NPR: Microfinance sours in India

[Lancer]

A friend posted this on facebook, and I figured I'd repost it here.

One of the most popular programs for helping the world's poor has gone sour in India.

Microcredit, the practice of making small loans to very poor people, grew into a multibillion-dollar business. But microfinance companies have been accused of predatory lending and collection practices so harsh that they drove some borrowers to suicide. One state government in India has enacted legislation that will, in effect, put the microlenders out of business.

The idea behind microcredit is to give a small loan to a very poor person to buy some asset that will help her work her way out of poverty.

A typical client is a poor woman who lives in a slum or a rural village. She might earn money as a farm laborer or in small trade, such as selling vegetables by the side of the road.

As little as $200 — the theory goes — could allow a woman like that to buy more goods to sell, or a couple of goats to milk, or a sewing machine to make clothing. A working asset could increase her ability to earn a living and make enough extra to repay the loan with interest.

The "up-by-your-bootstraps" capitalism of this idea was so appealing to thinkers in the developed world that one of the pioneers of microfinance, Muhammad Yunus of Bangladesh, won the Nobel Peace Prize in 2006.

Surprising Interest Rates

But microcredit in India doesn't come cheap.

The cost may be shocking to anyone in the United States who's ever borrowed for a car or a house.

"Just so your audience can brace themselves, the typical interest rates are in a range of 24 to 30 percent per annum," says Vijay Mahajan, president of the Microfinance Institutions Network, a trade group. "Most people find it very hard that this interest rate does any good to poor people who are the recipients."

One reason interest rates are so high, Mahajan says, is that microlending is both time and labor intensive.

Microfinance lenders do their business on the client's doorstep, meaning that representatives have to travel to slums or rural villages to make the loans and then come back weekly to collect the payments. But microfinance was also very profitable. So much so, says Shubhankar Sengupta, director of a Kolkata-based microfinance company called Arohan Financial Services, that it made sense to run it as a commercial venture, tapping into investment banks for the vast amounts of money needed to fuel the growing number of microloans.

It was so profitable that one company, SKS Microfinance, raised $357 million when it went public on the Mumbai stock exchange in August.

One Woman's Story

Rama is an example of microfinance gone wrong. She makes her living rolling bidis, the cheap little cigars smoked by India's poorest people. She lives in the town of Warangal, a farming center in Andhra Pradesh, one of the poorest states in southern India.

One woman cuts the leaves into shape, while Rama and others roll the smokes and bundle them into baskets. A quick, persistent worker can earn between 30 and 40 rupees rolling bidis, less than $1 a day.

Rama says microfinance representatives offered her a loan, with almost no questions asked. She took it, though she didn't have a plan to invest the money or pay it back. She used the money for household expenses, for medical treatment for family members, and to celebrate a birthday. A second company offered her another loan, which she used to make payments on the first.

Kurapati Venkatanarayana, who teaches economics at Kakatiya University in Warangal, says Rama began a downward spiral that's common among debtors in Warangal.

"They get loans from the second company, and pay to the first company. They take the third loan from third company, and pay to the first and second company," he said.

Before long, Rama had five loans from different companies, and no way to pay.

She says the collectors from the finance companies hounded her day and night, shaming her in front of her neighbors. They told her to get the money any way she could, by stealing if necessary, she says, and they told her she'd be better off dead.

Venkatanarayana says that's because, unbeknownst to her, Rama's loan payments had included a life-insurance premium.

"If the people who borrow die, the microfinance companies get the insurance amount," he said.

Rama says her 17-year-old daughter, Mounika, took the threats to heart. Mounika believed that if anyone in the family committed suicide, the debts would somehow be erased: She doused herself with kerosene from the stove. It took two days for her to die from the burns.

State Curbs Industry

Venkatanarayana says he's been keeping count: So far this year, he says, more than 120 people, most of them women, have committed suicide in Andhra Pradesh because of the burden of microfinance debt.

Andhra Pradesh, a sprawling, heavily populated state, is home to about 75 percent of the microfinance companies in India.

Most are based in the state capital of Hyderabad, a modern, bustling city that is so tied into the information technology business that its nickname is "Cyberabad."

