Editorial: AP Microfinance Crisis – a signpost ignored

Microfinance Focus, Oct. 23, 2010 : A year ago, Microfinance Focus Senior Analyst, Daniel Rozas, published an article raising a warning flag about a developing bubble in Andhra Pradesh.  Rozas wrote:

“The spark that sets off a large-scale delinquency crisis can be anything and could come at any time – a rapid drop in economic growth, a populist political movement, a religious decree, or a collections effort gone bad.  One can’t control the spark, but one can control how much fuel that spark can ignite.”

That spark has now been ignited.  Whether the flames can be put out quickly enough to prevent disaster is by no means assured.  We hope they will be.  But it is also deeply disappointing to see the sector having come to this point.   After all, there was no lack of recent examples to learn from:  the US financial market, Bosnia, Nicaragua, Morocco, Pakistan, Kolar, and even Andhra Pradesh back in 2007.  So why are we here?

At the surface, it seems that Indian MFIs were taking steps, having formed MFIN earlier this year with the explicit objective of developing lending standards, including caps on total debt levels for clients.  It sounded reasonable.  But whether these actions were driven by real recognition of the risks, or simply visible motions to quell concerns raised by RBI and others, it’s apparent that they were not driven by any sense of urgency.  MFIs were simply too busy to implement real changes.

SKS was too busy with its IPO.  Other large NBFCs were too busy trying to catch up to SKS.  Regulators were too busy worrying about profits and interest rates.  Meanwhile, growth has continued unabated, including in Andhra Pradesh.  Seems everyone was so preoccupied trying to win the race that they failed to see the cliff up ahead.

We are hopeful.  Disaster may yet be avoided.  And as soon as it is, we hope that – finally – MFIs will grow up and realize that the status quo is no longer tenable.  And we hope they will seriously sit down with real regulators (as opposed to wolves disguised as state politicians) and find solutions that will finally put an end to fly-by-night operations, unconscionable collections practices, and dangerously weak lending standards.  For if they fail to heed even this signpost, MFIs will deserve the fate that will undoubtedly await them next time around.


Read The Article :  Is There a Microfinance Bubble in South India?

© 2010, Microfinance News. All rights reserved. 2008-09

8 Comments on “Editorial: AP Microfinance Crisis – a signpost ignored”

  • Phil Mader wrote on 25 October, 2010, 2:57

    Dear Daniel, I share your concerns for the sector. I am worried by what I see as a mixture of callousness and recklessness on the part of the MFI sector, while the AP government of course is working in a populist manner. However, I can’t really see how “disaster may yet be avoided” – 30 to 60 dead in my book constitute a disaster. I’ve been trying feverishly to divine the roots of this tragedy on http://governancexborders.wordpress.com. Maybe that will be of interest to the readers of this good op-ed, too. Best, Phil

  • Daniel Rozas wrote on 26 October, 2010, 13:12

    Phil — loss of life through suicide is always a tragedy.  But I wonder to what extent this is truly linked to microfinance?  Consider that in a state the size of AP, there are well over 1000 suicides each month.  Given the enormous penetration of microfinance there, it is inevitable that a large number of these will be microfinance borrowers.  

    The reporting on the suicides has been uneven — a small handful of stories appear reasonably credible, some seem outright fabrications, and the rest are somewhere in-between.  But I’ve had a hard time separating one from the other, since very little of the reporting is in any way objective (a few exceptions notwithstanding).  A study finding that loan officers encourage defaulters to commit suicide, yet citing no evidence to back that up??  I’m sorry, but that’s not journalism worthy of the name.  

    Absent better evidence, I’d be careful treating what’s in the Indian press as anything more than entertaining propaganda.  If you’re familiar with US media, think Rush Limbaugh as an example…

  • V.Rengarajan wrote on 26 October, 2010, 19:39

    Dear Daniel
    I agree with you that there is no lack of recent evidence to learn from the past . Enough is enough. But MF industry, despite with many proponents/advisers/counselors behind, has thoroughly failed to appreciate the realities and more ambitiously allowed the micro credit as be all and end all under the name micro finance
    Regarding suicide issue, your response to Phil appears to find justification for the inevitability of this sordid event in Micro finance arena. My concern is that How enormity of penetration of Micro credit ( not microfinance ) is permitted to tolerate some room for suicides? Leave alone the fabricated stories and ‘other’ types, as you mentioned, the moot point is how are even the ‘small number of reasonably credible ‘ suicides justified when the concept Micro finance emerged as champion of the poor for reduction of poverty . Is it (suicides) perhaps a sustainable way of alleviation of poverty once and for all? If the present status is of any indication , then the another question “ Among the two ‘Financial inclusion or Financial exclusion’ which is more safer to the poor for their survival leave alone jumping out of poverty line?

