Happy Birthday India Development Blog

It has been exactly one year since Doug Johnson made the first posts on the IDB. I wanted to take this opportunity to thank everybody who takes the time to read our posts, and give an even more special thanks to all those who make comments.

All of us who write for the blog are interested in learning from readers and hearing if you agree or disagree with a claim we have made in a post. Something as simple as putting up a comment that will link us to an article about the subject we have written about is incredibly welcome.

We know that the blog is far from perfect, but we hope that it can improve in content and as a forum for discussion. Among the ways we intend to “develop” the blog are by promoting more use of the comments section, reaching out to some new bloggers with different interests (i.e. not just microfinance and randomized evaluations), and having guest posts or interviews with academics and practitioners.

If you have any suggestions for other ways to improve the blog, or any other thoughts about the IDB, we would really appreciate if you let us know in the comments section.

Will the Financial Crisis Squeeze Out Small MFIs?

A few recent news articles mull over the impact of the financial crisis on microfinance. The first, from the Economist, takes an optimistic view pointing out that the high repayment rates that characterize most microfinance loans make MFIs safe investment options. On the other end, a Reuters piece argues that microfinance in South Asia is set to take a hit as banks become increasingly cautious. And yesterday, the Mint published an article in which Vikram Akula says that small players are going to be squeezed out of the Indian microfinance market. According to him, SKS is already taking over clients of smaller MFIs that are struggling in the economic downturn.

Thoughts?

Cowboys and Moneylenders

A recent Economist article outlines the trend in which American cities are cracking down on payday lenders by capping high interest rates. Over the summer, my colleague Dan wrote a lengthy article on payday lending, including a scenario of the cycle of debt that the poor often get trapped in as a result.

Clearly, payday lending is not an ideal form of finance. And while interest rates are exorbitant (as much as 400% annualized interest), I would stop at saying extortionate. From the article: “Industry supporters consider this attitude elitist, as if only rich people can handle living on credit. They say that if a hard-working American finds himself in a bind, taking an occasional payday loan may be better than bouncing a cheque or having the power cut off.” Dan argues the same, pointing out that people choose to take these loans as a last resort, most likely because they don’t have access to cheaper loans on such short notice.

In India (and in many developing countries), moneylenders are the equivalent. Like payday lenders, they are oft villanized. Until this summer, the word moneylender evoked images of Tollywood-esque villains, complete with goonda sidekicks. In reality, when I met a moneylender as a welcome surprise of the TIP F/D internship over the summer, he was….scared. There he was, sitting in front of about 25 mostly foreign 20-somethings that he couldn’t understand, and he looked frightened. He probably thought he was there for us to interrogate him about why he was so evil. It turned out that he was a normal businessman providing a service that is sorely needed in many rural areas of the country. Obviously, my sample size of one prevents a blanket statement, but I think I can fairly say that rather than painting the moneylender as villain, we should acknowledge that they exist because the financial system has not yet come up with an adequate solution.

In India, when people take loans from moneylenders, it is usually because they have no place else to turn. According to RBI, 41% of the Indian population is unbanked. This number is likely significantly lower than the reality as most of the well off probably have more than one account to protect their savings. So, should we really place the blame on the moneylender (or payday lender) rather than the gaps in the financial system?

Just Keep the Interest

Several weeks ago, a colleague of mine told me about a recently opened MFI located in South India that uncovered an innovative method of legally offering savings accounts to their clients (I won’t go into the details of how until this has been approved by the government). Even better than simply being able to offer a savings product, it would be cheaply accessible (not a fixed deposit) and offer around an 8% rate of interest. After getting excited about the idea of Indian MFIs finally being able to offer a badly needed service to rural consumers, my next thought was “why offer interest?” Pocketing this money, rather than offering any interest, let alone 8%, might be a great way for the MFI to keep operational costs down and thus offer lower costs for other products. My belief about the irrelevance of interest rates on savings to the rural poor is informed by this account of the massive Indonesian MFI Bank Rakyat Indonesia’s experience with different savings programs. The following excerpt can be found in Morduch and Rutherford’s “Microfinance: analytical issues fro India.”

Bank Rakyat Indonesia has also made convenience, reliability, continuity, and flexibility core elements of its mission. To do this, it underwent a radical make-over in 1983. The bank had started as a government-owned rural development bank in 1968, charged with helping to spur agricultural production. To help both borrowers and depositors, the government mandated that borrowers pay interest rates of 12% while depositors received 15% under the national savings program Tabungan Nasional (TABANAS). The intentions were good but the negative interest rate spread was untenable, and by the late 1970s the bank was suffering huge operating losses. Indonesia de-regulated banks in 1983, and BRI transformed itself with the aim of becoming financially viable without subsidies. The staff turned to the villages to study local financial markets to better understand what households really needed, and in 1986, after a year of field work, BRI rolled out the new “village savings” product, Simpanan Pedasaan (SIMPEDES). It was quickly popular, despite not paying interest at all on small deposits and paying at most 12% for the largest deposits – relative to the 15% returns offered by TABANAS. But while TABANAS restricted withdrawals to two times per month, SIMPEDES offers unlimited withdrawals. Patten and Rosengard (1991, p. 72) argue that “although very few TABANAS savers actually withdraw funds twice a month, this limitation is an important psychological barrier to the people in rural areas, who seem to fear that they will not have access to their TABANAS savings when they need them.”

