Posts Tagged ‘india’

Microfinance is more than a loan

October 24th, 2011

Poor children are key beneficiaries of their mother's microcredit loans

Interesting personal experience article by Jitin Mitra on the status and impact of microfinance in India.

As a result of the microfinance crisis in India, there has been a significant decline in the availability of microloans for poor Indian workers. While certain politicians gloat that they are protecting poor borrowers, Jitin notes that ”the reality is that millions of poor families have been forced back to traditional money lenders who have been far less beneficial, often charging over 50% interest and claiming collateral following defaults.” And, when poor families pay higher interest rates to moneylenders, this reduces their (already meager) disposable income. While mothers often take the brunt of the impact by reducing their own consumption (e.g. fewer/smaller meals per day), inevitably their children are also impacted.

Also what’s so often overlooked in an evaluation of microcredit is the empowerment benefits provided to most women borrowers. Jitin notes that ”[Microcredit borrowers'] confidence had soared as they were now able to provide for their families and in turn, gained respect within their communities.” If we care about social justice and equal opportunity, well-managed microcredit is one of the most powerful tools that has demonstrated empowerment benefit at scale.

Jitin also reminds us of a recent study commissioned by the Small Industries Development Bank of India (SIDBI), an independent financial institution aimed to aid the growth and development of micro, small and medium-scale enterprises in India. It showed that borrowers benefitted significantly from microfinance. Amongst the findings were that:

  • 76% were able to increase their income through MFI assistance
  • 66% improved their food consumption
  • 56% could improve their housing conditions
  • 77% could provide better educational facilities
While there are necessary and important reforms needed for a fast-growing industry like microfinance, we need to continue to advocate on behalf of the poor to ensure that power-hungry politicians don’t de-rail programs which have huge benefits for the poor.

India Regulator Proposes Radical Microfinance Reforms

January 22nd, 2011

This week, the Reserve Bank of India (India’s central banking regulator) proposed significant new microfinance regulations which would impact the majority of microfinance lending in India.

There are many new regulation recommendations which they hope to have adopted as early as April 1, 2011.  Here are a few highlights:

  • Create a new non-banking financial company category called NBFC-MFI with new regulations
  • Max microloan size of RS 25,000 (~US$500)
  • Minimum 12 months duration for loans under RS 15,000 (~US$300) and 24 months for loans above that
  • Each borrower chooses whether they make weekly, bi-weekly or monthly repayments
  • Only one joint liability group (or self-help group) per borrower and max of 2 loans per borrower
  • Interest rate cap of 10-12% margin over cost of capital
  • Minimum 90% of assets must be for microloans and at least 75% of these loans must be for business purposes
  • Limitation on loan-related revenue to interest, loan insurance (must be optional) and max 1% loan origination fee
  • NBFC-MFI must have minimum capitalization of RS 15 crore (~US$3m) up from RS 2 crore (US$500k)
  • Minimum capital adequacy of 15% up from 12% and with stricter definitions of capital basis
  • Consideration of appointing local bank officials or political appointees as arbitrators in loan repayment issues

The RBI is attempting to create a national regulatory framework which supersedes specific India state-based legislation like we have seen in Andra Pradesh.  Overall, I think national banking regulation with an independent regulator is positive for the poor in India.

It is going to be interesting to see what the reaction to this proposal is from the microfinance industry.  Typically, this type of legislation is generally embraced by the large, established players because it creates more certainty and they have the resources and sophistication to leverage this to grow their market share at the expense of the smaller players.  Since in microfinance scale often benefits operational efficiencies, it is easier for the larger players to manage their profit optimization under regulations with price caps.

