate need on one side and greed and politics on the other, reports Rohini Mohan
Photographs by Vijay Pandey
IT WAS a windfall five years ago that taught Panchali Satyavva the power of a lie. It happened one Monday afternoon in Someshwar village of Nizamabad district in Andhra Pradesh. It was raining in sheets and she had just placed a bucket under the steady trickle of water from the roof of her hut. Two men were at her door, holding umbrellas and offering her an unsolicited Rs. 5,000. They would deliver it at her hut in three days, they did not want her to pledge any land or gold or cows — none of which she had anyway — and they would come back with more if she repaid this loan in 50 weekly instalments. All she had to do was promise that she would spend the money wisely, like investing it in a small-scale business.
“I looked at my roof leak,” says Satyavva, 30. “And said I was going to buy a cycle to sell vegetables in the city.” She had no land for growing vegetables, she hated the city, and she didn’t know how to ride a cycle. Three days later, she still got her Rs.5,000. It wasn’t raining anymore, so she spent Rs. 2,000 on six plastic chairs, Rs. 1,000 on groceries and clothes for her five children, and the rest towards a Rs. 15,000 loan from her self-help group (SHG). A week later, another duo offered her Rs. 10,000. She lied again — she would buy some goats — and used the money to treat her husband’s tuberculosis. “It was so easy,” she says. “They seemed as desperate to give as I was desperate to take. They didn’t seem to care what I would do with the money.”
In five years, Satyavva has accumulated a debt of nearly Rs. 2 lakh, none of which she spent on ‘income-generating activities’. Since her wedding 10 years ago, she has been borrowing from the local moneylender at 20-50 percent interest. When the state government routed subsidised bank loans through women’s SHGs, Satyavva joined one, and owes her group Rs. 42,000. But it was around the birth of her second child in 1996 that Satyavva says “money really began to rain on us”.
It was the beginning of the microfinance revolution in the southern state: small, NGO-like organisations giving small, NGO-spirited loans to the poor at their doorstep, in less than a week after they applied for it. Their pocket-sized loans were sanctioned faster than those of the SHGs or banks, and interests far lower than that of moneylenders. “We had always needed money, and the supply suddenly seemed unlimited,” says Satyavva’s husband Suresh. “We stopped saying no.”
In late October, Satyavva attempted suicide. That was the day three groups of men had stormed her house: collection agents from six microfinance institutions (MFI) who abused and refused to leave unless she paid Rs, 84,000 by sunset; a couple from the mandal office of Satyavva’s SHG with news that her bank was not going to write off the outstanding Rs. 42,000; and a burly duo from the moneylender making deafening demands for Rs. 80,000. They threatened her in different ways. Satyavva ran inside her hut, drew the curtain, and drank rat poison. “I was scared,” she recalls. “Because all the money was gone. And there was no one else to borrow from.”
Satyavva lives to tell her story thanks to a concerned neighbour who rushed her to a local hospital. But the terror she felt, of mountainous debt that crept stealthily into her life, resonates across the 23 districts of AP, home to 75 percent of MFIs in India. According to the state government’s Society for Elimination of Rural Poverty (SERP), 88 people have committed suicide reportedly due to coercion from MFI collection agents. Just before the suicides came to light, SKS Microfinance, India’s biggest MFI, had raised Rs. 1,300 crore in an initial public offering (IPO), drawing attention to the fortunes being made in the industry.
In response, the state government came up with the AP Microfinance Institutions (Regulation of Money Lending) Ordinance, 2010, a legislation to impose interest caps, prevent coercion and monitor MFIs. Recoveries came to a standstill. Banks pulled back on lending to MFIs, share prices of SKS crashed, and an all-round introspective debate began. For the first time, the meteoric growth of the Rs. 25,000 crore microfinance industry has been stalled. Worse, its much lauded win-win model of for-profit social welfare is being questioned.
According to AP statistics, 88 people have committed suicide due to coercion from loan recovery agents
The questions are loudest today in AP, the battleground of an odd duel of good intentions. Both the state government and MFIs are falling over themselves to alleviate poverty by giving micro loans to poor women like Satyavva. But poor households have spent lakhs and many of their lives have only gotten much worse. The great idea of credit access has today gone very wrong, the mission forgotten in the excitement of the battle. In the past five years, the story of good men giving small loans has become the story of greed and politics.
A DECADE AGO, no financial institution would lend to a resident of the chronically poor Someshwar village. Today, the village — home to 600 adults, most of them stone quarry workers earning Rs. 55 a day — owes a total of Rs. 2 crore in loans to MFIs and banks. In a sense, the microfinance crisis goes beyond MFIs. It is about a deeper crisis, about the creation of a life on credit.
