Credit crunch, Microfinance etc.

An article that appeared in the Times of India, republished in Micro Capital:

Big financial institutions of all sorts are in dire straits across the globe. But one category remains unaffected - micro-finance. Even as the global financial system freezes and giants like Lehman Brothers collapse, micro-finance institutions (MFIs) are expanding unfazed. Famous financiers face defaults big enough to wipe them out, but MFIs report virtually zero default.

The article goes on to say the following:

Microfinance, by contrast, has no collateral at all. MFIs deliberately keep loans small, well within repayment capacity. Some MFIs give first loans of just Rs 5,000 a year. Those who repay qualify for a higher second loan, maybe Rs 7,000, and the third loan can be still higher. But MFIs set an absolute loan limit, ranging from Rs 12,000 to Rs 25,000, depending on local economic opportunities, to guard against over-borrowing. Wall Street needs similar safeguards.

India Post / NABARD credit disbursal

A news item dated 29th September 2008 mentioned that, NABARD - National Bank for Agriculture and Rural Development has teamed up with India Post, the postal service of Govt. of India, to distribute microcredit to self help groups.

However, a later news item, dated 7th October 2008, says NABARD has backed off, at least temporarily, pending resolution of who shares the risks.

Don't make profits from micro finance - says Yunus

In the 11th annual Microcredit Summit Campaign conference being held in Bali, Indonesia, Grameen Bank's Muhammad Yunus has said:

If you are making profits you are moving into the same mental mind-set as loan sharks.

However, the trend is going to be different. More private equity players and big banks are getting into the micro credit field, hoping to earn significant profits. I had already linked to The Economist article on CompartamosBanco, a micro credit institution which became an aggressive for-profit company a while back, raising hackles across.

Rangde.org - a Kiva.org type set up for India

I found out about Rangde.org, an operation along the lines of Kiva.org, in bringing together microcredit lenders and borrowers. It also offers the lender an effective rate of 3.5% on the investment (the repayment period is unclear), while charging the borrower 8.5% (the spread of 5% is decent for the people involved in between, as we all know how high the cost of servicing is in this sector).

I wish them a great progress.

Micro-finance growing the fastest in the East (India)

Chennai-based Centre for Micro Finance (CMF) has said the micro-finance sector is growing at the rate of 82% in the eastern part of the country, the fastest rate in India.

Also, there exist a great disparity in the penetration of micro finance within the region, with Orissa and West Bengal witnessing high levels of penetration, and states like Assam, Bihar and and Jharkhand lagging behind.

A proposed Micro Finance Bill 2007 is yet to be passed by the Parliament as there is no consensus on several issues. Most notable being on limiting the interest rate charged by the micro-finance companies. The article also talks about this.

Speaking at a seminar on micro credit organised by the Confederation of Indian Industries (CII), Abhijit Banerjee of Massachusetts Institute of Technology (MIT), said "Putting a ceiling on the rate of interest charged by the micro finance institution would not be a good idea, more so on this juncture when the economy is passing through a high inflationary regime."

According to him, "One should look for a couple of years before putting a cap on the lending rates, with the increase in competition the interest rate might even moderate. Moreover, in the current inflationary situation, it would become all the more difficult for these MFIs to sustain".

...

Generally a borrower repaid the loan weekly and so for a annual loan of Rs 5000, a collection officer had to visit 52 times, pushing up the transaction cost per loan.

"Hence the interest rate is higher," he explained.

Pragati Gramodyog Sansthan (PGS) - helping bonded labourers

An article on slavery talks about the brave work done by an Uttar Pradesh based entity helping former bonded labourers benefiting from micro-credit.

Gonoo lives in Lohagara Dhal, a forgotten corner of Uttar Pradesh, a north Indian state that contains 8 percent of the world’s poor. I met him one evening in December 2005 as he walked with two dozen other laborers in tattered and filthy clothes. Behind them was the quarry. In that pit, Gonoo, a member of the historically outcast Kol tribe, worked with his family 14 hours a day. His tools were a hammer and a pike.

...

Every single man, woman, and child in Lohagara Dhal is a slave. But, in theory at least, Garg neither bought nor owns them. They are working off debts, which, for many, started at less than $10. But interest accrues at over 100 percent annually here. Most of the debts span at least two generations, though they have no legal standing under modern Indian law. They are a fiction that Garg constructs through fraud and maintains through violence. The seed of Gonoo’s slavery, for instance, was a loan of 62 cents. In 1958 his grandfather borrowed that amount from the owner of a farm where he worked. Three generations and three slave masters later, Gonoo’s family remains in bondage.