So, I would expect that if this is implemented it would have the following results:

  • Slower growth in access to microfinance. The report notes that microfinance and self-help group market penetration is < 1% in all regions of India except the south where is is 3.4%.  Most MFIs will have to slow down growth as interest rate margin cap discourages forward investing.  Fewer new MFIs will start because of the higher initial costs and higher operating subsidy required before getting to large scale.  The interest margin cap will also dramatically slow growth in areas which are currently the most underserved — i.e. higher poverty and lower density areas of India where cost of operations are higher and revenue per client is lower (due to lower loan sizes).
  • Significant industry consolidation. The big, at-scale players will gobble up many of the smaller players or the smaller players may just fold.  This is not necessarily good for borrowers as it reduces competition and some of the higher value add approaches of these smaller players.
  • Less financial product innovation. The strict requirements are going to stall the development of better quality (from borrower perspective) financial products outside of the one-size-fits-all business microloan product.  This includes more business-cycle friendly working capital loans, housing loans, various insurance products, savings-type products, etc.  And % of revenue restrictions will prevent MFIs from distributing 3rd party products as well.
  • More populist politicalization of financial products for poor. This concept of appointing a local ombudsman (for loan repayment arbitration) from the local business or political elite has predictable results — corruption, political posturing and ultimately higher costs for MFIs (which can’t be passed along to borrowers).

Do you agree with my observations and/or conclusions?  Please add additional insights and thoughts in comments.

UPDATE: Here are additional responses to RBI recommendations:

Related Articles:

India microcredit crisis analysis

December 17th, 2010

Good video explainer and analysis on the microcredit crisis in the state of Andra Pradesh in India.  I recommend if you’d like to get a good overview of the history and situation.

A Ujjivan client is highlighted in the first and second video.   Ujjivan is one of the most socially responsible and professionally run MFIs in India and deserves the credit given.

Video 1: The microfinance mess: How it all began…

Video 2: The tragic turn of events: The reason…

Video 3: Killing MFIs is not the answer…

India microfinance crisis by the numbers

November 16th, 2010

Finally a reporter who actually attempts to explain the objective facts on the current microfinance crisis in the Indian state of Andhra Pradesh.

Microfinance by the Numbers by Eric Bellman

Here are a few highlights:

  • Default rates by borrowers were ~2% before the politicians intervened and now have risen to 50% since they instructed borrowers not to repay their loans
  • On a per capita basis, there are 5-10x fewer suicides amongst microcredit borrowers than the general Indian population
  • Upon closer investigation, it appears that loan sharks, landlords and even family members are more to blame for the suicides than the microcredit companies
  • The interest rate for microcredit loans (24-30%) is the same as the local rate for credit cards (30%) which has never been controversial
  • Even though government schemes like self-help groups offer heavily subsidized 3% loans to women, why is there so much demand for microcredit (hint: loans insufficient, not available or require bribes)

Net: If the government continues this harassment of MFIs and imposes unreasonable regulations, the current microcredit borrowers will no longer have access to these financial services and will either have to go without, or more likely be back as clients of the local loan shark at 150-300% interest rate plus their well-known collection techniques.

SKS Microfinance IPO Report

September 30th, 2010

CGAP (part of The World Bank) has recently produced an analysis of SKS Microfinance IPO in India. This is the first IPO of an Indian MFI.  The IPO was 13 times oversubscribed … that is, 13 times more demand than availability of IPO shares.  SKS priced at the high end of their range with valuation of US$1.5B and sold 11% new stock raising US$155M.  In the first 5 weeks of trading, the stock rose 42%.

This article summarizes a lot of good historical and current data about SKS and also outlines some of the key issues that a successful IPO raises for SKS and the microfinance industry overall.

Slavery book review

December 6th, 2009

phuleSlavery
by Mahatma Phule

Slavery was written around 1900 as an expose on the caste system in India. As a reformer and social activist, Phule (along with his wife) advocated for women’s education and sought to bring light on the devastating “slavery of the mind” which enabled the upper caste peoples (particularly the Brahmin caste) to control and continue impoverishment of the vast majority of Indian people using the Hindu religion.

Ambedkar, one of the father’s of India independence (author of the Indian constitution and himself a dalit … aka Untouchable), condemned the Hindu religion which he referred to as Brahminism … essentially the worship of Brahmins.

I have included PDFs of the Slavery book as, although I have a hard copy, it is no longer in print and very hard to find. I found this copy on-line, but the website which published it is quite unreliable.

Related posts on the India caste system:

Slavery by Mahatma Phule

DEDICATED TO THE GOOD PEOPLE OF THE UNITED STATES
AS A TOKEN OF ADMIRATION FOR THEIR SUBLIME DISINTERESTED AND SELF SACRIFICING DEVOTION

in the cause of Negro slavery;
and with an earnest desire,
that my countrymen may take their noble
examples as their guide in the emancipation
of their Sudra Brethren from
the trammels of Brahmin thraldom.