I love this story because it represents a bank responding to the desires of their clients, and not demanding that clients desire what the banks assume they should want. More on BRI and the SIMPEDES loan can be found in Marguerite Robinson’s “The Microfinance Revolution.”

It is more than a stretch to assume that Indonesian rural savers and South Indian savers are one and the same, but is certainly worth researching. Let’s say this does turn out to be true. Then my attitude is, and this may seem severe, why disburse interest that does not make the product any more attractive to recipients.* Take that money and use it to make other “push” products (products that are theoretically valuable for the client but difficult to sell) more attractive, such as health and crop insurance.

* I realized a few hours after putting up this post that I should have thrown in a caveat. The BRI example does not necessarily mean that their clients did not care about receiving interest on their savings. It only suggests that in comparison with accessibility, receiving interest was not a high priority and the lack of interest in the SIMPEDES product was likely not much of a deterrent to take up.

Teacher Attendance linked to Student Success

In a recent entry, I argued that a cost-effective way to increase child attendance in schools would be through health interventions, such as deworming and providing supplements to reduce anaemia. Interestingly, these initiatives did not help increase students’ test scores.

Using more research from the Poverty Action Lab (JPAL), it seems like getting teachers into the classroom more consistently in India can help increase student performance. A study conducted by Esther Duflo, Rema Hanna and Stephen Ryan in Udaipur demonstrates that impersonal monitoring and monetary incentives that encourage teacher attendance can markedly increase teacher attendance and help improve students test scores.

The Situation
In Udaipur schools, on a typical day, 44% of teachers are absent. These numbers are higher than in other areas of India (average is about 19% absence rate). Across India low teacher attendance negatively impacts students.

The Intervention: Monetary incentives and impersonal monitoring
J-PAL, in conjunction with Seva Mandir (an NGO that runs hundreds of schools), chose 113 schools to monitor, 57 of which received the following intervention. Impersonal monitoring consisted of having a student take the teacher’s picture with a camera each day. The camera tracked the date and time that each picture was taken, thereby reducing the ability to cheat the system. The teachers with cameras in their classroom also had a different monetary incentive than other teachers:
• Standard pay – Teachers are paid Rs 1000 per month ( ~ $20) for 21 days of teaching.
• Pay for schools with cameras – Each teacher was guaranteed a base pay of Rs. 500, and received Rs. 50 for each valid day taught.

Results
As the image below from a JPAL brief on this study shows, three main outcomes stemmed from the intervention: 1) Teacher attendance increased by 21%, 2) Students improvement on a standardised aptitude test went up 11% more in schools with the intervention, and 3) Student graduation from state school increased by 10%.

This study shows that getting teachers into the classroom can help improve student performance. The authors do not recommend this specific “camera” intervention as a scalable one. They instead stress the need for a change in pay incentives (which can be very difficult in government run schools) and credible impersonal monitoring, which encourage teachers to attend school. Getting teachers into the classroom is not the only component of improving student performance, but it seems to be a good start.

To learn more about this study and how to improve teacher attendance, read the following:
Solving (Teacher) Absenteeism, Raising Test Scores
Monitoring Works: Getting Teachers to Come to School (Udaipur study)

No Longer Live Blogging: Presentations Available

While at the Microfinance India Summit last week, I spent a substantial amount of my time rushing to record the data and recommendations suggested in the presenters PowerPoints. It turns out that this was a foolish waste of time. As promised, the organizers of the conference have made available online nearly every presentation. I suggest taking a look at the following:

- Suman Bery, of the National Council for Applied Economic Research (NCAER), presented on the Council’s findings from a large panel study they have been doing on the SHG Bank Linkage Programme. As Mr. Bery acknowledged, the conclusions should be taken with a grain of salt because NCAER were not able to have a true control group to which those participating in the program could be compared.

- I have a soft spot for witty old patrician British men, so I pretty much eat up anything said by Professor Malcom Harper, former chairman of BASIX and author of “What’s Wrong with Microfinance.” He presented on the future of SHGs in India. He truly seemed confused about where the movement was headed, claiming that he could both see SHGs dying out because clients preferred joint liability MFIs or on the opposite end of the spectrum, that they could slowly morph into cooperative banks similar to what we see in Germany today.

- CGAP Senior Microfinance Specialist Syed Hashemi’s PowerPoint on “Graduating the Poorest” was not only informative but extremely aesthetically pleasing. He discusses the theory behind ultra poor programs and the various locations they are piloting the program. CMF, along with professors from MIT, are evaluating the “ultra poor program” being run by Bandhan in West Bengal. I recently interviewed the CMF research associate managing this project and the podcast can be found here.