  • Daniel Rozas wrote on 27 October, 2010, 1:11

    Hi Rengarajan,

    I’m not supporting or denying that MFI collection practices might be contributing to suicides.  I simply don’t know.  What I do know is that there are no standards set for collections, and in the absence of such, some lenders are bound to go over the line.  In fact, I’m sure that some (maybe even many) do.  

    That’s exactly the reason why our editorial calls for regulations to put an end to unconscionable collections practices.  They simply have no place in any industry, let alone one that ostensibly has a social purpose.  This should be done whether or not they lead to suicides. 

    Let’s put some things in perspective.  Suicides in India, despite widespread and deeply entrenched poverty, are in fact quite low, far lower than even countries with the highest living standards — Norway, Japan, Switzerland, US…   And I’m certain that some of them can be related to debt in one way or another.  But suggesting that suicides are caused by debt or by specific collection practices is a gross oversimplification of a host of complex social and cultural forces, of which the economic situation is but one factor.  

    In the end, even with the most innocuous collection practices and with no overindebtedness, suicides will continue to happen, including suicides of microfinance borrowers.  This I can guarantee with 100% certainty.  So if the standard is to be no suicides, or no suicides that can be linked to debt in any way, then the only solution will be the elimination of all debt — not just microfinance, but also mortgages, auto loans, and, yes — SHGs.  

  • Vinod Kothari wrote on 27 October, 2010, 10:20

    Comments on Daniel’s article seem to be getting into the least-intended direction – whether suicides, or how many suicides. No, we need to get into the very fundamental question of whether microcredit has gone into putting rural India either into a debt trap or into a debt-redemptoin mirage – where loans continue to get larger, and there is hardly any credible evidence of borrowers ever getting out of the books of microcredit companies at all. We need to get into fundamental questions of whether entities driven by targets of EPS and equity valuations can maintain the balance with the need to meet the financial inclusion of a very very sensitive sector. Over the years, we have allowed a scramble of lenders into the space. The transformation of so-called NGOs into for-profit companies, with scarce equity put in by the promoters, growing book size at tremendous pace – all this should have raised concerns long time back. We surely did not need the Andhra Ordinance to be aware that in the animal farm, chickens have come to roost. It is unfortunate that as a conscious, thinking society, we allow things to blow up into a crisis of this scale.

  • V.Rengarajan wrote on 28 October, 2010, 8:32

    Hi Daniel
    Thanks for your response. I wish to share two more points on the subject.
    First, it is unfortunate for having been driven to a situation where we have to think seriously on the solution for ‘no suicide with the elimination of all debt’ instead of constructively for reduction in poverty through provision of debt..
    While searching for the black ship in this present crisis, an anatomy on functioning of micro credit or the so called ‘asset’ ( in financial market parlance) after the delivery from MFI at poor household level ( not at surface level )reveals that micro credit alone (per se) cannot deliver the expected good in poverty sector unless its productivity is enhanced with supporting facilities (forward and backward linkages) other wise called a kind of ‘servicing’ at micro level. This kind of ‘linkage services’ alone enhance the productivity of asset in terms of income generation and consequently ‘true value’ of the asset at clients’ level.. With blind continuous flow of micro credit alone, (without any linked ‘services’) it only remains as a fungible asset susceptible to misutilization leading to over-indebtedness .and other known eventualities. such as poor income generation and irregularities in repayment due to structured repayment schedule, and coercive collection practices, etc .Further this problems also get aggravated more either in a credit saturated market due to multiple lending or in poor credit absorbing capacity of the given area due to weak infrastructure. Both are risky area affecting true value of the ‘ asset’ at micro level.. It is therefore a pre requisite to arrange a conducive environment with adequate linkage ‘servicing’ for ensuring the productivity of the micro credit and the ‘true value’ of the asset released to the poor client’s level and ultimately at MFI level too.. Further, this linkage servicing also acts as a kind of security or ‘incentives’ for the poor to honor repayment codes ethically. This will perhaps go a long way for ensuring certainly ‘no suicide’ on one hand and candid poverty reduction on the other. .This calls for coordinated endeavor by the development partners including the government. besides the lending institution be it the bank or MFI . Till then mere credit delivery which is suicidal in the most sensitive poverty sector, need to be eschewed.
    Second, the phenomenon like loan getting larger continuously , glittering recovery performance, at the ‘company book level’ or ‘surface level’ do not reflect the ground realities. Further, in the SHG linked MFI system for credit delivery ( predominant form in India )to ultimate poor borrowers , it is reported ( Srinivasan-Microfinance- State of the sector report 2008 ) that “incidence of members’ drop out was 8.2% by 43% of SHG. The drop out rate was 8.2%” ( leave alone mortality of groups)This continued trend indicate the borrowers getting out company’s book mostly the poor and probably new members ( (likely)the non poor foraying in their place for keeping the asset growing larger at book level. If this situation remains unchecked, how to protect them (drop outs from the SHG/MFI book ) from getting excluded in the book in the context of poverty reduction ( being the mission and the goal of MF )? It is unfair that the drop out phenomenon is not given due recognition by the MFIs so long they get new borrowers to maintain a good asset position in their ‘book’. This is also another area of concern to be taken care of while working out a solution for ‘no suicide’ and ‘poverty reduction’ as well through micro credit in the poverty sector.