After the outcry over the suicides, the state assembly passed a law that makes it so difficult to make loans that the microfinance companies say they won't be able to do business.

Mahajan, of the microfinance trade group, says the companies haven't been able to collect on their loans, even from people who can afford to repay.

"Political leaders have been going around and saying, 'Do not repay MFI loans,' so our repayment rates, which all these 15 years have been around 98 to 99 percent, have come down to less than 10 percent," he says. "So there's a major default that's beginning to happen."

Microfinance companies may not be able to repay hundreds of millions of dollars in loans that they have outstanding from banks. Mahajan acknowledges that greedy lenders and unchecked growth have given the microfinance business a bad name, but he says that shutting down the industry will ultimately hurt the poor.

At 56, he has worked most of his life for nonprofit development groups.

He says that he got into commercial microfinance because he saw it as the only way to increase the scale of financial services to India's poor: not just lending, but access to savings accounts and insurance — the things people in wealthy countries take for granted.

Now, he says, that cause may have been set back by at least a decade.

[bobalot]

From what I understand, the problem with micro-finance for micro businesses is that there only so many jobs that a poor uneducated person can do.

Micro-finance allows the 'first wave' to initially make large profits but the markets become saturated very quickly, prices collapse and people can't pay back their loans.

For example, some bloke takes out a loan and buys a cow (that he couldn't previously afford). He sells the milk and earns money. The other hundreds (or thousands) of poor desperate people take note and also take out loans and buy cows and the local market for milk quickly gets saturated.

[K. A. Pital]

The glorious solution of poverty through capitalism actually went sour because the profit motive was still above all? Who'd have thought of that! Now, now, Muhammad Yunus, how's your "Peace Prize" doing?

I was suspicious about this whole "micro-lending" shit from the get-go, because credit, ultimately, is a method of putting people into debt slavery instead of people actually using whatever real purchasing power they have. No, let's extend the practice of reckless lending to the very poor! That'll teach 'em freeloaders. Let them burn and commit suicide - after all, the strong survive and repay, the weak perish, right? Or maybe not lending to these people in the first place would be a wise idea?

God, there's hardly something I hate more than consumer credits and the vile scum who give it out, and after that - the idiots who sign up for it. I guess oligarchs. But consumer credit lenders and borrowers are closely behind, the first for their malevolence and the latter for their stupidity. It is indeed a sad day when the very poor and uneducated become a target for subhuman "loan sharks" of various brands.

[Shroom Man 777]

Indians are plying Feelipeeni streets on their scooters, people loan money from them and everyday the Indians scoot around collecting tiny amounts of cash little by little, day by day.

[TheKwas]

Lets not let some examples of bad micro-finance taint the entire process. Yunus still deserves his nobel and his Grameen Foundation is still a major force for good in Bangladesh. The problem is that micro-finance turned out to actually be very profitable, which led to the idea being co-opted by profit-motivated private firms, rather than the community-minded NGOs that started the idea (Grameen). Micro-finance is still a great tool for helping the world's poorest, but there has to be some regulation that weeds out the predators from the community-minded NGOs (perhaps government-ran microbanks, or not allow micro-finance companies to be for-profit?).

The Grameen Foundation, imo, is the best existing model to try and replicate. There's a significant amount of literature that suggests they, on the whole, have been a significant boon to Bangladesh's poorest. The foundation itself has a method of tracking client wellbeing and improvement after loans called the Progress out of Poverty Index.

I think what this thread shows is the ability of good ideas being abused by bad regulation.

From what I understand, the problem with micro-finance for micro businesses is that there only so many jobs that a poor uneducated person can do.

Micro-finance allows the 'first wave' to initially make large profits but the markets become saturated very quickly, prices collapse and people can't pay back their loans.

There's actually a very wide range of jobs uneducated people can do in poor countries (indeed, almost everyone in the labour market is uneducated and most still have jobs), and micro-finance isn't nearly big enough to cause market saturation in any significant field. I'd like to see any evidence that suggests this is a real mechanism working against micro-finance, because it seems silly on it's head and I've never heard this sort of argument ever be made during my time research Micro-finance.