- And of course, you have to check out the presentation by former Centre for Micro Finance Executive Director Annie Duflo, in which she discusses the results from various studies that CMF and Innovations for Poverty Action (IPA) have conducted on the impact of microfinance.

Education: If you are not healthy, you can't go to school

Though I mainly focus on microfinance here at CMF, I am always drawn to research and news on education. I think that in India, and in most other nations, educational opportunity and attainment is one of the key factors in determining whether individuals and their families can improve their lives.

Accordingly, I eagerly read a recent editorial written by the heads of the Poverty Action Lab (JPAL) in South Asia (here), on how deworming can increase child attendance in schools. According to the editorial, a deworming intervention in Kenyan primary schools reduced absenteeism by 25% and increased the amount of schooling the average child receives by one year.

In a study conducted in Delhi at Pratham preschools (an NGO that focuses on children literacy) focusing on child health once again yielded educational returns. Deworming tablets, coupled with iron and Vitamin A supplements to combat anaemia, were provided to children in this study involving about 3,000 children. Weight gain was about 5.8%, and on the educational side, participation in preschools increased by almost 6% and absenteeism fell by about 20%.

In addition to the marked increase in school participation, these health interventions are also attractive on another dimension; they are relatively cheap. When comparing deworming to other interventions that would increase school participation by one year, deworming is substantially cheaper. Deworming cost US$5 per child, while other typical interventions cost the following:
1) School meals. ~US$30
2) School uniforms, ~US$100
3) Conditional cash transfers, ~US$125

Once children are healthy enough to get into the classroom, there are plenty of challenges that remain, including teacher absenteeism and quality. That said, getting children into the classrooms is a start and deworming is a prudent path to addressing this challenge. To learn more about the studies in Delhi and Kenya, check out the following links:
1) Kenyan deworming initiative and analysis
2) Pratham deworming and anaemia intervention

* Thanks to Theresa Chen for pointing out the editorial, and Thomas and Clara at JPAL for writing it!

Does MF addresses gender issues? Is it even social??

My colleague points out here, about the focus on women in a national level conference. Immediately I remembered my meeting with a national level gender resource organization. "Why do we need finance as a vehicle to empower women?" - The question summarizes all her concerns. Not to say she was definitely negative about either SHG led microfinance or MFI directly lending money to women. This is really a big question. I will try to tell why below.

First let us differentiate between being social and being gender specific. Being social is very much to do with a household. It cares about household and in all aspects - Livelihoods, Health, Gender, Governance, Education etc. When we talk about gender, we are necessarily looking at gender issues in each and every aspect of household/community for example how gender is pronounced or suppressed in governance issues. We can call these gender equations. When it comes to being social for an MFI, only livelihoods equation is taken care of (that too has various issues, some of these are discussed below). We need to be very clear about the fact that microfinance targets poor families not women.

The financial focus on women however, increases her woes, increase responsibilities and make her more vulnerable. This may set on those, who talk of women empowerment through microfinance, looking for my head. I can quote various studies and epw articles which favor or negate the above idea; but I plan to stick to my ideas here.

Services are provided through women because they are more responsible. MFIs then benefit from the gender aspect - women are more socially responsible too, a woman group is more bound to stick to rules than men. Now even if women don’t have any control on money she will repay. There is not enough evidence that supports the hypothesis that it makes them more heard/respectable in household,

At CMF we did a micro finance client profiling study (a qualitative study delving into lives of some MF clients in south India, PDF, 300 kb). It came out that even if money was taken away by husbands women repaid the loan, while husbands never bothered about repayments. The pressure on women always increases with micro finance coming her way! The whole family starts expecting. The gender aspect in microfinance is just a pep talk. A few cases where microfinance has really helped women are exceptions. These are the cases where every thing has gone right including woman's luck. If we want to talk about women empowerment or even gender senstivity in micro finance, we must back financial services with a gender program. This is some thing CMF is trying to do in one of its impact evaluations.

That was about women empowerment part of microfinance. Let us come to being social. This CGAP report says socially responsible investors have helped the booming microfinance. The obvious implicit statement is that whole micro finance is some thing very social. I have repeatedly talked about MFIs being or not being social. That is you can imagine my reaction to the report, when I personally do not think MFIs as social institutions. So MFIs are social because they provide financial services to poor which in turn should increase the incomes or reduce the debt traps. I negate this; banks do the same for general public. I do not think MFIs are social just because they work with poor families. I don’t know how logical it is say that socially responsible investor’s boom microfinance industy. Omidyar/Reliance can not just start an MFI, they will form funds and that doesn’t prove their social motivations.

A new role for Mr Akula

This was probably coming. Vikram Akula, decides to step down as CEO of SKS. Read it here. No need to introduce him, he is the CEO of fastest growing MFI in the world. Mr Akula wants to focus on strategies now, so probably SKS board is his new destination or may be will be more involved with SKS Foundation, the non profit wing of SKS – just speculating!

