An interesting piece recently appeared in the Wall Street Journal about micro finance spurring credit bubbles in slums. The premise of the article by Ketaki Ghokale was primarily based on data from Ramanagaram, a small town in Karnataka. It basically highlights the impact of over-lending by the MFIs, citing that it leads to “social tensions” and fuels a cycle of indebtedness (this is further discussed in another article on pressures of group borrowing by the same author).
The piece makes an interesting reference to the mass default that is currently being witnessed in Ramnagaram, town and districts such as Kolar, Mysore etc in Karnataka. The cause for non-repayment is brushed off with “Local mosque leaders have started telling people in the predominantly Muslim community to stop paying their loans”, without exploring the actual development of events that led to such a directive from the Mosques. Further, the article quotes that the Mosque elders say that non-payment is not due to micro finance being against Islamic principles, while the circulars issued by the Anjuman Committee in Kolar to mosques in all the districts show otherwise.
The article further criticizes MFIs for their lack of systems to check the loan-utilization citing Ujjivan Financial Services which is reported to have admitted that it is well-known that loan clients lie about the purpose of the loan. It also talks of the mission drift in MFIs from being a “social agency” to becoming a “primarily lending agency that wants to maximize its profit” in an effort to attract investors.
The piece paints a very dark picture of MFI operations. It fails to trace or highlight the actual causes for the mass default. Moreover, it tries to draw parallels between the so-called micro credit bubble and the US Mortgage Crisis, since both were aggravated by non-documentation and commission-paid brokers, according to the author.
The article provoked a strongly-worded response from SKS, which is also quoted in the article to have “showed the industry how to tap private equity to scale up”. In a letter to the Managing Director of WSJ, Mr. Vikram Akula points out that non-repayment in “one slum in one city in one state” of India cannot be taken as a trend for the Indian micro finance sector. He argues that Indian MFIs have consistently shown a repayment of over 95%, which cannot happen if the clients are not earning any income from it. Mr. Akula criticizes the use of data from the Ramnagaram Financial Dairies study saying that it was a pilot study based on the evidence of 20 clients and points to more comprehensive studies such as the Competition Study by Karuna Krishnaswamy from CMF, which shows that multiple-loan borrowers have equal or more repayment rates than their peers who are single borrowers. Insinuating that all MFIs in India disburse loans willy-nilly like the mortgage systems is US can be construed as “downright irresponsible”, according to Mr. Akula. Right from discrediting the allegation that all MFIs give incentives based on loans, to highlighting the scrutiny systems of SKS, to defending the rumor that MFIs have stopped lending to Muslims, to hotly denying that MFIs do not publish their accounts, Mr. Akula has gone to many lengths to defend MFIs and discredits the article as a “poor and irresponsible piece of journalism”.
Apart from SKS, the article also provoked a similar response from Unitus and yet another from Ujjivan Financial Services. This may only be the beginning. Although it can be argued that the WSJ piece is not very well-researched and has instances of generalization and poor attribution, it is interesting to see that MFIs choose to underplay the mass-default that has occurred in Karnataka and dismiss the possibility that it could be partly due to faulty operational models.
3 comments:
Funny I came here by accident because I was searching for Indie Developers Blogs, but nonetheless.
My girlfriend is having a small project in the south part of India, Tiruvannamalai to be more precise.
We are going back this September flying there on the 11th, helping out a colony of people who all suffer from lepracy. Last year supplies were dropped there, people were given treatment to their illnesses, wounds were taken care of.
And in a small way the Mother Theresa Hospital was build up even more, with some supplies and equipment. This year even more is being pumped into that Hospital, large sums of money have been raised by some companys here in the Netherlands.
This year were going back there and try to create small place for them to work, sow clothes and try to sell them so they can earn their own. And also hit a water well or two for a easier to reach water supply.
The reason I am saying this all is because at first we were thinking of setting up a micro credit there as well, but were afraid it wouldnt work out for the same reasons pointed out in this article.
This article confirms those supsicions a little bit, but in the end as stated as well anything is possible.
It is good to see that a lot of people are still working on helping the people in India that are far worse of then the more rich and developed pard of the country.
I have been involved in one small project for a couple of years and so far there are no defaults. We work through a local pastor who knows the people, their needs and capabilities and has some standing in the community. Because, there are no defaults, the interest rate is low (12 percent, and as soon as a part of the loan is paid, the interest is paid on the rest of the loan) and sometimes used to finance other loans. Now it has reached two other places, in one of them through a local union. Such models may work on a small scale, if one can find reliable local role models in the community.
I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.
Susan
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