“It all began with the right ideas,” says CS Reddy, of AP Mahila Abhivruddhi Society (APMAS), an NGO that provides support to SHGs. Two decades ago — around the same time that Nobel laureate Mohammad Yunus was setting up the Grameen Bank model of microfinance in Bangladesh — post-liberalisation India too was mulling over a staggering figure. Sixty percent of the country did not have access to bank savings or credit. Yunus was turning the rules of banking upside down, giving millions of small loans without collateral to people normal banks thought least creditworthy: poor rural women. India’s pilot project came in 1992, when NABARD created the SHG-Bank Linkage Programme, involving 255 SHGs across the country.
In the SHG programme, women form groups of 11-20 members. Every member must first save at least Rs. 30 a month, which collectively acts as the collateral against which the group can avail bank loans at 12-15 percent interest. The group then relends to its members at 16-25 percent interest, factoring in possibilities of default.
“As a group, low-income women not only get access to bank credit, but also become more creditworthy with every full repayment, eligible for bigger loans,” says Reddy. Since the creditworthiness of the group rides on repayment, each woman in the group exerts pressure on the other to invest the loan in productive activities.
Of the 11 million SHGs, AP has the largest number (9,75,362 SHGs), with close to 90 percent of the state’s rural women as members. “AP has been the most active state in rural microcredit,” says Reddy. “The number of SHGs has increased 10- fold in the past decade.” However, in mid-2010, Hyderabad’s Centre for Economic and Social Studies published a study that shows SHG microcredit is popular, but members get three-fourths of their credit from other sources. So who was meeting this demand?
IN MUDIMYAL village of Ranga Reddy district, a little girl sleeps on the floor, tired of waiting for her mother to return from the canteen she runs in a nearby engineering college. When Bibi Begum gets home, it’s 5 pm. She has brought a couple of samosas, which she gives her daughter. “This has been our daily ritual,” says Begum. “These are a bribe for getting my daughter to do homework.” Smiling, she adds, “I make great samosas.”
When her husband moved to Bengaluru to work in a hotel four years ago, Begum found that the money he sent home was never sufficient. “I live in a joint family,” she says, pointing to her father, three sisters-in-law, their six children and mother-in-law. “I always loved to cook, so I thought I’d start catering samosas and tea to the college hostel.” For this, she needed money. “For just Rs. 5,000, my SHG’s bank asked me for this paper and that document,” says Begum. “I gave them everything. They took one month, doing hundred verifications.”
In the meantime, Begum heard about ‘Somvaar ki chitiya’ (Monday’s chit fund), as the villagers referred to Spandana Spoorthy Innovative Financial Services Ltd, a major MFI. She asked them for Rs. 5,000 and got it in a week. Once that was repaid, she took another Rs. 10,000 from Spandana, and Rs. 10,000 last year from SKS. She now runs the canteen full-time and has even built a study room for her daughter.
MFIs typically borrow from banks at 11- 15 percent interest but charge 24-30 percent, including the operation cost of travelling to remote villages, and factoring in possible defaults. Unlike in an SHG, where the loan is given to the group, the MFI gives loans to an individual who is backed by a group guarantee. The peer dynamics of this Joint Liability Group ensures timely repayment. Begum’s passbooks are proof that she pays her instalments without fail.
But, it comes at a price. Najm a, who is a member in Begum’s SHG and is also her aunt, divulges that Begum has been repaying MFI loans by bunking her SHG payments. “Begum has not yet returned the Rs. 20,000 that she owes the group. I scream at her every day, because our group has been blacklisted by the bank,” she says.
But Begum has three reasons for choosing the MFI over the SHG. One, the interest rate on the SHG loan is 9 percent, and a repayment delay will cost less if she put off paying the MFI loan whose interest is 24 percent. Two, MFI agents arrive at Begum’s house or canteen on a given day every week, to personally collect the instalment, while for the SHG instalment, she must spend Rs. 30 by bus to go to a bank 50 km away. Three, she wants to stay creditworthy for the MFIs. “They won’t give me loans again if I default. I need this quick-credit option,” says Begum.
Most women across India seem to share Begum’s rationale. Until recently, most MFIs boasted close to 98 percent repayment rates. In 2007, yearly disbursements of MFIs overtook that of SHGs. Between 2006 and 2009, MFIs grew by 83 percent annually while SHGs grew only 41 percent.
