India's loan arrangers hit by crisis

By Nidhi Dutt
BBC News, Mumbai

Image caption,
Microfinance is designed to help individuals with small business loans

A young widow sits in the middle of the dusty floor of her small mud brick house.

Her world, as a poor single mother in rural India, is as bare and as empty as the walls she stares at.

Lakshmamma had a micro-loan of about $200 that authorities say led her husband to commit suicide.

But what they seem to have overlooked, the family says, is that at the time of his death, Narsa Goud owed more than $2,000 to private lenders and relatives.

Lakshmamma is the face of a grassroots financial crisis in the southern Indian state of Andhra Pradesh.

In the last month, there has been a spate of suicides in rural areas that authorities attribute to debt concerns.

They say microfinance is part of the problem, accusing some major firms of malpractice, employing heavy-handed debt recovery tactics and charging interest rates that are too expensive for the poor.

In recent weeks, one major microfinance firm has been blamed for 17 of 57 recorded suicides.

But the lender says that the holders of these tiny loans had perfect repayment records.

The industry says that the government is using the age-old tragedy of rural suicides to get at it.

Extensive reach

The major companies that now find themselves at the centre of this crisis claim that people like Lakshmamma are being used to discredit an industry that has proven to be successful beyond its wildest dreams - and that of the state and local leaders.

Image caption,
Field workers usually travel to rural villages to visit borrowers once a week

They worry that if the government continues to squeeze their operations in Andhra Pradesh, millions of people will be affected.

And the reach of major lenders such as SKS Microfinance, India's biggest small loan firm by volume, is extensive.

SKS alone has about 2,200 branches, from where their field workers reach more than 100,000 villages.

The firm has 7.5 million clients in 19 states across the country and altogether, they hold debt worth approximately $3.5bn.

Andhra Pradesh is a key microfinance hub, with one of the highest concentrations of loans and lenders in the country. Business done here accounts for about 30% of India's total microfinance activity.

The industry's major players are well aware that how they ride out this crisis will have a great impact on their ability to expand and set up shop in many other parts of the country.

Big crisis, small cash

Last month, the state government imposed emergency measures on the microfinance industry, in effect barring field workers from entering villages and recovering loans.

And despite a subsequent High Court order permitting microfinance companies to continue working, many of their staff remain unable to get back out on to the road.

The impact is certainly being felt on the ground.

Image caption,
Microfinance firms work in some of the most remote parts of Andhra Pradesh

In recent weeks, some major firms have only been able to access about half the districts they usually do business in.

However, where they have been able to meet their clients, field workers are reporting recovery rates of about 80%.

Major lenders say that if business does not bounce back to normal soon, they fear they could be forgotten by their clients altogether.

One major lender commented that borrowers are usually willing to deal with uncertainty for about two weeks.

Any longer than that and business in such rural and remote areas becomes unpredictable and very uncertain.

Misunderstood money

Since the mid-1990s, India's microfinance industry has mushroomed.

From small beginnings, companies like SKS Microfinance have grown into multi-billion-dollar profitable entities.

They have made much of their money by filling a critical gap in the market between government programmes and the big banks.

According to SKS Microfinance, despite the work that has already been done, the industry remains unable to meet the huge, and growing, financial needs of India's poor.

Across the country, there are about 150 million households that need financial assistance, with a total credit requirement of about $60bn.

As of now, major lenders say the industry only has the capacity to meet about 19% of that demand.

Experts say micro lenders are putting small amounts of cash in the hands of people whom the traditional banking industry has struggled to reach.

And while the rate of interest is high, at about 30%, microfinance companies say their services still work out to be cheaper when compared to the overheads and difficulties incurred by the poor when seeking state or bank-based help.

Image caption,
Most small loan holders in India are women

Importantly, most small loan holders in India are women. To participate in programmes run by companies like SKS Microfinance, women have to form groups of five and the loans they apply for are contingent upon group guarantees and shared liability.

These small loans of up to about $1,000 provide much-needed cash for enterprise, emergencies and opportunity.

However, the crisis that has unfolded in Andhra Pradesh in recent weeks has taught many of these lenders vital lessons about doing business in India.

The head of one micro firm says that while his company has been successful in reaching out to poor communities, it may not have been as good at explaining how microfinance works and what his company actually does.

And since SKS's wildly successful public share offering in August this year, many have questioned the morality of companies that make big profits from helping the poor.

Vikram Akula, the founder and chief executive of SKS Microfinance, says a commercially successful business model - with a healthy capital flow driven by foreign investors and big banks - is the only way a company like his can accommodate the borrowers it already has and extend its reach to help many more people.

Official guarantees

With attention firmly on the small loan industry, the state has been actively promoting its own programmes and initiatives.

For years, authorities have been running self-help groups, organised and operated in a similar way to microfinance models.

According to the Rural Development Ministry, last year Andhra Pradesh spent $1bn on schemes that provided subsidised cash at interest rates well below the rate offered by microfinance companies.

Image caption,
Microfinance firms are struggling to meet demand for their services

And when it comes to their decision to act against micro lenders in recent weeks, the government is making no apologies.

R. Subrahmanyam, secretary of the Rural Development department, says that all the government is attempting to do now is regulate the rapidly growing micro market and asking companies to "behave".

No party actually thinks that microfinance firms will be pushed out of the state.

However, Mr Subrahmanyam says that in the event that some decide that Andhra Pradesh is no longer a place they want to do business in, the state and the banks have the financial capacity and the resources to fill the gap that opens up.

Lessons learned

When India's microfinance industry started, it was viewed as a mix of business and philanthropy.

At the time, microfinance was a critical cash lifeline for people in rural and remote India.

However, as the industry has grown and developed, so too has the focus on how it works and what companies actually stand for.

This latest crisis has shown that there is a great and growing need for regulation and protection of this emerging market.

The government of Andhra Pradesh is now in the process of registering every microfinance firm working in the state.

And for their part, firms that are part of the Microfinance Institutions Network, or MFIN, have offered debt restructuring assistance to borrowers who may be struggling to meet their micro-loan commitments.

Many of these companies are now realising that it is less about the money and more about how they negotiate their plans of future growth with those in positions of power.

This, they say, is not just an approach they need to utilise in Andhra Pradesh but across the country, if microfinance is to continue to play a critical role in lifting millions of people out of poverty in India.

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