I do not intend to write about how Akula got listed in Times 100 most influential people, how he could raise funds when financial world is in turmoil, how he could manage the huge growth rate and made SKS the market leader. I know for each of this he has a point on expert team in SKS, but leadership does matter.

Anyways, wish good luck to you Mr Akula. Hope you take SKS to new heights.

Obama: India, Microfinance and Economic Research

I have to admit that I am getting a bit swept up by the Obama victory. For those interested in Obama’s connection to our 3 favorite subjects here at the IDB. I suggest checking out the following articles:

India: This column from “The Hindu” by Siddharth Varadarajan details the consequences of an Obama administration for India. Varadarajan strikes a cautious note, suggesting that the “unabashed lovefest” for India during the Bush administration will now likely come to an end.

Microfinance: According to this article from “The New Nation,” Obama’s mother, Stanley Ann Dunham Soetoro, was an early promoter of “microfinancing for women in Indonesia, well before the idea of giving women small loans became a major component of development. Her research helped the Bank Rakyat Indonesia set [future] policy…” Bank Rakyat Indonesia is one of the world’s largest MFIs. She also went on to work at Women’s World Banking, a global network of microfinance providers. Thanks to Microfinance Gateway for linking to this article.

Economic Research: This terrific New Yorker article by George Packer, quotes Cass Sunstein, a Harvard law professor, claiming that Obama “knows an astonishing amount about cutting-edge economic thinking.” One piece of evidence he gives for this is Obama’s support for automatic enrolment in retirement plans, with the option to withdraw (rather than the other way around). The evidence for the impact of this policy comes from a study conducted by behavioral economist Richard Thaler and behavioral finance professor Shlomo Benartzi.

Live blogging: Is transparent pricing in microfinance necessary?

Does it seem like the obvious response to this question should be a “Yes!”? An interesting point made by Sanjay Sinha (M-CRIL), at one of the Conference sessions, was how communication would play a key role in ensuring that increased transparency would not backfire on the MFIs. While it is important to understand what an MFI’s APR is, it is also important to not forget the other side of the equation – operation costs. He painted a scenario in which the same MFI charges 35% in one of the states in North-East India and 25% to its clients in a politically-stable state. A policy-maker, or more likely a politician, who does not understand the implications such political and socio-economic environment has on operational costs, would assume that the MFI is making money off the poor. Perhaps the very reason institutions are reluctant about pricing disclosures – inherent political risks. Sinha had a PAR60 graph for 42 MFIs between 2002 and 2008. Something that was obvious was that the PAR60 shot-up between 2004-05 and 2006-07 – a period of increased political risks for Indian MFIs in the aftermath of the AP Crisis.

The lead presenter for this panel was Chuck Waterfield of MFTransparency, a newly founded initiative for promoting transparent pricing in the microfinance industry. Waterfield’s presentation was detailed, but here follows a short summary.

1. The cost of providing credit is relatively flat for smaller and larger loan sizes. Therefore, if an institution wants to make a profit, it has to increase its interest rates.
2. Non-transparent pricing is common, and perhaps has become a culture in the microfinance sector, because explaining interest rate differentials to clients is a challenge (the larger question to me is of course whether clients understand interest rates – something that CMF is working on).
3. Data from MIX Market for 80 MFIs in EastAsia/Pacific confirms to theory – smaller the loan size, higher the operational costs ratio. In India and Bangladesh, the curves are much flatter i.e. there are no dramatic increases in operational costs for smaller loans.

Speaking of interest rates and micro-borrowers, my colleagues and I ran into the Co-founder of Rang-De – an organization that I have described (mistakenly as I learned) as “the Indian Kiva” to people. One stated difference between the micro-entrepreneurs supported through Kiva and Rang-De is that the latter benefit from the well-intentioned online ‘investors’. Kiva partners (frequently small NGOs and MFIs) do not pass on the reduced cost of funding (investors lend money at 0%) to their borrowers. This struck me as an immediate instance where better and effectively implemented transparency norms could help both clients and investors.

Live blogging: Savings savings savings

A very interesting discussion about savings took place at the Microfinance India Summit today. Apart from just discussing the different options that MFIs have to facilitate savings, the discussion went on to talk about the issue of high cost involved in mobilization of small savings.

 

I realized that the chapter on micro savings in India has reached a different level altogether. It’s not only about figuring out the type of product poor people demand--the development practitioners seem to have figured that out. The main problem lies on the supply side. Mobilization of small savings is not at all cost-effective.

Further, during the tea break, I also got talking to Preeti Sahai of BASIX, who is heading a business correspondent model in collaboration with AXIS bank to provide smart cards to clients in different parts of east Delhi. This smart card directly allows the client to open a bank account with the AXIS bank. Apart from just providing credit, BASIX (along with AXIS) is providing savings facility to its clients as well. They hope to extend these services to other backward parts of Delhi. However, on speaking with Preeti, I got to know that the biggest challenge they were facing to do so was the high cost involved in facilitating savings.