AP is home to the four largest MFIs in India, and its microfinance penetration is the highest in the country. Along with massive SHG lending, this makes AP the motherland of microcredit. It is no wonder then that the state is the arena of bitter state- MFI competition that is the core of the current microfinance crisis. The government-run SERP’s regional director of microfinance J Murali is livid. “We worked for 13 years to create credit discipline, teach the poor to save, repay in time and invest in small businesses,” he says. “MFIs have destroyed this system by lending indiscriminately.”
Central to the business of microcredit is relationships women share with each other. “Ever since I moved to this village after my wedding, I have had to make new friends,” says Begum. “Sometimes I think this community of women is the only thing I can count on.”
The cut-throat competition and wildfire spread of microfinance drew more women into groups, but there has been an unforeseen fallout. In search of creditworthiness, both MFIs and SHGs have, in a way, monetised friendships and blood relations.Women who see each other every day at the water pump, whose children go to the same schools, and husbands work on the same farms, now feel their relations fraught with tension.
“If I need a fistful of rice more for my lunch, I used to be able to walk into my neighbour’s house and request some,” says Begum. “Now I hide from her because I owe her Rs. 500.” Najma, who has tired of demanding money from her niece says, “I sometimes wonder when I myself became like a collection agent.” The social fabric that MFIs and SHGs count on is today under great strain.
Chandramma sits pensively in an autorickshaw, rocking her sick one-year-old granddaughter. They’re going home to Malkapuram village after consulting a doctor at the government hospital in Chevella town in Ranga Reddy district. “Anika was born in that same hospital,” says Chandramma. “Her mother died in childbirth.” For the delivery, the agricultural labourer had taken a loan of Rs. 8,000 from Asmitha Microfin. She has been repaying this in instalments of Rs. 175 per week. “Nine more weeks are left,” she says, counting on her fingers. “That is around Rs. 1,600, I think.”
Chandramma has another loan of Rs. 12,000 taken at 50 percent interest from a moneylender, which she used to repay the Rs. 16,000 she had borrowed from Spandana. “This was for my second daughter’s delivery that happened two days after Anika’s birth,” she says. Neither Spandana nor Asmitha had checked if she had invested in cows, as she had claimed.
“It is already a travel-heavy, labour-intensive sector. Most MFIs don’t want to incur the cost of helping rural women to spend the money too,” says Vijay Mahajan, who started Basix, the first MFI in India. Sitting in his Hyderabad office, Mahajan, now the president of the MFI Network of India, says that as long as instalments were being met, “it began to matter less and less what the money was used for.” Basix too had initially focussed only on dispensing loans. In 2002, however, Mahajan found an impact study that said only 52 percent of three-year plus microcredit customers had reported an increase in income (23 percent reported no change and 25 percent reported losses). Loan repayments however remained at 96 percent.
Women are the backbone of microcredit because they are less mobile than men, and therefore less likely to have anywhere to disappear to after having taken the loan. Several studies have also shown is that given a choice between school fees and a motorbike, they are more likely to choose the former, which would lead to more long-term benefits for the household. Mahajan says that microfinanciers did not account for the status anxiety that drives aspirational consumption among women.
‘Overnight, firms became profit-hungry, demolishing the system with their greed,’ says analyst Murali
“I realised two things,” says Mahajan. “One, my loans were being used for consumption. Two, women were repaying my loans by borrowing from elsewhere. Instead of reducing indebtedness, I was deepening it.” So, Basix revised its strategy. It complemented microcredit with investment advice and a range of agricultural and business development services. This, of course, takes time, and increases costs. “This way, you won’t make big profits, but will make enough to help people and grow slowly and steadily,” says Mahajan.
The dominant philosophy in the sector however, was the exact opposite. The astounding international success of SKS had led to a replication of their model across the sector — almost all lending was now to women, the loan documentation cycle was just four hours, repayments were all weekly, and interest hovered around 24-36 percent. percent. Most visibly, almost all MFIs sought funds from capital markets. Private equity funds invested $250 million just last year, and Indian and international banks gave $4 billion this year. As private funds poured in, attracted by microcredit’s low default rate, MFIs saw unbridled growth.
WITHOUT CAPITAL markets, microfinance would have withered away,” says Sankar Datta, who heads the Hyderabad-based Livelihood School, the research wing of Basix. “The poor would have lost another source of credit and gone back to moneylenders.” The only way to attract investors was to show them that the poor are creditworthy and can return a profit. The rural microcredit demand was Rs. 50,000 crore and MFIs were at the halfway mark. More loans needed to be given, and more people reached. In their hunger for growth, an overlending spree began, says Datta. “The MFIs went from ‘let’s help as much as we can’ to Grow! Grow! Grow! More loans were given mindlessly,” he says.