...

Among the Kol of Uttar Pradesh, for instance, an organization called Pragati Gramodyog Sansthan (PGS)—the Progressive Institute for Village Enterprises—has helped hundreds of families break the grip of the quarry contractors. Working methodically since 1985, PGS organizers slowly built up confidence among slaves. With PGS’s help, the Kol formed microcredit unions and won leases to quarries so that they could keep the proceeds of their labor. Some bought property, a cow or a goat, for the first time in their lives, and their incomes, which had been nil, multiplied quickly. PGS set up primary schools and dug wells. Villages that for generations had known nothing but slavery began to become free.

A moving story. A great example that micro-credit can go a long way in changing the fortunes of thousands of people.

The Economist article on profiting from the poor

The Economist has an article talking about Mexico's CompartamosBanco. This Microfinance Bank charges high interest rate (annualised 75%+) and has listed its shares with a market capitalisation of over USD one billion.

Compartamos apparently ran a not-for-profit like operation and grew very little. Then it rediscovered itself as a for-profit aggressive company, raised money and is growing fast now. Several Microfinance industry veterans including Mohammad Yunus are of the opinion that Microfinance must be a social business with no-profit, no-dividend, reinvestment model. Compartamos is of the opinion that generating profits out of this sector will bring in more investment and thereby more individuals can benefit from this process.

The Economist approves this viewpoint. It is also praising Compartamos for its financial literacy course that has benefited around 60,000 people.

Microcredit for slum dwellers in Delhi

A Government of India Press Release says, a bunch of Government owned banks have come together "to provide loans at reasonable rates of interest to the slum dwellers of Ekta Vihar in Delhi".

The banks involved in the lending are "Andhra Bank, Bank of India, Canara Bank, Indian Overseas Bank, Punjab National Bank, State Bank of India, Syndicate Bank, UCO Bank and Vijaya Bank."

The self help group involved in managing the lending is "ASHA Community Health and Development Society, an NGO working in health and development of slum areas."

The press release also says that the borrowers are eligible for life insurance cover from LIC.

Kiva vs Microplace

I was thinking of writing about this for quite a while. There are two nice write-ups which I will point to. One at NextBillion.net: Kiva vs. MicroPlace - What's the Difference? and the other at Microfinance Gateway: The buzz about online microlending. At the nextbillion.net, an Indian commenter Subhodip Dutta had written:

I am looking forward to launching an Indian specific P2P lending site which would be a mixture of all three sites prosper,kiva & microplace.Already in the process of coding and designing would really appreciate if any one guide or throw some more light on the regulatory licensing aspects of the business and other country specific government permissions. Suggestions from mentors are welcome.

In India, both Kiva and Microplace will run into rough weather with the authorities, in my opinion. Or alternately, the RBI and the Government may not mind Kiva model but may get antsy with the Microplace model. It may be possible to simply register a non-for-profit charity and set up a web site to run a Kiva type operation.

However, Microplace model seems to be interesting. It is a bit too early to say which will succeed. India is a large enough microfinance market where one can tap enough lenders and enough MFIs and enough borrowers, to sustain several Kiva and Microplace like operations simultaneously.

Micro-investment: Fabindia

Business Standard has a story on Fab India, owned by William Bissell, working with weavers to put together joint ventures.

The concept, now a Harvard Business School case study, is simple. A fully-owned subsidiary of FabIndia, Artisans Micro Finance, a venture fund, facilitates the setting up of these companies, which are owned 49 per cent by the fund, 26 per cent by the artisans, 15 per cent by private investors and 10 per cent by the employees of the community-owned company.

The investment by these four categories of investors provides the paid-up capital. The company promotes the sales of its artisan community to FabIndia, which is the principal buyer. Eventually the companies will sell to other buyers, too. Haryana and Faridabad have already started independent sales.

The results seem impressive too.

Although the villagers see it as a gamble, there is already evidence that it works. A community-owned company promoted a year ago in Jodhpur with a paid-up capital of Rs 34 lakh is valued at Rs 1.10 crore. The company, which totted up sales of Rs 5.7 crore and a profit after tax of Rs 22 lakh in its first year, has 2,300 artisan shareholders.

Each of their Rs 100 shares is worth about Rs 300. As many of them hold 10 shares each, their investment of Rs 1,000 has tripled to Rs 3,000, an escalation they couldn't have dreamed of. Through a complicated internal trading system, an artisan can — if he wishes — recover his investment.