 

Having witnessed a discussion on the same issue just before this, it struck me that there needs to be a change in the chain of thought about micro savings in India. It’s not the demand side which needs attention; probably more thought needs to be given to figure out cost–effective of ways of mobilizing small savings or else ... i wonder  if  mobilizing small savings really worth it...?

 

Live Blogging: MF and the Global Meltdown

For me, the highlight of the conference thus far was the session titled “Global Meltdown and Microfinance: Implication for the Sector.” The following is a description of the proceedings:

Characters

Vijay Mahajan (moderator of session and Chairman of BASIX)

Vikram Akula (CEO of SKS)

Eric Savage (Managing Director of Unitus Capital

Nancy Barry (President of Enterprise Solution to Poverty)

Robert Annibale (Global Director Microfinance, Citigroup)

Mahajan introduces the session with his usual playfulness and joie de vivre. He explains that for this session there will be no presentations, but rather, he hopes, a frank discussion.

Annibale begins by stating his belief that the investment community’s view of MF has not changed due to the financial crisis. It is simply that there is tight liquidity in general, and this will inevitably have some affect on funding. Collaterized debt obligations, and other forms of structured debt, will likely become less popular because of the bad name they have acquired from the sub-prime crisis. Finally, he argues that a deceleration of growth might be good for a sector that is possibly overheating.

Akula speaks next. He claims that he is going to be a contrarian, but then goes on to say exactly what I would have expected, that microfinance clients will not be affected because they are “decoupled” from the formal financial sector. He gives three reasons for this: 1) clients are not integrated into greater economy 2) members have high returns on investment, so just a marginal decrease won’t hurt them badly 3) poor people can over come anything (again, these are Akula’s opinions, not mine). He brings up other instances in history, such as the financial crises in Indonesia and Latin America, which demonstrated this decoupling. Akula’s last piece of evidence that members are not being affected is that SKS borrowing data for October was as strong as ever.

Barry begins her response to Akula by bluntly stating that she hopes he is wrong because perhaps less funds will give MFIs the opportunity to reassess their activities. She explains to Akula that the fact that borrowing for SKS is up is far from clearly correlated with the economic health of his clients, and that in the example of Indonesia, the primary source of funding for BRI, Indonesia’s market leader, was the savings mobilized from their clients (which is not true for most Indian MF providers). She relates her experience speaking to SEWA bank clients that had recently expressed difficulties with selling their products. She continued to go on a bit of tangent by discussing her issues with the current predominant model of MFIs. Her feeling is that these MFIs are having little impact because they don’t know how to do anything else but lend, and have very little depth (SKS was clearly implicated as being an MFI of this type). She hopes that this global economic slowdown might give MFI CEO’s like Akula a moment to take pause and consider whether they were truly doing all they could towards poverty alleviation.

Savage brought things back towards the original question of the session, and suggests the global meltdown will have an effect on MFIs because the rates they can lend at will almost surely rise. He believes that major bankers no longer trust their ability to judge what types of loans are correlated to the global market, and that will generally make them more cautious. He ends by suggesting that he still sees MF as a fantastic place for investment.

Mahajan then comments that he thinks that we still do not know what the impact of the global crisis will be, and that it may still be a year before it has consequences for MF in India.

Annibale notes that Indian MF is a bit insulated because so much of its funding comes from within India. (For better or worse, and this time for the better, conservative regulation assures this dominance of local funding). He thinks that the crisis might also force MF to diversify funding sources and focus on bringing down operating costs.

Akula jumps in to suggest that although the amount of money that is available is unlikely to change, the composition of the recipients might. He believes that small and medium sized MFI could get squeezed, while large MFIs (like SKS, who received 75 million in equity last week) might even find funding easier to garner. In response to Barry, he claims that he would love to be able to take savings, but it is not possible considering current regulations. He also responds to Barry that he thinks big group lenders such as SKS can both move up market and grow, at the same time as increasing depth (citing SKS massive health insurance scheme as an example).

Barry reacts to this by railing against the “radical uniformity” of the major group lenders. She challenges organizations that she admires like SEWA Bank and BASIX, which she believes have true multi pronged strategies, to become national “gamechangers” by attempting to expand. She even directly recommends to Akula that he reconsider SKS’s approach so that his organization could become the “gamechanger” she believes Indian MF needs.

I have left out a bit of what discussed for the sake of brevity, but I believe these are the essentials. Following the session, I had a bit of a debate with some of my CMF colleagues. I am quite sympathetic to Akula, and they were greatly impressed by Barry. It was comforting to know that “radical uniformity” is not such a problem within our organization. I hope that some of my colleagues will chime in to discuss their interpretations of this discussion, and what I have misrepresented.