Please post comments on what you think of this and whether it is relevant for today.

The man who saved 1 billion lives

September 16th, 2009

borlaug-wheatNorman Borlaug, aged 95, died this past Saturday.   In 1999, the Atlantic Monthly estimated that his efforts (along with the people he trained and institutes he founded) had saved more than one billion lives … almost all in developing countries.  [Thanks to Gregg Easterbrook who posted op-ed piece today.]

You’re probably asking … what the heck did he do to have such an impact?

Borlaug was a key innovator in agriculture productivity.  He developed higher yield crops which required less water, less pesticides, were more disease resistant and thrived under much more varied and adverse conditions than previous cereal breeds.  He is often referred to as the father of the Green Revolution.

A few big picture stats:

  • In 1950, world grain production was 692 million tons for 2.2 billion people.
  • In 1992, production rose to 1.9 billion tons for 5.6 billion people.
  • Grain yields doubled from < 0.5 ton per acre to 1.1 tons per acre.
  • From 1965 to 2005, global per capita food consumption rose to 2,798 daily calories from 2,063 … mostly in developing countries.

Changing history in India and Pakistan

In the 1965 India/Pakistan famine, Borlaug traveled with 35 truck loads of high-yield seeds to the Indian subcontinent.  In the midst of a famine (and a war), he (and his Mexican assistants) sowed the first crop with these seeds.  Within 3 years, Pakistan was self-sufficient in wheat production and within 6 years, India was self-sufficient in all cereal production.  There hasn’t been a shortage of food since then in those countries.  He appropriately received the Nobel Peace Prize.

Backlash from people who have never gone hungry

As he ventured into seeking to provide similar cereal crop benefits to Africa, he was denounced by critics because his techniques require some pesticides as well as fertilizers.  Here’s some of his responses:

“[Most Western environmentalists] have never experienced the physical sensation of hunger.  They do their lobbying from comfortable office suites in Washington or Brussels.  If they lived just one month amid the misery of the developing world, as I have for 50 years, they’d be crying out for tractors and fertilizers and irrigation canals and be outraged that fashionable elitists in wealthy nations were trying to deny them these things.”

“Without high-yield agriculture, increases in food output would have been realized through drastic expansion of acres under cultivation, losses of pristine land a hundred times greater than all losses to urban and suburban expansion.”

In nations which have adopted his techniques, population growth as slowed as less workers are needed to produce food.

On behalf of the billions of people who have benefited from Borlaug’s pioneering work, I say “thank you.”

India microfinance and tightening credit markets

May 20th, 2009

I was recently in India and had the chance to meet with a number of microfinance CEOs, bankers and insiders in the microfinance industry including Unitus, Unitus Capital and Unitus Equity Fund staff. One of my key inquiries was how was the global financial crisis affecting MFIs ability to access capital. Accessing capital from 3rd parties is a critical issue for Indian MFIs as they are prohibited by the Reserve Bank of India of accepting deposits as a source of capital. While an increasing number of the MFIs are generating some profits, the profits are insufficient to support their lending growth needs, so they need to go to outside sources for most of their capital needs.

A few highlight observations:

  • Large MFIs. The large MFIs are continuing to have access to sufficient capital for their growth needs. One large MFIs chose to slow down growth in late 2008 in order to test the new market conditions for credit, but is now operating once again growing its lending. SKS, based in Hyderabad, announced closing $75M in new equity capital late in 2008.
  • Securitization. (Wikipedia definition) Spadana announced $20M securitization in late 2008. In Feb 2009, SKS successfully securitized $40M of their loan portfolio with ICICI Bank. Then just last month SKS announced a $20M new securitization deal with YES Bank which received the highest rating from credit rating agency CRISIL. Securitization has gained a notorious reputation in conjunction with the USA mortgage crisis, but implemented prudently (with strong underlying assets) it is an important and valuable financial vehicle.
  • MFI Valuations. Valuations for all MFIs are down with smaller/earlier-stage MFIs being hit even harder. This is not a surprise as equity has become more expensive with the tightening financial markets, but it none the less is a shock to many MFIs who need more equity capital to keep growing. There are different responses to this. One MFI CEO I met with said that they were going to not raise equity capital right now and have made consequently made a decision to dramatically slow down their growth.
  • Donor Capital. Donor capital for non-profit MFIs is largely dried up. Because of the prominent success of a number of for-profit MFIs, non-profit MFIs are struggling to raise donor capital needed for growth. This is a significant problem as MFIs need to get to a certain scale before they can be financially sustainable. I met with one MFI CEO pioneering work in a very underserved area of India who had to stop most new loan disbursements because they don’t have a strong enough capital base in order to get additional on-lending capital from banks. Without getting more scale, they will not get to profitability and therefore are stuck in a very difficult position.
  • MFI On-Lending Capital. The good news is that the government mandates for banks to lend a certain percentage of their loans to support the poor (called the priority sector requirement) is still in place and microfinance is still getting a large allocation of this. The bad news is that the banks are becoming more risk adverse and many are looking to concentrate their lendings to fewer larger (less risky) MFIs. This means that some of the MFIs which are most innovative and tackling some of the harder areas of India are finding it harder to raise on-lending capital.

My net: Overall, microfinance in India is continuing to expand despite the global financial credit crisis. Much of the citizen sector which microfinance reaches are still not connected to the global financial markets and so are less affected by the macro issues. My hope is that MFIs will continue to have discipline in lending in order to keep repayment issues to a minimum in order to continue to provide these valuable financials services to the next village and the next slum.

The Caste System in India Lives

July 26th, 2007

I recently blogged about how the caste system was being lived out on the streets of India in the life of one very poor dalit woman.

About a month ago, (yes, I’m behind on blogging) the Wall Street Journal wrote a front-page weekend edition piece called “Caste Away” about a dalit (aka an Untouchable) who has attempted to break into the fast-growing, professional IT business in India. The article tells the story of how Mr. Thoti was been discriminated against throughout his attempt to build a career. There are moments of hope when he finds hiring managers who are color-blind to the caste system, but this is the exception rather than the rule. Even the chief economist of the Royal Bank of India (equivalent to USA central bank), another rare dalit success story, still faces discrimination.

If you are interested in further reading, there is a book written over a century ago by Mahatma Phule called Slavery which argues that India’s caste system is similar to the slavery issue faced by the USA.

The India Caste System Overview

At the top of the caste system are the brahmins … historically the priests and by far are the current ruling class (almost every institution) in India today. Then their nearest high-caste cohorts are the kshatriyas (warrior caste) and vaishyas (merchant caste). The vaishyas overwhelming oversee the banking and financial systems in India. The Sudras are the low-caste peoples … numbering over 500 million in India! … who are identified with a particular occupation (e.g. potter’s caste, shepherd’s caste, buthcher’s caste, etc.) And then below the caste system are the dalits or untouchables.

Here is a picture of the caste hierarchy.

What is interesting is that the dalits, while still overwhelmingly extremely poor, are often better off than the low-caste peoples. Part of this is due to the affirmative action setup for dalits.

Have you experienced the caste system? Please post a comment (and please include your caste name in your comment!)

India, the superpower?

February 12th, 2007

Good article in Fortune magazine titled: India, The Superpower? Think Again by Cait Murphy.

She points out that India has done a marvelous job in building a revenue (and tax) generating IT sector employing 1 million people, but it has only 7 million employed in the formal manufacturing sector vs. 100 million people in China. The bottom line is that India is not generating enough jobs for the 10+ million Indians who enter the job market each year.

Other economies in Southeast Asia have successfully developed ahead of India “by being relatively open to trade; by investing in primary and secondary education; and by building pretty decent infrastructure (not only roads and ports, but health clinics and water supplies). India has begun to embrace one leg of this triangle – freer trade … As for the other two legs of this development triangle – education and infrastructure – these are still badly broken. About a third of teachers fail to show up on any given day (and, of course, are unsackable); the supply of both water and power is expensive and unreliable.”

Other key areas which India needs to focus on before boasting about being a superpower: an unreformed state banking sector; labor regulations that actively discourage hiring; abstruse land laws (and consequent lack of land titles); misshapen subsidies that hurt the poor; and corruption that is broad, deep and ubiquitous.