[K. A. Pital]

It is predatory lending, not the jobs of the poor, which made the idea flop. And frankly, if the government takes over microfinance, it kicks out "make a profit" from "help the poor and make a profit on them". Problem is that once you kick out the "make profit" from microfinance, you remove capitalists from the equation and leave only governments or NGOs. And the other problem is that there has been scant few sound evidence that microfinance actually reduces poverty - most of it anecdotal. Statistical investigations are complicated because collecting data is very hard. And many studies show different results - like that poverty is not affected much by the presence or absence of microloans.

[Fingolfin_Noldor]

Quite frankly, microcredit just means that loan sharks just get to wear suits and ties and look official.

But this is par the course for anything in India because corruption is so rampant.

[HankSolo]

Suicides have been accompanying moneylenders for most of the last two centuries. Usually these loans are sought to meet living expenses or repay other loans, not generate further income. You don’t even need predatory practices for that to turn ugly. The frequent election promises of loan forgiveness are just making things worse for those few who can make use of the credit.

People have to get it in their heads that an agrarian economy isn’t going to work at the population density we have. The government needs to get health and education right, cut out the middlemen who hog the proceeds and push through the early nastiness of industrialization as quickly as possible. That’s not helped when the government/industry (no saints but we don’t have anything better) is hindered by a lot of NGOs that think we should freeze the clock and somehow little tweaks like microfinance and welfare payments will let a billion people enjoy a half decent standard of living farming and fishing like their grandparents did.

[mr friendly guy]

Just nodding off from work, so I will post more when I get home, however...

1. One of the reasoning behind microfinance is that the rate is actually less than what a poor villager would take from loan sharks. Bigger organisations can manage to give the rate lower by virtue of being larger. An example of a microfinance organisation which does this is wokai.org

2. A good microfinance organisation won't just lend money out like American banks with subprime mortgages. They actually do have people assess your ability to pay back. This is done via usually a) checking up on the villager, giving them some education on finances etc b) having a group effort, so that if one member of the group fails to pay back, the whole group is banned from further loans. Harsh, but used only as a last resort, and in those I lend to they have managed to pay back individually.

3. Yunnus himself doesn't object to organisations which are out to make a profit using his idea (I saw this on a youtube video). The problem is that as this article shows, it encourages shonky operators who don't do the above, and instead take out life insurance policies etc.

3 a. This makes me think one of the ways they can get around this is government affiliated or approved organisations, or to have the government directly run this, using some equivalent of a managed fund, which individuals and other funds can invest into. The return will of course decide whether others wish to invest in microfinance. Problem is if there is corruption in the government.

I might post more when I get home and if time permits. However I do support a microfinance organisation (Wokai - look them up on google or youtube), and I am proud that I do a little bit to help some poor person improve their life. One person can search Wokai and see the testimonies of those who benefit. Granted you could say hur hur they could have just typed whatever they want and mistranslate their testimonies, but thats really cynical.

[Sarevok]

I am surprised by the image Yunus has abroad. The man is not well liked here in Bangladesh. He made his billions doing business for foreign entities like Telenor. His micro finance work is just a PR stunt for foreigners. The Yunus we know here is an incredibly powerful business man controlling Grameen - the most powerful and richest company in the country with billions upon billions in assets and incredible political pull (Yunus almost became President 2 years back). Grameen controls the entire telecommunications and IT sector as well as having a hefty presence in banking. He is not what one would say is an "oligarch" but one cant help see the similarities.

[K. A. Pital]

I am surprised by the image Yunus has abroad. The man is not well liked here in Bangladesh. He made his billions doing business for foreign entities like Telenor. His micro finance work is just a PR stunt for foreigners. The Yunus we know here is an incredibly powerful business man controlling Grameen - the most powerful and richest company in the country with billions upon billions in assets and incredible political pull (Yunus almost became President 2 years back). Grameen controls the entire telecommunications and IT sector as well as having a hefty presence in banking. He is not what one would say is an "oligarch" but one cant help see the similarities.

