"Every day we think about it and feel entrapped".

It's not the script that Manda Gawande, 45, a housewife, and her four women friends in one of Nagpur's run down localities had desired when they borrowed money from a micro-finance institution. But the reminders of their commitment are now coming too fast for them to cope. "It's as though every week goes by so fast that we think we've paid our weekly installment only yesterday, and the man's back again at our doorstep to collect the installment today," she said.

Anna. That's the description they use here for the recovery boy. Every Friday, he comes at 10 in the morning, collects the weekly installments from them, reads out the rules, and promises to be back the same time, same place the following week. "Installment," says Gawande, "is a fact of life." Everything else must wait, but the group of five says they can't miss the weekly meetings with the MFIs' recovery agent, who, they say, knows they need small sums in their pressing times.

In the slums of Nagpur - nay, cities throughout the country - and across the countryside, micro finance pervades the minds of poor borrowers. "It brings happiness in the beginning," said a woman borrower, "tension in the end."

Micro-credit - small loans to the poor - has spread like wildfire across the world, with nearly half a billion consumers enrolled with the micro-finance institutions. India is no exception. There are about 70 million consumers of MFIs, and they are growing phenomenally every year, country-wide data shows. But far from its arrival on the scene as an innovative financial practice to address rural poverty, micro-credit is now being seen as the next big investment opportunity by too many lenders, many of them large institutions. This change, say critics, is antithetical to its charitable roots.

In an IPO, you are promising your investors that there is a lot of money to be made and this is a wrong message. Poor people should not be shown as an opportunity to make money out of.”
-- Mohammed Yunus

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Micro-finance now pervades the urban spaces as well. The gross loan portfolio of 146 self-reporting MFIs in 2009, the Micro-finance Information Exchange (MIX) data shows, stood at Rs. 21,000 crores, with an average per-borrower loan of Rs.6500. But along with growth has come a set of new challenges - criticism from many quarters of their high interest rates (between 25 and 50 per cent per annum, according to the country-wide data); poor governance; lack of transparency; multiple lending; and vicious debt cycles. Plus, there is no telling how the so-called micro-enterprises funded by the MFIs are performing nation-wide, say experts.

No real business

Take Gawande's group, for instance. Its members are not poor, but from a lower middle-income segment. They haven't borrowed money for any self-promoted business, but for consumption or urgent domestic requirement. Yet the official pretext for the MFI to lend money to the group remained a 'hosiery business'. "It's good that the agents don't ask us about our business," says Manda Gawande. "We actually have none."

In her case, she needed money for house repairs. The banks won't lend. The MFI option, they found, was better than the private usurer, who charges an interest of 5 per cent per month. The problems is - she has to bear all the pressures, since the loans are in her name, and tied intricately to the entire group.

Since there's no collateral, the MFIs resolve the problem of eligibility, requirement and enforcement of repayment by keeping the loan amount small, targeting groups instead of individuals, and making the attendance to the weekly meeting a compulsion, so that the non-poor are discouraged from borrowing (richer and credit-worthy individuals would opt for other easier options for their loans than MFI loans). "If one of us fails to pay our weekly installment," Gawande explained, "others have to pay a fine from their pocket." The moral obligation is too much of a pressure, she said. "Every day these women would make my life hell for having failed to pay my installment," she said. "The agent would not lend us money again."

For four other members, the reasons for borrowing money from the MFI differ. But like hundreds of other groups, they too had no business idea. "If we were entrepreneurs," says one of them, "we would not have been poor in the first place." Most of them, says Gawande, live a hand-to-mouth existence. In the two years that they have been borrowing money from the institution, the group says they've never had a peaceful moment or sound sleep. "We realise it's better to stay poor," they agree, "than in debt." They entered the debt cycle easily, Gawande concedes, but do not know how to come out of it. As one loan cycle comes to end, the other's ready to take its place.

No way out

Her other group members don't think credit cycles will move out of their lives anytime soon. At times, they borrow small sums from private moneylenders in the locality to repay their weekly sums to the MFI. Like millions of borrowers across India, this group too is simply juggling multiple loans.

Gawande has debt ranging from Rs.5000 to 15,000. "I borrowed from three places - Rs.32,000," she says. "Ten (thousand) each from Equitas and Janalakshmi, and Rs.12,000 from SKS," she says. First, she must keep the date and time of the meeting when the agents of the three companies come to collect the installments. Two, she must ensure that she has money ready on that day. "Some time we've to borrow from private moneylenders to repay this installment, but we can't skip this one," she says. An immense moral pressure abounds the group of five women, she says. "If one misses the installment, the others pay a price." SKS collects the money weekly and over 50 installments; Janalakshmi's is a monthly repayment for a year, and Equitas' repayment tenure is two years - every fortnight.