It is a very good thing to have a free press which publicly calls out these kind of issues.

Untouchables book review

February 3rd, 2006

Untouchables: My Family’s Triumphant Journey Out of the Caste System in Modern India

by Narendra Jadhav

If you want to understand India and how to be effective in accelerating impact on poverty there, you need to understand the caste (pronounced “cast”) system and how it affects how the vast majority of people think in India.  For outsiders, the caste system is often perceived as a thing of the past. For, wasn’t the caste system abolished when India declared independence from Britain over 50 years ago?

To see the caste system in action, all you need to do is open up any Indian newspaper and turn to the classifieds section for people seeking marriage partners. Almost all of the ads are explicit about the caste system of the ad buyer as well as the caste requirements of the spouse they are looking for. The explicit caste recognition is less front-and-center in other social spheres, but it is very much there under the surface and affecting how people think about themselves and each other.

This book is a biography of a dalit family living through The Great Depression, the India independence movement and up to today. Dalits are also known as the out-castes or untouchables. They are lower than the lower-castes as they are below the caste system. It is a story of triumph and yet a call to continue to fight to break the caste slavery system.

Narenda Jadhav, born in 1953, says that the caste system is still very much in place. It is still in people’s minds and affects how they see the world every day. Jadhav is a very successful economist and is the chief economist for the Reserve Bank of India (India’s central bank.) And Jadhav is a dalit.

Dalit is the more politically correct name for the out-castes or untouchables. These are people who are so low-on-the-totem-pole that they are not even in the caste system. They are lower than the lowest caste and therefore have no caste. This “matters” in India because castes are connected to occupations. For instance, there is the sweeper caste (who sweep streets), the milk caste (who raise animals to produce milk), the merchant caste (who conduct trade), etc. Historically, and still in much of India, people work in their caste occupations hoping to do a good job so that they when they are reincarnated they will move up to a higher caste. You can find out what caste people are from by asking their name.

The problem with the dalits is that they don’t have an association with an occupation type. So they are relegated to the most demeaning type of occupations including picking up cow dung, begging, scavaging and the like. They are treated like dirt by everyone including the lower caste peoples. They are denied education because they are considered too low for it.

In this book, Jadhav shares the story of his parents growing up through the depression era and through the Indian independence movement. His parents, dalits of course, were illiterate, extremely poor who were born in rural India and moved to Mumbai (formerly Bombay.) You get to see inside the lives of a family on the economic edge and without justice. Yet you see their determination to have their children have a better life.

His father, Damu, catches the dream and becomes a follower of Dr. Ambedkar (affectionately known as Babasaheb) who himself a dalit became a central person in defining the constitution of the new, independent India. Through the biography, Jadhav tells the story of how Ambedkar rallied dalits (now estimated at some 400M+ in India) to assert themselves. He first tried to work within the Hindu religious system for equal rights for dalits. He later gave up this approach and led a mass conversion (literally millions of people) of dalits to Buddhism as an act of liberation. Jadhav provides very interesting color commentary on what that looked like from the eyes of an ordinary dalit.

Damu followed through with Ambedkar’s personal recommendation to educate his children in order for them to escape the tyranny of the caste system. Damu followed through on this and many of his children even went on to college and to having prominent roles in the new India.

While I think that Jadhav has done us all a great service by telling this story, I think you must view the unique success of Jadhav (and his siblings) as an anomaly, not the norm. Just like we can find success stories of African-Americans, this doesn’t mean the equality and justice has been and is being served to all African-Americans in the USA [or pick your own example in another context.]

The caste system is, unfortunately, very much alive and well in India today and is a form of slavery as powerful as other slavery systems in history. About 100 years ago, Jotirao Govindrao Phule, wrote a book called Slavery which articules the how the Hindu religion (he calls it Brahminism) initiated and perpetuates the evil caste system in India. Dr. Ambedkar praised this book: “Mahatma Phule, the greatest Shudra of modern India who made the lower classes of Hindus conscious of their slavery to the higher classes and who preached the gospel that for India social democracy was more vital than independence from foreign rule.” That is, Ambedkar, Phule and others believe that the more important independence which India needs is liberation from the oppressive caste system.

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