Live Blogging: The Urban Casino and Rural Bingo Hall

Yesterday at the Microfinance India Summit, I attended a session on the needs of the urban poor. The impetus for this session is microfinance’s historical focus on the rural poor as opposed to the destitute who populate India’s cities. I was particularly impressed with the presentation by Samit Ghosh, the CEO of Ujjivan Financial Services. He enumerated a number of subtle differences in the lifestyles between the urban poor and rural poor that raised significant questions about product design and repayment schedules, among other implications. Some of the most striking rural-urban distinctions he mentioned included:

· A large portion of the rural poor are unemployed, while many of the urban poor are already employed (or underemployed) in the informal sector

· Urban poor have significantly less time (perhaps due to their existing employment) than rural poor to attend weekly repayment meetings

· Urban microfinance faces a much higher risk of “infiltration” by moneylenders and thus raises the risk of over-indebtedness

· While much of the urban poor are stationary, the existence of migrant workers in cities should be addressed, along with their unique financial needs

· Urban poor live in ethno linguistic enclaves and loan officers and microfinance staff should pay attention to these characteristics to make inroads into the communities

Mr. Ghosh closed by comparing the Indian urban slum to a casino, where a constant flurry of entrepreneurial activity occurs, and that microfinance institutions would do well to understand their unique needs as they move towards serving them in the future.

A Sweet Deal for Tata: 30,000 crore from Gujarat Govt.

A recently leaked Gujarati government document provides insight into why Tata moved the Nano project to Sanand. Tata got quite a deal. The BJP-led government is providing the following:
1) A soft loan of Rs. 9,570 crore at an interest rate of .1% AND deferred payment of 20 years;
2) Meeting all the costs of infrastructure development for the Nano manufacturing site;
3) A cut in power tariff rates; and
4) Rs. 700 crore to shift machinery from Singur to Sanand.

According to the Congress party’s calculations (which is in opposition in Gujarat), the loan and tax concessions total up to 30,000 crore in benefits for Tata over the next 20 years. Let's put that number into perspective: if Tata produces 50 lakh Nano cars during this time, the government handout would be the equivalent to Rs. 60,000 for each car rolled out. That’s 60% of the sticker price for the 1 lakh Nano car.

Personally, the numbers don’t shock me most. The fact that such a deal would not be publicly transparent, and would need to be leaked for the public to be aware when taxpayer money is truly financing the project, is what shocks me most. What kind of deals do state and local government make behind closed doors? Are these types of state government handouts typical in trying to bring businesses to their state?

For more background on how/why Tata moved from Singur, check out Emmerich’s post here, and for more on Gujarat’s handout to Tata, see this Hindu article.

Live Blogging: Poor, Poorest, Ultra-Poor….

The second plenary session at the Microfinance India Summit was entitled “Graduating the Poor in to Microfinance”. The session focused on the progress MFI’s have made in reaching the poorest of the poor, beginning with a presentation by Syed Hashemi of the World Bank.

Much was said about the inability of MFI’s to reach the most vulnerable households, with participants ultimately resorting to semantic considerations on the definition of the poorest (David Gibbons at Cashpor) as well as outlining the need for targeted ‘Ultra-poor’ programs, such as those sponsored by SKS and Bandhan, with short presentations made by Vikram Akula, CEO SKS, and CS Ghosh, CEO Bandhan (the Bandhan program, as it happens, is currently being evaluated by CMF RA, Jyoti Mukhopadhyay.
While one might be tempted to go in to the details of the Ultra-poor programs described, perhaps the highlight of the session – and possibly the day – was a candid back and forth between Gibbons and Akula.

Gibbons charged that the so called ‘Ultra-Poor’ programs amount to little more than lip-service by MFI’s looking to work on their public image, in the face of their inability to reach the poorest of the poor. In doing so, Gibbons believes that the Ultra-Poor have become a token group of people that conceals a much more numerous but slightly better off demographic. Gibbons asserted that he does not consider the ‘Ultra-Poor’ the ‘Poorest’ but rather just an exceptional group that threatens to hinder concern for the real poor, folks who have little or no material possessions (< $1 a day).

Akula, after issuing a forewarning that he would be frank and beginning with a mission of helping the most, launched in to a monologue on two hypothetical paths that an MFI (SKS, I believe) had considering taking: MFI A focuses on perhaps what Gibbons considers the ‘poorest’ and MFI B decides to go for higher-end clients, thereby recruiting a lower percentage of the poorest but, presumably by virtue of greater earnings potential, is able to scale-up faster and develop a much larger portfolio. The intention was clearly not to be subtle, and Akula clinically struck home his point that catering to a composition of the poorest and the not-so-poor may well result in higher numbers of the poorest being reached.