From what you say, he IS an oligarch and should be treated accordingly. Plus one to my hate list - oligarchs which enroach on media control, use it to gain political power and enter unholy alliances with foreign oligarchs and domestic politicians are scum. Which is probably 99,99% of oligarchs.

If microfinance is used by the oligarchs as a positive PR tool, then it is even sadder than I thought. Although to be fair, considering the shit oligarchs pull every day on our national TV, I shouldn't be surprised. The mega-rich share a similar behaviour across nations, and I'm not going to give Indian or Bangladeshi rich any indulgencies.

[Simon_Jester]

The glorious solution of poverty through capitalism actually went sour because the profit motive was still above all? Who'd have thought of that! Now, now, Muhammad Yunus, how's your "Peace Prize" doing?

I was suspicious about this whole "micro-lending" shit from the get-go, because credit, ultimately, is a method of putting people into debt slavery instead of people actually using whatever real purchasing power they have. No, let's extend the practice of reckless lending to the very poor! That'll teach 'em freeloaders. Let them burn and commit suicide - after all, the strong survive and repay, the weak perish, right? Or maybe not lending to these people in the first place would be a wise idea?

God, there's hardly something I hate more than consumer credits and the vile scum who give it out, and after that - the idiots who sign up for it. I guess oligarchs. But consumer credit lenders and borrowers are closely behind, the first for their malevolence and the latter for their stupidity. It is indeed a sad day when the very poor and uneducated become a target for subhuman "loan sharks" of various brands.

It's not as if this is all that new; the existence of small scale moneylenders in impoverished and/or rural communities goes back to pre-modern times.

Microloans are no doubt a bad idea when they're combined with high interest rates. They're an even worse idea when they're being given by people who put the money into living expenses- borrowing the money you need to maintain your standard of living is unsustainable by definition, regardless of the scale you do it on.

The proper way to organize them would probably wind up being quasi-charitable and organized by government; not something that fits well into a pure-capitalist model.

[bobalot]

There's actually a very wide range of jobs uneducated people can do in poor countries(indeed, almost everyone in the labour market is uneducated and most still have jobs)

Mate, are you serious? Have you ever been you rural areas in poverty stricken rural areas in South-East Asia? Employment options are basically limited to low productivity agriculture (surprise, surprise, which is what almost everybody is employed in). About 3/4 of the people of Bangladesh live in rural Bangladesh. While the 'unemployment' rate is statistically low their underemployment rate is a massive 40%. Take note that their under-employment isn't pansy under-employment we whine about in the west, vast segments of the population only work a few hours a week.

micro-finance isn't nearly big enough to cause market saturation in any significant field. I'd like to see any evidence that suggests this is a real mechanism working against micro-finance, because it seems silly on it's head and I've never heard this sort of argument ever be made during my time research Micro-finance.

The market mentioned in this criticism was not the national market of a given field. It was the saturation of local markets. Given the fact that these are rural areas and these people live in incredible poverty in areas of shitty or barely accessible infrastructure (the quasi-isolation of entire regions), it would be hardly surprising if a local market could become saturated.

Here is an example this criticism from an article written by Ha-Joon Chang for the United Nations University. I'm a bit surprised you have never come across it.

When a microfinance institution first starts its operation in a locality, the first group of clients may see their income rising—sometimes quite dramatically. For example, when in 1997 the Grameen Bank teamed up with Telenor, the Norwegian phone company, and gave out microloans to women to buy a mobile phone and rent it out to their villagers, these ‘telephone ladies’ made handsome profits—US$750-1,200 in a country whose annual average per capita income was around US$300. However, over time, the businesses financed by microcredit become crowded and their earnings fell. To go back to the Grameen Phone case, by 2005 there were so many telephone ladies that their income was estimated to be around only US$70 per year, even though the national average income had gone up to over US$450. This problem is known as the fallacy of composition—the fact that some people can succeed with a particular business does not mean that everyone can succeed with it.

I think the only way that micro-credit can survive without government support is charge near usurious rates. The only reason Grameen has lower rates than the "loan sharks" making asses of themselves only because the government subsidises the Grameen bank. I like the idea of micro-credit, but it looks like it has a fairly limited application in regards to poverty reduction. The government should shut out all the greedy douchenozzles fucking up micro-credit.