  • Rajan Alexander wrote on 28 October, 2010, 21:49

    When we started out in development a couple of decades ago, we instinctively targeted to reduce the influence of money lenders, if not eliminate them completely. Why? They were the traditional oppressors and exploiters in society. Micro-savings and revolving loans worked very well until the most fancied MFIs burst into the scene. MFIs operate under these two beliefs: “Having access to expensive credit is better than no credit” and “the observed rate is where demand equals supply”. These two beliefs were ironically the very same fulcrum the traditional money-lenders operate with.

    The result is an “Animal Farm” situation where we are now not able to distinguish between “pigs” and “humans” and vice versa. In fact, money-lenders have got a make-over by packaging themselves as MFIs. A good example is Mohd Yunis of Grameen Bank comes from a traditional money-lending caste. And of course, he got the Nobel Prize and so did Al Gore & Pachauri. Thank God the Nobel Committee did not confer Gandhiji the same distinction, by clubbing him with these scamsters.

    The IPO of SKS, one of the largest MFIs in India, saw it over-subscribed by 15 times; their Ten-Rupee share was priced at a premium of Rs 985 – showing how much the market had confidence on their profitability while “banking with the poor”. The promotors of SKS became multi-billionaires over-night! MFIs argue that they have to charge high rates to maintain profitability. Profitability, which even private banks couldn’t match! Profitability that permits SKS to pay Rs 1 crore as bonus to their just fired CEO!

    And how do they attain profitability?

    A month ago, SKS in the state of Andhra Pradesh was accused of a series of farmer suicides that prompted the state government to introduce new restrictions on the microfinance industry by seeking to cap lending rates and end coercive means of recovery. Last week alone, Andhra Pradesh police arrested three loan agents of SKS Microfinance and Spandana Sphoorty Financial Ltd. after borrowers complain that they were illegally pressured by the agents to repay their small loans around $1,300. For those of us in the field, this conduct of MFIs is no surprise.

    MFI research puts irinterest rates between 25-30%. But my experience (and this is my 30 years in the field) put this figure several times higher. Even if we take this range which they described as the lowest in the world, the only benefit of such loans is for working capital and not capital formation. What is the kind of subsidies Rata Tata gets to produce a one lakh car? We all are aware that a mere 0.5% rise in banking rates can crash the stock market, so sensitive is their profitability linked to interest rates. Compare this with those the poor is asked to bear.

    AP’s share of outstanding microfinance loans represents nearly 40% of the sector’s total portfolio, according to CRISIL. Now if MFI is all about access to the poor, we can ask the question, why the clamour to be concentrated in a state which belong to top-five in development in the country? We would have thought they would have gone to the five lying at the bottom rung of the country. But no, they avoid it like plague. It is easy to see they do this on repayment potential of states. The interests MFIs pursue are interests of self sustenance and their own growth. The poor is hardly in the radar except for rhetoric. In fact, it is on the blood and coercion of the poor, MFIs like SKS can giveaway Rs 1 crore as bonus to the CEO.

    The sooner MFIs are seen as profit enterprises, the better. The longer they pretend they are pro-poor, the longer they discredit the NGO sector that gave birth to a Frankenstein. Rather than regulate MFIs, I for one will welcome the day of their demise.


  1. Andhra Pradesh’s Animal Farm: The chickens have come home to roost «

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