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India Journal: Microfinance by the Numbers

Dear Esteemed Politicians and Bureaucrats of Andhra Pradesh:






The first number to look at is default rates. Up until a month ago, at the biggest lenders, less than 2% of borrowers in the state were missing payments on their microloans. The payment crisis, where people abandoned their repayment schedules, happened only after you told borrowers they didn’t have to pay. If this borrowers’ rebellion was triggered by dirty lenders, one would imagine the default rate would have expanded gradually before tipping into crisis.

Another figure you should be careful about using is the growing tally of microlending-related suicides. Whether it is 50 or 100, it is a tragedy of course. But with more than six million borrowers in Andhra Pradesh alone, it is statistically practically inevitable that there will be some suicidal microborrowers. If the number of suicides in the populace of tiny borrowers is in line with the average for India, there will be more than 600 that will choose to take their own lives this year in Andhra Pradesh. Still, correlation is not causation, even though it makes good political speeches.

If the state investigates suspicious debt-related suicides, it may well find that loan sharks, landlords and even family members are more often the ones that could be accused of harassing borrowers to death.

The loan interest rate is another controversial number that needs looking into. Most microlenders charge around 30% annual interest on their loans, which seems high, especially for an industry that claims to be helping the poor. It costs a lot of money to manage these tiny loans which are handed out in cash in remote areas, say the microlenders.

But for a better understanding of the rate, maybe critics need to look in their own wallets. Most credit cards in India charge around 30% as well. They also provide a form of small, unsecured loans and are actually much cheaper to manage. Few complain about their credit card rates.

Another number to look at is the interest on the heavily-subsidized loans to women’s self help groups in your great state. When these government loans cost less than 3% per year, how is it that millions are still flocking to the microlenders that charge ten times that amount?

Some of you bureaucrats and politicians are claiming it must be trickery: The ignorant masses are somehow being bullied into borrowing money they don’t need and at rates they can’t afford. Friends, you know better than anyone that an assumption of the ignorance of the masses is a massive ignorant assumption. Those with less money are more aware than the rich about every paisa they spend and owe.

They are snapping up the microloans from companies like SKS Microfinance Ltd., Spandana Sphoorty Financial, Basix and Share Microfin Ltd. because it is cheaper than the alternative (the village loan shark) and because government loans are too often not easily available thanks to government inefficiency and sometimes because those administering them demand bribes of up to 20% of the loan amount, according ton one World Bank report.

Moreover, despite decades of trying by government banks and insurance firms, the penetration rates of financial services to the poor are still surprisingly low. The Reserve Bank of India estimates that only around 40% of Indians have access to bank accounts while 10% have life insurance and only 1% non-life insurance. I’d imagine the government would welcome more help from the private sector.

A number you should also know well is the state’s budget. You know better than anyone that there are limited resources to do everything your citizens need you to do. Roads, schools, power plants, bridges, irrigation, employment guarantee programs, food for the needy — you could double your budget (and add all the billions of the Bill and Melinda Gates Foundation) and there are still not enough rupees out there. So why shut down a business that is trying to serve another basic need: the need for financial inclusion?

Of course, harassment should not be tolerated. Investigate and take those accused of haranguing poor borrowers to court and to jail. I understand my arguments are oversimplified but please do not hobble the whole industry for the mistakes of a few.

Did you shut down Cyberabad after one of Hyderabad’s most celebrated and connected citizens, Ramalinga Raju, admitted to duping the world and inflating Satyam Computer Services’ books by around $1 billion? The microlending industry employs and supports the livelihoods of more people in your state then the tech industry.

The last figure you need to know is the current default rate. The biggest microlenders say that more than half of their borrowers are still avoiding payments on their microloans – thanks to your urging. If that ends up being the default rate, many will go out of business.

That will mean that the millions of borrowers that can’t get state-subsidized loans will have to return to their dependence on the village loan shark. It will also send a signal to the rest of the world that the poor don’t pay.

Your state was at the center of the evolution of global thinking about what the private sector can do for the poor. International banks and investors poured billions into the sector while private sector companies used microlender networks to deliver everything from cell phones to life insurance to groceries to solar lamps to the poor.

If everyone gets burned by your policies, then the private sectors’ experiments in reverse innovation and reaching out to those at the bottom could be deemed a failure.

You will have the poor all to yourselves again. Maybe that’s what you want. But, if I may be frank, your track record so far suggests you might be able to use any help you can get.

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