11/14/2010 Anatomy Of A Crisis

Publication: The Economic Times Kolkata;Date: Nov 11, 2010;Section: Spl Report;Page: 10

Anatomy Of A Crisis
It isn’t just the microfinance institutions that are to blame for
the current crisis in the sector in Andhra Pradesh. M
Rajshekhar says the malaise runs deeper and goes back
longer.
With Trushna Udgirkar

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 rurallending 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
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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 incomegenerating 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.

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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
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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.
Tomorrow—How to fix Indian microfinance

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