Microcredit in Meghalaya

Microcredit institutions has spread in the Indian state of Meghalaya. The Economic Times reports:

"At present, there are more than 1100 SHGs, formed under twenty-five federations comprising ten community and rural development blocks spread across the West, South and East Garo Hills. The groups are required to form federations before registering under the banner of BILCHAM," said Daniel Ingty, a rural development officer associated with the bank.

Here, BILCHAM is Banking Institution and Learning Centre of Excellence for Holistic Aspiration of Mothers, an apex self help group federation in Meghalaya.

Bollywood film has micro-credit featured

A bollywood film called "Summer 2007", produced by Atul Pandey and directed by Suhail Tatari focuses on farm suicide in India, and proposes micro-credit as a possible solution:

The film also explores the possibility of micro credit as a solution and has a character inspired by Mohammad Yunus, the 2006 Nobel peace prizewinner and founder of Grameen Bank, Bangladesh's biggest micro-credit institution.

Microfinance Q&A in The Guardian

A somewhat insulting Q&A on microfinance has been published in The Guardian. Here are some samples:

Why is Barclays interested in people with virtually no cash?
It isn't. That's why Care International is involved: it has the expertise to work with the poorest villagers. Barclays is interested in developing financial services for the next level up, where people might want to borrow to invest, and need a secure place to make deposits. ...

What is the point of people with almost no income getting into debt?
At the most basic level, sometimes even the poorest have to borrow a little in order to meet an unexpected financial demand such as a health bill.

If Barclays has no interest in "people with virtually no cash", they do not have to get involved in microfinance. Other people who are interested in the well-being of poor people with no cash are more than happy to do so. Barclays and several other banks are jumping into the microfinance bandwagon because they know they can make profits.

As to why people with almost no income are getting into debt, it is because by borrowing, they can generate income. This may sound a bit strange to Anne Perkins who wrote the Q&A. But people borrow micro loans not just for consumption, but mostly to generate income.

If we demanded that only people with income should get loans, then microfinance would not have survived.

LIC, state insurer to enlarge micro-insurance program

Life Insurance Corporation of India (LIC) says it will massively increase its rural, micro-insurance program five-fold to offer 4 million insurance policies this year in rural India.

TS Vijayan, chairman, LIC said that two years ago, the insurer had sold 8 lakh policies through its tieup with NGOs, micro-finance organisations, co-operative societies and rural banks.

"Now that LIC's technology platform is perfected, we are confident of moving out in a big way. Having realised that the key to greater spread will come from creating new distribution avenues, we have set a target of selling more than 4 million policies in the current year," he said.

Loan waiver culture - The ET editorial

21st May 2008 dated The Economic Times editorial (Waiver hits credit culture) lamets that waiver of farm loans by the Government of India has resulted in increased defaults.

The government’s farm loan waiver scheme has already caused default rates to rise, forcing the country’s largest bank, the State Bank of India (SBI), to temporarily stop funding tractor and farm equipment purchases.

Of course, the finance minister P.Chidambaram immediately intervened and directed the state owned bank to continue giving tractor loans.

Muhammad Yunus of Grameen Bank has severely criticised bank loan waivers by the Government owned Bangladeshi banks and how this has seriously affected the operations of microfinance bank, Grameen.

Paying back the loan is a cultural concept. People borrowing money should feel the strong moral urge to pay the loans back. Loan waivers instead make them feel that if things go really, really bad, Government will step in and cancel the interest payable and even the principal. This will make even the decent guys default on their loans.

Such a culture will seriously impact the microfinance institutions operating in the rural areas. The farmer whose agricultural loan from the state owned bank was waived, will have a wife who is the ideal candidate for taking loans from a microfinance company. Think about her attitude to paying the loans back, when her husband's loan gets waived by the Government itself!

The same ET editorial says the following:

It is also important to ensure that micro-finance and not bank lending becomes the dominant way of disbursing credit to the farm sector. The entrenched patronage culture has meant that despite farm credit growing at a fast pace, the number of farmers covered has not increased proportionately, implying that the same set of beneficiaries are cornering the increased credit.

No right thinking MFI should enter the farm loan sector. It is the most dangerous sector in India and also Bangladesh. As long as Government intervention persists, privately funded MFIs should never lend any money to the farmers. Muhammad Yunus has made this very clear... he stays as far away from the farm sector as possible, and he is managing a large bank. The Indian MFIs are tiny compared to Grameen and they will be killed by the farmers and Indian Government together.

The Indian Government has made the lives of several cooperative agricultural banks and societies crippled. The government will announce the loan waiver and the banks will be reimbursed at a later date, sometimes spreading over 5 years the money lost from waiving the loans. During this time, the cooperative banks will struggle to operate. Larger nationalised banks will manage because of their other portfolios.