If it is private equity that inflames the frenzied need for growth, should it at all be allowed in an industry that does business with the poor? “Commercial involvement was inevitable in India,” says Justin Oliver, executive director of Centre for Microfinance, the research wing of the Institute of Financial Management and Research, Chennai. Unlike in Bangladesh, Indian law does not permit microfinanciers to collect savings from people. “This rules out a broad area of funding for MFIs,” says Oliver. Initial funders NABARD and SIDBI too seemed unable to keep up. Soon, commercial banks and private equity came in. “The capital market doesn’t immediately mean greed,” says Oliver. “But yes, it’s not a factory. There has to be more to the microfinance business than just the bottom line.
The allegation of greed is new to MFIs, celebrated for a decade as the financial salvation of the poor. In fact, until 2005, there was only one for-profit MFI in India and about 10 not-for-profit MFIs. SKS founder Vikram Akula used to be a poster boy for the brilliance of financial inclusion, but his oversubscribed IPO, and open admission that MFIs can grow only if they are commercial, became emblematic of the sector drifting away from its founding mission. They had, it seemed, forgotten about poverty alleviation. “Overnight, MFIs became profit hungry, demolishing the system with their greed,” says SERP’s Murali.
Political circles in AP are reacting selfrighteously. Ever since the recent suicides were reported in the media, former chief minister and TDP supremo Chandrababu Naidu, once a staunch supporter of the SHG model, has been holding rallies across AP asking people not to repay the MFI loans. The idea there is: if you can’t fix it, kill it. “The loans are exorbitant, and must be written off!” Naidu, now the opposition leader, thunders in a public meeting on the outskirts of Hyderabad. The crowd, comprising mostly of women holding silver and yellow SHG banners, chants with him. “Write it off! Write it off!”
AFTER YADAMMA, 28, attended one such rally, she went home to tell her family the good news. “We should refuse to repay the MFI loans,” she told her mother. “What if the government waives it all?” A resident of Thadipathi village of Mehboobnagar district, she took an SHG loan to buy stock for their kirana shop, but the bulk of her borrowing is from Spandana, Asmitha and SKS. Of the 30 SHGs in her village, 19 have decided to withhold repayments on MFI loans. “No MFI agent has been seen here for two months anyway,” says Yadamma.
Microcredit is a deeply political weapon in AP. Some 11 million women, and nine in ten rural households are touched by SHGs. For politicians, these already mobilised women are akin to a votebank. “Women love me because I’m associated with the rise of SHGs in AP,” says Naidu.
In 2004, Congress’ late YS Rajasekhara Reddy had robbed Naidu of that claim by his historic paavla vaddi. Banks would now lend to SHGs at 3 percent instead of 12 percent. Women and other similarly mollified groups swept YSR to power. Two times. Naidu is trying to reclaim his votebank. But in trying to rattle the state government, he has done greater damage. He has messed with credit discipline.
The visible blow to the microfinance industry today is the AP legislation to monitor MFIs. Rural Development Principal Secretary Reddy Subramanyam, who co-wrote the ordinance, says it’s shocking that MFIs have been unregulated so far. “We just want them to be ethical,” he says.
In truth, however, the legislation is meant not only to rein in MFIs, but also to protect state-supported SHGs. Most MFIs seem to welcome the regulation, but call the ordinance short-sighted. Datta believes that interest caps, monthly instead of weekly repayments, registration of borrowers, and banning door-to-door collections, will tie the hands of MFIs.
‘We’ve lost legitimacy by chasing profits. It remains an intelligent sector but it has lost its soul,’ says Mahajan
The crisis in AP has led to a countrywide call for better regulation of microfinanciers. “It is a multi-crore industry and we need a regulator,” says a senior official from NABARD, which will perhaps emerge soon as the apex microfinance body. However, Mahajan believes that the change must come from within. “We have lost our legitimacy by chasing profits, and that’s why we became open to political attack,” he says. “It remains an intelligent, energetic sector, but its soul is lost.”
The issue here is not purely profit motive, but the fact that media, politicians, banks and the poor were all so moist-eyed about the rosy meeting of corporate and welfare models that regulation was given the boot. If in doubt about the way ahead for the microfinance sector, one needs to only go to a poor woman’s house. It is in the deep indebtedness of AP’s credit-rich poor that the debate is easy to settle.