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!