I am surprised by the image Yunus has abroad. The man is not well liked here in Bangladesh. He made his billions doing business for foreign entities like Telenor. His micro finance work is just a PR stunt for foreigners. The Yunus we know here is an incredibly powerful business man controlling Grameen - the most powerful and richest company in the country with billions upon billions in assets and incredible political pull (Yunus almost became President 2 years back). Grameen controls the entire telecommunications and IT sector as well as having a hefty presence in banking. He is not what one would say is an "oligarch" but one cant help see the similarities.

It turns out he may have stolen a mere $100 million from Grameen Bank. What is the story with that Sarevok? (I'm assuming you would know better than us)

[Guardsman Bass]

There's a pretty good article on the Micro-finance situation in the India-based Economic Times:

The poster boy of microfinance is now seeking some anonymity. In Andhra Pradesh, the epicentre of the worst crisis faced by microfinance in India, SKS Microfinance is playing down its identity and going into preservation mode. At its modest office in a residential colony in Warangal district, India's largest microfinance company has taken down its board. At its head office in upmarket Begumpet in Hyderabad, it hung a cloth mesh in front of its plush, six-storey glass building, ostensibly to protect it from the public ire over suicides. It's a bad time to be a microfinance institution (MFI).

While MR Rao, CEO of SKS, deflects the blame for "coercive lending" to new MFIs, some old industry hands admit to an institutional failure. "That (following sound lending practices) is where we failed," says Sajeev Viswanathan, CEO of Basix, an MFI. MFIs lent liberally to individuals who didn't have a corresponding ability to repay. The mismatch had to hurt sometime, and that's what is happening now.

But it's not just MFIs that are responsible for this state of affairs. Many other parts of the ecosystem, and what they have spawned over the years, are also culpable in bringing rural lending to a pass. Five in particular...

Crisis Point 1
Banks

"If banks lent us enough, why would we borrow from MFIs?" asks Shantiamma rhetorically. When ET met her, Shantiamma, a woman in her early-50s, was plucking cotton in a field just outside Gangapur, a village 6 km from the Hyderabad-Kurnool highway. A labourer, she knows how banks have failed women like her who exist on the economic fringes.

Banks first reached out to women like her when Chandrababu Naidu of the Telugu Desam Party (TDP) was the chief minister of Andhra. In 2000, his government ran a rural-lending pilot called Velugu, which was managed by the Society for Elimination of Rural Poverty (SERP) based on the concept of self-help groups (SHGs). It formed groups of 10-15 women and assured them access to bank credit provided they took responsibility of its repayment as a group, rather than individually. The idea was to use collective responsibility to instil borrowing discipline.

In 2002, Velugu was adopted across the state, with banks charging SHGs an interest rate of 12%. In 2004-05, when Rajshekhar Reddy of the Congress became the CM, he reduced it to 3%; the state would refund the balance 9% to banks.

The credit line is available to SHGs, but it is inflexible. A typical loan for a new SHG starts at Rs 50,000, for one year. As the group proves its ability to repay, the loan amount and the tenure increases — for example, Rs 5 lakh for 5 years. At any point in time, an SHG is entitled to only one loan. In other words, there's no provision for an emergency top-up, which several women need.

A senior SERP official is especially critical of two lending practices. One, banks don't often give SHGs their full loan entitlement, especially to scheduled castes and tribes. "If an SHG is eligible for a Rs 3-5 lakh loan, a bank might release Rs 1-1.5 lakh only." Two, banks are lending against a savings collateral. "The women of AP would have savings of about Rs 4,500 crore, or about Rs 40,000-50,000 per group," he says. "This money could have been used for emergencies." And so, they turn to MFIs.

There was another reason why the poorer women turned to MFIs. "You don't find the poorest of the poor in SERP's SHGs any longer," says the SERP official. "If they default, the other group members eject them, as banks don't lend to defaulters." They were left with no option but to turn to MFIs and moneylenders.