Akula has a point if we solely consider a discrete point in the future – that would, of course, depend on the accuracy of his math – but his consideration of discrete states, while rhetorically clever, is somewhat misleading. I tend to think that institutions rooted in profit-maximization are, unsurprisingly, naturally driven by the need to increase the growth in their profits by virtue of being beholden to their shareholders. This would presumably mean the natural course they would take would be continuing up higher-end clients, in addition to investing in influencing whatever institutions that impede this trend towards their benefit (i.e. expending resources to do away with regulations like coercive lending practices, interest rate caps etc…)

Such regulations may well exist to protect the poor, and, moreover, I suspect Akula’s calculus probably needs to take in to account population growth rates and a decreasing growth rate in the inclusion of the poorest (as is suggested by the logic above).

Live blogging: SKS raises Rs. 366 crore in equity

At this morning’s session of the Microfinance India Summit, Vijay Mahajan, Chairman of BASIX, surprised much of the audience with an announcement of SKS Microfinance’s raise of Rs. 366 crore in equity ($75 million USD). Mr. Mahajan called the equity raise—SKS’s fourth—a “celebration.” This Economic Times article provides more details.

As a research center focused on the Indian microfinance sector, the Centre for Micro Finance (CMF) has followed SKS’s increasing equity rounds as the organization has become more sophisticated. Earlier this year, CMF worked with Prof. Shawn Cole of Harvard University to document SKS’s second equity round—the first investment of private equity in an Indian microfinance institution. The resulting Harvard Business School case study asks the fundamental question of how to conduct the valuation of an organization in an industry which has never had one previously.

CMF also closely tracks the increasing trend towards equity fundraising across the Indian microfinance industry. The Bankers Institute of Rural Development (BIRD) commissioned CMF to conduct a study on the equity investment and microfinance, which should be published in 2009.

Live Blogging the Microfinance India Summit: Beyond Pomp and Circumstance

I am going to be going for speed today, at the likely cost of some quality.

At the moment, we are listening to the Welcome Address to the Microfinance India Summit being delivered by Brij Mohan, the Chairman of ACCESS. My eyes are drawn to the huge board that serves at the backdrop to the dais. On the board are 4 photos which have one thing in common. The photos are all of smiling women. Not a man to be seen. Although, I have never considered microfinance primarily a women’s empowerment movement, there are many practitioners and funders who do. This almost exclusive focus on women could be limiting the impact of microfinance if the findings from this study, conducted by De Mel, Mckenzie and Woodruff, on returns to investment in Sri Lanka, are generalizable. The study finds that monthly returns to enterprises run by men averages around 9% while for women the number is close to 0. It may be true that women repay more consistently, but repayment rates do not equal impact.

So in conclusion, I think 1 of the 4 photos should include a male.

The speech of Dr. Suresh Agarwal, Chairman of the Prime Ministers Office and Chief Guest of the conference, reminded me of the beauty and uniqueness of microfinance being demand driven (the reason I became interested in the sector in the first place. He instructs the MF sector to remain focused on the welfare of clients and the long term health of the industry, and not to resort to foisting debt on poor people without credit capacity simply because the government has set a certain target for lending.

* Thanks to Justin Oliver for pointing me to the Sri Lanka study.

The Links

This week has been a bit sparse on content here at the IDB, but stay tuned as over the next week we will be live blogging the Microfinance India conference, organized by ACCESS Development Services. The conference is taking place in Delhi on Tuesday and Wednesday of this week.

And now for some links:

· The article was written more than 3 years ago, but I could not agree more with S. Venkitaramanan of the Hindu that it is time for “the RBI to make peace with NBFCs.”

· A fascinating piece from New York Times Magazine on what the mainstream financial industry in the US can learn from check cashers, with some important points on transparency.

· A column from the Times of India that may exaggerate the likelihood for success of RSBY, India’s grand scheme to give every below poverty line (BPL) household insurance against catastrophic health shocks. It is starry eyed, yet it is still a nice introduction to the program.

· This study conducted by Innovation for Poverty Action (IPA) on a program which promoted the growth of cash crops for export by farmers in Kenya details an upsetting example of how heightened quality control regulations (which may or not be protectionist) in rich countries can have painful effects on workers on small farms in economically poor nations.

Avoiding Bad Data and the US Election

Much of what we do here at CMF involves research on microfinance that aims to have strong internal validity. Proponents of the kind of evaluations we are involved in point to the fact that in our studies we are able to eliminate confounding variables by randomizing the groups who do and do not receive an intervention. We also aim to collect data through questionnaires that are rigorous and unbiased. I am proud that we try to do this, but I can’t emphasize enough that collecting data in this manner is REALLY hard.

This came to my mind after reading this article on the unreliability of exit polling from the website www.fivethirtyeight.com. It is an excellent examination of the variety of ways that data can be collected poorly. Reason number 4 is particularly pertinent to our research.

If you are interested in the US presidential race and statistically inclined, I cannot recommend this site enough.

"Development is not a Cup of Tea." Report from the SHG Sustainability Conference

This weekend, CMF and NABARD hosted a conference entitled "Sustainability of SHGs: Scope, Issues and Challenges." For those of you that are new to microfinance or this blog, an SHG is a Self Help Group, the predominant model of micro-lending in India. The traditional definition of an SHG is a group of 10-20 women of homogenous socio-political background that come together to save, lend, and address common problems.