"We created micro-credit to fight the loan sharks," reasoned Professor Muhammed Yunus, the Grameen Bank founder and Nobel laureate, at a gathering of financial officials at United Nations earlier this year. "We didn't create micro-credit to encourage new loan sharks." Micro-credit, he said, should be seen as an opportunity to help people out of poverty in a business way, not to make money out of poor people.

The debate would not have hogged the public arena had the pressures on some of the debtor-farmers in Andhra Pradesh not led them to take their own lives, following the route hundreds of them have chosen over the last one and a half decades in Indian countryside. The charitable MFIs suddenly looked like sahukars, though the MFI industry has been quick in rebuffing the Andhra suicides story, seeking a judicial probe.

A push for transparency and regulation

Besotted by concerns and pressure for regulation, the MFI sector is being pushed to be more transparent. The debate so far has mostly centered on this question: How much interest and profit is acceptable? The global Microfinance Information Exchange (MIX), which monitors the sector, puts the interest rates by MFIs as fluid and highly varying inter and intra country. At its annual conclave in Jakarta in June, the Microcredit Summit Campaign called lenders to disclose their interest rates, urging more transparency and greater protection of the poor. "Investors, donors, policymakers, researchers and practitioners will immensely benefit from" having access to the interest rate data, Yunus was quoted as saying in a statement by the network.

"We created micro-credit to fight the loan sharks," reasoned Professor Muhammed Yunus, the Grameen Bank founder and Nobel laureate, at a gathering of financial officials at United Nations earlier this year. "We didn't create micro-credit to encourage new loan sharks."
At the same summit, the Campaign launched a new global scheme, called MicroFinance Transparency, as a response to controversy shrouding MFIs over high lending rates to the poor who lack information or expertise. The MF Transparency is in the process of constructing a country-wide data, in what would be a daunting exercise to make online information available to the investors on who's charging what.

The din over high interest rates has even drawn the Central Government's scrutiny, with the RBI and NABARD looking into the goings-on in the sector. The finance ministry has been insisting that interest rates charged by the MFIs are very high, and they must be lowered. The finance ministry has said that though it does not wish to cap or additionally regulate the MFIs and that the respective states must deal with them at their level, the institutions must keep interest rates low and affordable. "It must self-regulate itself," Finance Minister Pranab Mukherjee said in New Delhi in October 2010. In a recent note to the public sector banks, financial services secretary R Gopalan asked them to ensure that MFIs, particularly large and well-established ones, charge their borrowers around 22-24 per cent.

In an interview to a television channel after the Andhra Pradesh High Court verdict on the government's bill to regulate the sector, the founder of Basix, a leading MFI, and president of Micro-Finance Institutes' Network (MFIN) Vijay Mahajan accepted multiple lending as one of the problem areas. The term MFI is being used loosely, he said. Those under the MFIN umbrella are regulated by and registered with RBI and they do not engage in the coercive practices. So the question is, who's doing it.

"All our investigations," says Mahajan, "lead to names we have never heard of as members of the industry and in many cases we can't identify. So in that sense I think seeking registration by the state government was necessary." Speaking of conceptual regulation of the industry worldwide, Yunus said in an interview to Microfinance Focus, an online magazine, that this should come from the industry itself. "Micro-credit is a word misused and abused by MFIs," he said. "So, we should tell that this is not the genuine microfinance organisation." This applies to the Indian context too, says Mahajan.

After the controversy in Andhra Pradesh, MFIs have begun taking measures in damage-control exercise. Late October, they agreed to slash their interest rates by 2.5 per cent, and restructure loans from 50 weeks to 75 or even 100 weeks for those who find it difficult to repay.

But the high interest rates by MFIs are a global concern. In Mexico and some African countries, the interest rates of MFIs are as high as 100 per cent. The New York Times quoted Damian von Stauffenberg, founder of independent rating agency Microrate, as saying that while local conditions must be factored in, "any firm charging 20 to 30 per cent above the market was unconscionable" and that "profit rates above 30 per cent should be considered high."

Yunus explicitly opposes the growing trend of MFIs tapping the stockmarket through IPOs. First, Mexican firm Banco Compartamos went public in 2007. Now, it's the Hyderabad-based SKS Micro-Finance Ltd. "This is coming from the banking side, from the profit maximising side, and I am opposed to that," Yunus was quoted as saying by Microfinance Focus. "If they do it I cannot stop them, but I would encourage genuine micro-credit programs. When you opt for an IPO, you are promising your investors that there is a lot of money to be made, and this is a wrong message. Poor people should not be shown as an opportunity to make money out of."

Yunus says anything beyond 15 per cent above the cost of raising the money falls in red zone of loan sharking. "You will never see the situation of poor people if you look at it through the glasses of profit-making." Yet by that measure, 75 per cent of MFIs across the world would fall into his "red zone," a lead researcher at MIX, Adrian Gonzalez said in his March 2010 analysis. His study found that much of the money from interest rates was used to cover operating expenses, and argued that tackling costs, as opposed to profits, could prove an efficient way to lower interest rates.