Crisis Point 2
MFIs

Even as banks under-funded SHGs, they extended loans to MFIs. They got the same benefits, but at a lower cost and lower risk. Loans to MFIs qualify for priority-sector lending. And going through them lowers banks' costs. Instead of giving loans to, say, 500 SHGs of Rs 2 lakh each, they could give Rs 10 crore to just one MFI — and pass on the loan servicing to it. Also, Andhra politicians have a penchant for loan write-offs. Each time they make such promises, borrowers tend to withhold repayments of bank loans in anticipation of a waiver. On-lending helped them avoid such risks.

Over the last five years, the nature of microfinance delivery has changed. Says S Sivakumar, head of ITC's eChoupal initiative: "Microfinance used to stand on two pillars: income generation and social capital."

At one end, it was meant to create income-generating activities, which would enable women to repay loans of 30% interest without driving themselves into destitution. At the other end, MFIs had to forge a form of social capital that would encourage repayment, as SHGs did.

Both these pillars got undermined as MFIs chased growth. They defined their role as only of credit delivery, and focused on making processes idiot-proof and scalable. They left income generation and social-capital building to the groups and the government. Says a former microfinance professional who has worked in Andhra: "We would spend time with the women even after a transaction was over. There was a real relationship. Not anymore."

The relationship of MFIs with women has become transactional. According to Mixmarket, an online aggregator of microfinance information, each employee of Share Microfin, an MFI, handled 331 borrowers in 2005; in 2009, this had increased to 436 borrowers.

Seeing the success of MFIs, more players, both formal and informal, rushed in. Competition intensified. MFIs moved beyond lending to households with existing, predictable cash flows, and began targeting households relying on uncertain, daily cash flows. Says a senior banker with a private bank in Hyderabad: "Much of this lending was calibrated to an MFI's capital availability and growth needs, not to a household's ability to repay."

Such changes converge uncomfortably at Malki Mohammad Puram, a small Dalit village in Andhra's West Godavari district. The 132 households here used to rely on fishing, but switched to agricultural labour after the government levelled their fishing ponds. In 2007, there was one MFI in the village. Today, there are eight. "About 80% of the households had loans from 6 MFIs," says V Prabhudas, CEO, CResa (Centre for Rural Reconstruction through Social Action), a society delivering microfinance in Andhra.

The over-indebtedness even showed up at the state level. "The average household in the state has a minimum of three to four loans," says B Rajshekhar, CEO, Serp. "We have seen cases where the monthly cash flow of the household was Rs 4,000-5,000 and the outflow was Rs 7,500." The industry's 2009 state of the sector report, pegs the penetration of microfinance loans among poor households at 823%. In other words, if only poor households were availing microfinance loans, each household was servicing eight loans (See table: The Loan Ranger State).

Despite that, no attempts were made to cool down the market. MFIs kept lending. Viswanathan of Basix says MFI lending in Andhra rose from Rs 5,000-6,000 crore in 2009 to Rs 9,000 crore this year.

Sidbi, which provides both debt and equity funding to MFIs, stayed mum. The RBI did little more than periodically warn the MFIs. The banks too played along. "I would get calls from banks seeking reassurances that the MFIs they wanted to lend to would not implode for just two more years," says a senior staff member at a loan portfolio audit and technical assistance agency. "By then, they could recover their loans." The private banker says banks, to meet lending targets, would release 60% of funds to MFIs in the last quarter of the financial year. "Scrutiny was bound to suffer," he says.

Crisis Point 3
Credit Culture

The easy money is altering the credit culture in villages. In Warangal district, employees of a large MFI say that, earlier, women had to be cajoled into taking loans. They would borrow nervously and repay fastidiously, out of not wanting to be locked out of a source of credit that lent quickly and without collateral.

Increasingly, the employees add, some women are getting blasé about borrowing. "When we warn women against defaulting, some of them retort, 'we will borrow from someone else'." Instances have been reported of women negotiating loans by pitting MFIs against each other.

Rural India, usually the elite among them, is beginning to exploit the microfinance model for private gain. For instance, in a village in Hanamakonda's Palaveyipullah mandal, the centre leader and a group member took money from several MFIs in the name of 10 other women, paid interest for 10 weeks, and then stopped. That is one kind of a change.