The SHG bank-linkage programme was first pioneered by Myrada, a Karnataka-based NGO. The bank-linkage programme allows SHGs to access large sums of capital from banks for distribution among group members—at the same time, banks can more efficiently meet their priority sector requirement for rural lending. After successfully piloting the program with NABARD, the SHG-bank linkage programme has fast become the largest microfinance initiative in India. But this also raises important questions – with so many crores (10 million rupees for you foreigners) being poured into the program, are SHGs really fostering good savings and lending practices, empowering women, or alleviating poverty? Recent studies indicate serious quality issues in the programme, which if not addressed, will lead to ever lower repayment rates. A comprehensive study by APMAS and EDA Rural Systems on SHGs points out that though social lights are increasing, financial shades pose a risk to the movement.

We were lucky to hear Mr. Aloysius P. Fernandez, Myrada's Executive Director, speak (he certainly won the award for most animated speaker of the day) about his own experiences with Self-Help Groups.

Among other things, he asked the conference participants (which included prominent members of RBI, NABARD and fellow practitioners) to stop thinking of SHGs as static, proprietary institutions that can be claimed by NABARD, Myrada, or any other facilitator for that matter – in his experience with mature, well-functioning SHGs, a strong SHG is a fluid, organic group of women (sometimes men) that can and do respond to their community, village or member-level problems as they arise. At its core, he stressed that SHG formation was meant to be a bottom-up solution to increasing access to finance, but it has since been compromised by a top-down push for quantity over quality.

As for the development catchphrase of the day (or decade), Mr. Fernandez pointed out that the Germans don't have a word for sustainable – nor does Tamil, Kannada, and so on. I can't do his delivery justice, but you'll have a chance to hear the whole conference on our website shortly. In his opinion, we should stop talking about sustainability and focus instead on participation. He suggests that if SHGs are to persist as relevant tools to poverty alleviation (or simply financial inclusion), we must not forget that development takes time, effort, and power . In his own experience with Myrada, he has seen that members of SHGs only begin to move from consumption, health or education loans to productive loans over a period of 8 to 10 years. If the Indian development community wishes SHGs to promote livelihoods, practitioners must let go of set formulas and focus on developing flexible livelihood strategies – access to finance (especially of the amount available through SHGs) is not nearly enough.

In his own words, "Development is not something static; development is not a cup of tea."

For more on the SHG movement, check out a recently published report entitled "Impact and Sustainability of the SHG Bank Linkage Programme" by NCAER here.

Democracy Stories

There are two unsettling scenes, one fictional and one true, which often come to my mind when discussing politics with India’s educated elite. They lead me to know particular conclusions, but I thought they might be worth sharing.

The first scene can be found in Kazuo Shiguro’s excellent novel “The Remains of the Day.” I cannot remember the exact details, but it plays out something like the following:

In the mid 1930s, three British aristocrats are sitting in the smoking room of a manor. They are discussing global politics and specifically Britain’s strategy in response to the rise of the Germans. The men decide that this in extremely complicated issue that very few of Britain’s citizens understand. This leads the men to begin arguing over the virtues of democracy, and particularly the merits of voting rights for the poor and uneducated masses. To prove the point that the masses are certainly not qualified to vote, one of the men decides to call in manor’s butler. The butler enters the room and the men quiz the butler on his views of how Britain should approach forging alliances in the Balkans (an esoteric question they were sure he would not be able to answer). The butler modestly suggests that he of course does not feel entitled to an opinion on the matter. The aristocrat who called him in feels vindicated, and declares that it is ridiculous to suggest that ignorant people like the butler should have any say in Britain’s foreign policy and the way in which the country is governed.

The second scene took place about a month in front of my house, which is located in a large town in western Orissa. In this case, I do believe I accurately remember the details:

It was the evening of the municipal elections in the town, and I had just returned from work. My landlord, a manager at a local industrial plant and a wonderfully kind and liberal minded man, came out onto the road in front of the house and I asked him about his day. He told me that in response to recent flooding in Orissa, he had spent much of his time helping drain water from a local slum. I then asked whether had voted. He responded that he was busy and that he did not think voting was of much value as all the candidates were the same and even if they were good, they were at the mercy of corrupt parties. We had an extended conversation in which I played devils advocate and brought up the different reasons voting might have been worthwhile. He shot down each reason with ease. At the end of the conversation, my landlord’s maid came outside on her way home. I asked him whether his maid had voted. He responded that of course she had. I was a bit surprised at the certainty of this. My landlord saw this on my face and explained, “voting is for poor people.”

For some more quantitative info on voting and democracy checkout this paper on the rationality of voting that fellow blogger Emmerich Davies pointed out to me.

*In full disclosure, though I am an American citizen, I will not be voting in tomorrow’s election simply from laziness.