Loan sharking

EXPLOITING THE POOR

Just think. If the poorest of a poor woman in a village wants to buy a goat, she can avail a small loan from a micro-finance institute. She buys a goat, which becomes her life-line ensuring her livelihood security, and is forced to repay the loan at a staggering interest rate of 24 per cent on an average.

In any city on the other hand, if you want to buy a car you can walk up to a bank and get an easy loan for an annual interest rate not exceeding 8 per cent. Buying a television or a refrigerator on installments may be still cheaper, often without any interest rate. While for you in the city the bank loan is merely a business transaction and therefore comes cheap, in the village the petty loans are being distributed in the name of empowering the poor.

I am sure that if the poorest of the poor woman was also to get a loan for buying a goat at a minimal rate of interest, say 4 per cent or even 7 per cent that we provide to farmers, she would be driving a Nano car at the end of the year. Since this is not allowed to happen, I sometimes wonder whether the primary objective of micro-finance is to protect the health of the banks and the intermediary organisations rather than to pull the poor out of the poverty trap.

If the poorest of the poor, living below the poverty line, need financial credit at an exorbitantly high interest rate of 24 per cent to get empowered, why the more resourceful people living in urban centres cannot empower themselves with the same rate of interest? If the poor in rural India can make business sense from this high rate of return, how come the people living in the city cannot? Why do poor have to pay three times more interest for small loans?

Let us not forget that a majority of the 150 million poorest of the poor in rural areas, who are borrowing from the plethora of micro-finance institutions, probably earn their daily bread from working under the National Rural Employment Guarantee Scheme (NREGS), which only provides them an assured daily income of Rs 60 to Rs 80 and that too for only 100 days in a year. Isn’t it criminal to charge these poor borrowers 24 per cent interest on small loans?

It is therefore quite apparent that poverty has literally become a big and organised business. If you are educated, and looking for a profitable business enterprise, and more so if you are a non-resident Indian and want to translocate to India, micro-finance offers you the right avenue. There can be no better business opportunity than starting a micro-finance institution with assured returns and 100 per cent loan recovery.

Safety and profit

At times of economic insecurity, micro-finance is a business with assured returns. No wonder, Monsanto, Citicorp, ABN Amro, ICICI, Nabard, UN and a host of other international and national financial institutions are lending at roughly 12-13 per cent to the micro-finance institutions. These MFIs add another 10 to 12 per cent to meet their overheads, and therefore for the poor borrower the cumulative interest comes to around 24 per cent a year.

The micro-finance business has grown manifold. India Microfinance Report 2009 tells us that the portfolio of the micro-finance institutions has grown by 97 per cent, and number of beneficiaries has also gone up by 60 per cent. Another news report tells us that SKS Micro-finance is charging approximately 24 per cent rate of interest in Orissa, Karnataka and Andhra Pradesh; in southern India, Equitas Micro-finance is seeking 21-28 per cent interest rate and Basix Microfinance is providing small loans at 18-24 per cent interest rate.

The unprecedented growth in micro-finance tells us that while the rules of the game have changed, the poor in the villages continue to be exploited. Micro-finance institutions have shifted the game from the hands of the villains of the story, the ‘sahukars’ to a sophisticatedly organised class of new money-lenders. These are not the usual ‘banias’ but a highly educated class of people who use all the modern marketing skills. Charging usurious interest rates, these MFIs actually “live off the back of the poor.”

I don’t understand how the Reserve Bank of India can be a mute spectator. Ostensibly the RBI is only concerned at the health of the banks, since they get an assured return of 12 per cent without even making any effort to build up its customer base. I see no reason why the RBI cannot force these banks to lend at a maximum of 2 per cent interest for the poorest of the poor, allowing the MFIs to charge an additional 2 per cent. Any micro-finance charging more than 4 per cent interest for the people, who are somehow surviving below the poverty line, should be considered a crime.

At present, MFIs do follow a code of conduct, but I fail to understand why some institutions like the Society for Rural Improvement in Kerala charge 10 to 15 per cent rate of interest, only 2 to 3 per cent more than what the commercial banks charge them, while the big players romp home with another 12 per cent interest over and above what the banks lend them for.