At the lower reaches in the villages, as MFIs lend to households without regular cash flows, communities are changing in a different way. Women talk about the pressure to ensure weekly repayments. Some of this pressure comes from fellow group members.

If a member is unable to pay interest, the remaining group members have to make good the shortfall. They better, for a default means no loans for any of them in the future. In the process, an inversion has taken place. Says anti-caste writer Kancha Illiah: "Five years ago, SHG members used to beat up husbands who beat their wives. Now, they are beating up women who fail to repay."

Crisis Point 4
Labour Slowdown

The stage was set. And then, a confluence of external factors triggered the present state of suicides. The last four months have seen a spike in the number of women struggling to repay MFI loans. Of the 30-odd women that ET spoke to, all but one were repaying their MFI loans through manual labour.

In this period, opportunities for labour work have plummeted in Andhra due to heavy rains. Then, this year, the Centre asked the states to cap employment under the National Rural Employment Guarantee Act (NREGA) at 100 days per household. This was a major blow for MFI borrowers in Andhra, as NREGA works for more days there than in any other state.

According to the state government, for the period from March to November, the average number of workdays per household in Andhra under NREGA fell from 62.7 in 2009-10 to 52.8 in 2010-11. The percentage of households that got 100 days of work fell from 21.1% in 2009-10 to 13.3% in 2010-11. The stir for a separate state of Telengana also affected the labour market in real estate.

Borrowers counting on agri-labour and NREGA to make repayments were left in a lurch. For instance, at the erstwhile fishing village of Malki Mohammad Puram, the sudden shrinkage of the labour markets disrupted credit cycles. In July, villagers started defaulting. "Things are worse in the inland districts," says CS Reddy, the head of Hyderabad-based organisation that provides capacity building and support to SHG institutions. "In the coastal districts, there are more income streams — coconuts, tobacco, bananas, etc. In non-coastal districts, it is just non-farm labour, nrega and farm labour," he says.

One of the fatalities of all this was Chintan Kumar of Ibrahimpur village. Fellow villagers say Kumar had taken a microfinance loan, which he was repaying through labour. When he couldn't repay, the MFI staff and group members started pressurising him. He immolated himself on August 21.

Crisis Point 5
Politics

As news of such incidents increased, the situation took a political turn. According to Kancha Illiah, the TDP, the main opposition party, saw an opportunity to win back its traditional vote bank of women and other backward castes (OBCs). But in the 2004 elections, amid a backdrop of farmer suicides, the Congress promised SHG loans at 3%. It won and delivered on the promise. And soon after, it appropriated the SHG programme and renamed Velugu as Indira Kranthi Pratham.

The TDP is now trying to use the MFI crisis to win back these constituencies, especially with municipal and panchayat polls due next year. Naidu has been saying that while the TDP created SHGs, the Congress created the MFIs. And then, there is YS Jagan Mohan Reddy, former Chief Minister Rajshekhar Reddy's son. He, like Naidu, is trying to use this crisis to woo voters in Telengana and project incumbent Rosaiah as a weak CM.

Much of this slugging took place through the state media, important parts of which are controlled by political parties. Jagan Reddy owns the Sakshi channel and newspaper, while the TDP is said to be close to the owners of NTV and ABN. The target of their ire was common: MFIs.

The Congress government, which was losing political space, hurriedly introduced the ordinance. It was aided by the bureaucracy, which has had an antagonistic relationship with the MFIs for years. "The ordinance had been under discussion for a while. When the opportunity finally presented itself, it was finalised and pushed through," says Sowmya Kidambi, who heads a state department that does social audits on the NREGA.

It shows in its construct. While it introduces a much-needed layer of checks and balances by regulating the field conduct of MFIs and seeking client information to address the problem of multiple borrowing, it also adds a knot of red tape. It empowers project directors whose job it is to promote the SHG-bank linkage to also clear MFI loans to SHG members. "Will they remain objective while dealing with rivals?" asks CS Reddy of APMAS. Or, will they turn this authority into a wanton exercise of power?

It's an imperfect and uncomfortable state of affairs. And every piece in the lending ecosystem is to blame.