Far from its original vision

The MFIs have seen two major shifts at the altar this decade - the growth imperative, and the private investors' growing interest in the sector at the same time. "When we look at the two decades of MFI presence in India, we find three distinct waves," says M S Sriram, a former IIM-Ahmedabad professor and now a Bangalore-based independent researcher.

The first wave, he says, was when the development sector discovered the methodology of reaching loans to the poor through a scalable model, something that the Grameen Bank of Bangladesh mastered. The second wave was when these MFIs scaled up and sought methods to morph into commercial entities. In the third wave, the mainstream institutions themselves took to microfinance as a lucrative business, he says. It's the third wave, where there's huge money to be made from the poor. As Sriram puts it, the MFI sector shifted from public purpose to private commercial interests; and from not-for-profit donor-driven model to for-profit market model. By early 2002, he says, most donor-driven MFIs were talking the language of transformation to keep up with their pace of growth; donors saw a market-based model to offer financial services to the poor.

Most high growth MFIs have adopted and improvised upon the Grameen methodology: identify the poor, organise them (so there's homogeneity and moral liability of repayment in the absence of any collateral), and standardise products and systems, enforce discipline, and ensure that any breach is dealt with harshly.

Another major problem with MFIs in India, says Sriram, is governance. The MFIs, he says, are not coming clean on two things: what the institutional representatives are doing on the board; and what role lenders and equity holders are playing in the organisation. "And while there are independent members on the Boards, these directors do not seem to be exercising their independence," he adds.

Does it alleviate poverty?

The question that runs through all this is: does micro-finance alleviate poverty? There are not too many large-scale studies on the sector, but a couple of efforts raise concern. The Chennai-based Centre for Micro-Finance (CMF), which examined these says that the first report suggests that the impact of micro-finance on the poor has not been as positive as the sector would believe. And the other report, it points out, goes on to suggest that as an instrument of poverty alleviation, micro-finance is not a clear choice. The CMF's own study of Spandana customers in Hyderabad slums found no clear proof that micro-finance lifts people out of poverty.

Most high growth MFIs identify the poor, organise them, and standardise products and systems, enforce discipline, and ensure that any breach is dealt with harshly. (Above: Yousuf Pathan and his group at his electrical shop in village Waifad, Wardha, Maharashtra. The group has taken loans from Basix for their respective micro-enterprises).
A longitudinal impact study commissioned by Small Industries Development Bank of India supported some of the intuitive hypotheses on the impact of micro-finance. But it does not fully support the hypothesis that micro-finance is an effective strategy for extending financial services to the poor, or that it contributes to women's empowerment.

Studies by Professor R Ramakumar of the Tata Institute of Social Sciences (TISS) and Pallavi Chavan show that NGO-led micro-credit programmes have been able to bring about a marginal improvement in incomes, but the borrowers have not gained much by way of technological improvements, given the emphasis on 'survival skills'. These findings indicate that micro-finance is a great tool for smoothening consumption and relieving seasonal liquidity crises that visit poor families; and that it reduces the need to resort to high-cost borrowing from informal sources, the CMF said in its report.

Barely breaking even

The reasons, it seems, are pretty straighforward. Under certain simple assumptions, says Ramakumar, the borrower-initiated micro-enterprise (especially in rural sector) should have a rate of return of at least 24 to 36 per cent to break even. For smaller industries or firms, rates of return would be smaller, making a target of 24 to 36 per cent highly unrealistic, given the low organic composition of capital in the enterprise. So, any RoR below 24 to 36 per cent would imply a loss for the borrower, he explains. "The argument that loans under micro-credit programmes could raise incomes of the poor, thus, stands on very weak grounds," his studies point out.

Take the case of Yousuf Turebkhan Pathan, 42, who runs a small electrical shop in Wardha's Waifad village. As part of a five-member group he's borrowed Rs.15,000 from Basix, payable over 18 months with an EMI of Rs.1000. As that loan is barely sufficient for his shop's expansion, he asked his mother to borrow from another MFI in the village for his enterprise. "In all I repay Rs.3000 every month for three different loans worth Rs.32,000," he says. "That eats up most of my income, and in the end I am virtually left with nothing, he says, ruing hefty interest rates as unjustified and unfair. "Loans," he says, "are now my necessity."

Customers like Pathan and his mother Yasin Bi have no financial expertise to understand what interest rate they should actually pay on their small loans. "The contrast between the client who is supposed to benefit and the promoter who is actually benefitted is stark," says Sriram. "In such a business it is better to be moderate. "It is in the long-term interest of these businessmen to consider this, because the backlash in case of undue enrichment from the poor is going to be much larger and harsher."

It's time, he says, for MFIs to pause and introspect.