Providing relief to the farmers in distress is very important. I am not against that. However the methodology should be carefully thought out. Low interest or no interest loans from Government directly to the affected, who in turn pay the banks for the loans they have taken should be the way to go. Rather than waiving the loans, give them a further liberal loan which they can pay back slowly. Yunus has done this in case of Grameen.

The Government can offer to pay the premia on crop insurance out of their budgeteray allocation, thereby offering completely free of cost insurance to the farmers. That would be acceptable. As it is, farm income is not taxed. Water comes free wherever farmers live in the river bed. Fertiliser is subsidised by the Government. In several Indian states, power is free to the farmers, or offered at extremely cheap rates by heavy subsidy.

If despite all this the farmers fail, it is because of the vagaries in the weather, lack of proper education, outdated methods of farming, highly fragmented fields reducing the yield drastically, complete lack of crop insurance and lack of cold storage facilities which can help them to get good price.

Rather than waiving the loans, the government should focus on improving the agricultural infrastructure and educating the farmers.

A panchayat near Chennai - Kuthampakkam - had a president called Elango for the last two terms. Currently someone else runs the panchayat. Kuthambakkam used to be full of thieves and robbers. (The word 'Kutham' is Tamil means 'Crime'. Pakkam is Ville. The place itself was called Crimeville, so you can imagine what the inhabitants used to do there!) He gave a speech couple of years ego on what he achieved there. He helped the farmers get loans, on the condition that they pay back the loans to the banks so they can get more loans. He helped set up flour mills, so that local entrepreneurs will procure the produce and pay a decent money and make the same into value added products. He got the village women to press oil, mill rice, make flour, produce other processed food and helped them to sell in the nearby towns. The village started propspering.

When DMK won the state elections in Tamil Nadu, one of the first thing they did was to waive off agricultural loans taken from the state controlled co-operative banks. Elango said that the farmers in his village started giving him dirty looks for forcing them to pay the loans back, while their brothers elsewhere enjoyed complete waiver. (His presentation @ slideshare in English, His speech from Archive.org in Tamil, My blog post then about this presentation in Tamil.)

How one man's laudable efforts end up for nought by the thoughtless 'waiver' actions of a government!

Microfinance and Sub-prime - from India Development Blog

India Development Blog, a blog by researchers at the Institute for Financial Management and Research, compares securitization of Microfinance loan portfolio and onselling them with similar things that have happened with Sub-prime mortgage in USA. Most notable quote is

the worry is that MFIs that have securitized their portfolios and banks, which have lent money through the SHG-bank linkage program no longer have the incentives to ensure quality. The intention is that these financial instruments are designed with these issues in mind, and they are able to mitigate these problems, but in reality, that is not often true, as we have seen from the subprime mortgage crisis.

If would be interesting to know from the MFIs that have done securitization deals in India, how they keep up the quality of loan collection, and debt restructuring when they find defaulting likely to happen.

Grama Vidiyal gets funding

Trichy, Tamil Nadu based microfinance institution Grama Vidiyal Microfinance Company has received investment funding from Unitus Equity Fund L.P., USA and Vinod Khosla, a VC. The investment received was Rs. 14.7 crore. The company focuses on Tamil Nadu right now. It hopes to cover all districts of Tamil Nadu and expects to spread its operation to other states in 2009.

I couldn't locate any website for this company.

Unitus and Vinod Khosla have also invested in SKS Microfinance.

Grameen Veolia Water partnership

After Grameen Danone partnership offering nutritional yogurt and milk products in Bangladesh, Grameen is doing a deal with the French water company Veolia, for setting up water treatment plants and 'paid' water supply to people in Bangladesh.

Veolia and other water utility companies are seen as bad companies, in particular in the developing third world countries. Across the world, Veolia, Suez, and other water utility companies do not have a good record when it comes to taking over municipal facilities and providing service to the customers. The Water Business, a book by Ann-Christin Sjolander Holland, covers in detail the track record of these companies in Latin American, Asian and African countries.

Prof. Yunus of Grameen is seen as something of an outcaste, for his attempt at alleviating poverty by sleeping with 'profit making companies'. It was Telenor in telecom, a relationship that is not exactly great because Grameen goofed up with the ownership model, giving away majority equity to Telenor. But the deal with Danone is more carefully set up. Veolia will follow the same model of 50-50 ownership. I would like to keenly follow, if Veolia deliver in Bangladesh in the coming years.