[Illuminatus Primus]

The glorious solution of poverty through capitalism actually went sour because the profit motive was still above all? Who'd have thought of that! Now, now, Muhammad Yunus, how's your "Peace Prize" doing?

I was suspicious about this whole "micro-lending" shit from the get-go, because credit, ultimately, is a method of putting people into debt slavery instead of people actually using whatever real purchasing power they have. No, let's extend the practice of reckless lending to the very poor! That'll teach 'em freeloaders. Let them burn and commit suicide - after all, the strong survive and repay, the weak perish, right? Or maybe not lending to these people in the first place would be a wise idea?

God, there's hardly something I hate more than consumer credits and the vile scum who give it out, and after that - the idiots who sign up for it. I guess oligarchs. But consumer credit lenders and borrowers are closely behind, the first for their malevolence and the latter for their stupidity. It is indeed a sad day when the very poor and uneducated become a target for subhuman "loan sharks" of various brands.

Called it too. It was obvious that something so "corporate responsibility" in its vibe, and so enthusiastically supported in establishment sectors for lifting poverty in the Third World, would not be what it seemed. One wonders of course who came up with the idea, a clever privileged economist or banker in the West, or the poor benighted little people still in need of their betters' schemes.

[madd0ct0r]

Bugger. I was right behind that idea.

So in order to work it requires:

a recognition of the idea's limits (it can't help everyone, everywhere)
regulation (self and imposed)
Huge fucking taxes on profits, including company salaries
self-sustaining NGO's (as opposed to profit chasing companies or charities)
Realistic spreads of loan uses. Not 18 'telephone ladies' in a village
Links to greater development planning authorities

any of these fall down or break, and you've got the predators moving in.
Basically, it's a useful tool. No tool solves all problems.


Anything I missed?

[mr friendly guy]

Well I suggest

1. NGOs running it have to be charities and hence non profit. Thus they should calculate the minimal amount of rate required such that they can run their operations with minimal profit. Any extra profit must be reinvested into either a fund or back into the charity. The reinvestment in a fund should be for further uses related to the microfinance charity.

2. The government should be the only other organisation running a microfinance gig.

The government should appoint someone with the same level of screening given to managers of sovereign wealth funds to run the microfinance organisation. They should have high amounts of accountability. The government based organisation should also keep track and see how effective it is.

3. Both private NGOs and the government organisation should adhere to guidelines. These include no money be lent for personal uses and must be lent as part of a business plan.

4. The government organisation is allowed to make some profit, which goes back to its stakeholders (ie the government).

5. The government may allow other organisations, ie public or private funds to invest in the government based microfinance organisation. They however cannot take a majority stake. That is the government has a majority stake at all time. This is to encourage private investment. This should work like a managed fund.

6. If the government run microfinance organisation makes a profit, some of the money goes to the stakeholders. However the profit motive should never override the organisations primary goal, which is to lend money to budding entrepreneurs at a decent rate.

[Fingolfin_Noldor]

I think the real problem is that India and many other poor countries do not have a coherent plan on country development. All these "efforts" are at best simply papering over the various problems, and what not. Never mind the bleeding heart morons who are content with just feeding the black holes of corruption just for a bit of self satisfaction.

[Rye]

It is predatory lending, not the jobs of the poor, which made the idea flop. And frankly, if the government takes over microfinance, it kicks out "make a profit" from "help the poor and make a profit on them". Problem is that once you kick out the "make profit" from microfinance, you remove capitalists from the equation and leave only governments or NGOs. And the other problem is that there has been scant few sound evidence that microfinance actually reduces poverty - most of it anecdotal. Statistical investigations are complicated because collecting data is very hard. And many studies show different results - like that poverty is not affected much by the presence or absence of microloans.

I quite like the idea of government-sponsored microloans to defuse the profit motive ruining the shit out of the process. It gets around the problems we have regarding handouts, work and motivation, and also provides funds for normal life. These funds are also eventually paid back, presumably with a bit more taken from the more successful ventures to offset the less successful ones, and you have a fairly low-impact social program that may end up paying for itself or even potentially providing extra money for other social programs.