Grameen is more than a micro-finance institution, in that it is looking at solutions to complex problems, beyond simply loaning money.

It will be interesting to see which MFI in India will seriously consider this model.

Micro finance institutions in East India, Forbes List

This Business Standard article mentions several MFIs active in East India namely,

1. SKS Microfinance
2. Bandhan
3. Microcredit Foundation of India
4. Sadhana Microfin Society
5. Grameen Koota
6. Asmitha Microfin Ltd
7. Share Microfin
8. BISWA
9. Kas foundation
10. Prochesta
11. Youth Volunteers Union

This article also mentions a Forbes ranking list. So I searched for it and got this list.

Reliance Capital foray into microfinance

Reliance Capital is providing funding (I suppose loans) to MAS Financial Services and Vardan Trust, two microfinance institutions in India. Initially they have been given Rs. 5 crore and Rs. 40 lakh respectively. Reliance Capital is earmarking Rs. 100 crore for Microfinance initiatives.

Details from The Economic Times

The Independent: Microcredits go mobile in India...

I couldn't understand much from this article though.

But now hundreds of Indians have become attached to a mobile bank manager, which means they can be in direct contact with lenders. Using smart cards and handheld biometric fingerprint readers, Indian banks such as ICICI and Punjab National are now taking their services direct to India's 350 million once un-bankable people.

All I could locate from this article was the name of the company FINO, which must be this one. Should find out what they do.

New Yorker article: What Microloans Miss

Pretty much the usual criticism that what developing countries require is more job creation and not micro loans.

What poor countries need most, then, is not more microbusinesses. They need more small-to-medium-sized enterprises, the kind that are bigger than a fruit stand but smaller than a Fortune 1000 corporation. In high-income countries, these companies create more than sixty per cent of all jobs, but in the developing world they’re relatively rare, thanks to a lack of institutions able to provide them with the capital they need. It’s easy for really big companies in poor countries to tap the markets for funding, and now, because of microfinance, it’s possible for really small enterprises to get money, too. But the companies in between find it hard. It’s a phenomenon that has been dubbed the “missing middle.”

Interview with Vikram Akula, SKS Microfinance

There is an interview with Vikram Akula in Business Standard, dated 22nd February 2008. I cannot however locate the online URL to provide a link here. I will mention just the key points here.

On his model being a replica of Grameen Bank: Yes, it is, except for the difference that SKS works on for-profit and expects to make a profit. Yunus' Grameen model talks of no-profit, no-loss.

On the interest rate being high: SKS charges on an average 26% diminishing interest. This breaks into 11% their own borrowing cost, 9% staff costs, 3% amenities and office costs, 2% loan-loss provision, between 1-2% profit.Wherever they have reached size, they have reduced the interest rates - for example in Andhra Pradesh and Karnataka to 24%. Their eventual goal is to reduce this to 21% if further efficiencies are achieved.

FMCG: In addition to offering loans, they are negotiating with FMCG product companies to offer FMCG goods at cheaper prices to their existing loan customers. Current customer base of SKS is around 1.7 million people. Targeted by March 2008 - 2 million, and by March 2009 - 4 million.

Investment in Gold: SKS is offering fixed price gold coins, which can be paid for by a weekly investment of Rs. 10-15. Once the investment is complete, the investor gets a certificate for the weight of gold, at market price, which can be traded any time for the current market price of gold.

Education: SKS is teaming up with education provider and infrastructure provider to set up schools. SKS will finance the families. Infrastructure provider will set up school buildings. Education provider will provide the teaching. The cost of the education is expected to be Rs. 250 per child per month (which will be borrowed from SKS and paid to the providers). They expect to start with 20-30 schools in May 2008, and extend this to over 300 schools.

SKS Microfinance gets third round of investment

US based Silicon Valley Bank and Columbia Pacific have together invested Rs. 147 crore (around US$ 36.75 million) in SKS Microfinance in December 2007. In the earlier round of investment made in October 2007, a clutch of investors, including Sequoia Capital, Unitus Equity Fund and Vinod Khosla had invested Rs. 50 crore (US$ 12.5 million).

The Economic Times article

Micro - housing loans

This is not a new concept, but only now coming to India. National Housing Bank (NHB) and Chennai based Repco Foundation for Micro Credit (owned by Repco Bank, owned by Government of India), are disbursing micro home loans in five districts of Tamil Nadu. The loans range form Rs 25,000 to Rs 2 lakh. This is not for buying land, but only construction loans for those people who already own the land. Obviously, over the coming days, the model will change to include buying land as well.

News from Economic Times