Microfinance companies are the financial institutions that offer small.docx

Microfinance companies are the financial institutions that offer small-scale financial services in both the forms – credit and savings, especially to the poor in rural, semi-urban and urban areas. These financial services are meant to help them in undertaking economic activities, mitigating vulnerabilities to income shocks, smoothening consumption, increasing savings and supporting self-empowerment.

There are a number of microfinance companies in India, which play some pivotal roles to the development of India.

India's microfinance sector is fragmented with more than 3000 microfinance companies (MGIs), NGOs and NGO-MFIs. The top 10 microfinance companies in India are estimated to account for almost 74 per cent of the total loans outstanding. It can be added here that the total loan outstanding of Indian microfinance sector lies between ` 160-175 billion. As on March 31, 2009, almost 17 Indian microfinance companies have more ` 1 million outstanding loans.

List of Top Microfinance Companies in India Following are the top 10 Microfinance companies in India:

SKS Microfinance Ltd (SKSMPL)

Name SKS Microfinance Ltd

Headquarter Secunderabad, Andhra Pradesh

Legal Status Pvt. Ltd. Company (NBFC)

Lending Model JLG

Number of Branches 1,413

Loan Outstanding (` Mn)

(As on September 30, 2008)

18,227

Borrowers

(As on September 30, 2008)2,590,950

Net Worth (` Mn)


2,395

Portfolio Yield (%)

(Apr 1-Sep 30, 2008)23.40

OSS (%)(Apr 1-Sep 30, 2008) 126.49

Current Portfolio (%)

(As on September 30, 2008)99.14

Debt to Net Worth (Times)


Spandana Sphoorty Financial Ltd (SSFL)

Name Spandana Sphoorty Financial Ltd

Headquarter Hyderabad, Andhra Pradesh

Legal Status Public Ltd. Company (NBFC)

Lending Model JLG, Individual

Number of Branches 696



11,987

Borrowers

(As on September 30, 2008)1,668,807

Net Worth (` Mn)


1,225

Portfolio Yield (%)

(Apr 1-Sep 30, 2008)27.43

OSS (%)(Apr 1-Sep 30, 2008) 132.02





Share Microfin Limited (SML)

Name Share Microfin Limited



Lending Model JLG, Individual




8,568

Borrowers

(As on September 30, 2008)1,231,556

Net Worth (` Mn)


1,448

Portfolio Yield (%)

(Apr 1-Sep 30, 2008)27.49

OSS (%)(Apr 1-Sep 30, 2008) 152.45





Asmitha Microfin Ltd (AML)

Name Asmitha Microfin Ltd



Lending Model JLG




4,944

Borrowers

(As on September 30, 2008)694,350

Net Worth (` Mn)


475

Portfolio Yield (%)

(Apr 1-Sep 30, 2008)17.43

OSS (%)(Apr 1-Sep 30, 2008) 121.04





Shri Kshetra Dharmasthala Rural Development Project (SKDRDP)

Name Shri Kshetra Dharmasthala Rural Development Project

Headquarter Dharmasthala, Karnataka

Legal Status Trust

Lending Model SHG




4,060

Borrowers

(As on September 30, 2008)612,482

Net Worth (` Mn)


157

Portfolio Yield (%)

(Apr 1-Sep 30, 2008)12.02

OSS (%)(Apr 1-Sep 30, 2008) 100.46





Bhartiya Samruddhi Finance Limited (BSFL)

Name Bhartiya Samruddhi Finance Limited


Legal Status Public Ltd. Company, (NBFC)

Lending Model Diversified




3,882

Borrowers

(As on September 30, 2008)457,668

Net Worth (` Mn)


317

Portfolio Yield (%)

(Apr 1-Sep 30, 2008)17.89

OSS (%)(Apr 1-Sep 30, 2008) 108.97





Bandhan

Name Bandhan

Headquarter Kolkata, West Bengal

Legal Status Society

Lending Model JLG


Loan Outstanding (` Mn) 3,389


Borrowers

(As on September 30, 2008)851,713

Net Worth (` Mn)


435

Portfolio Yield (%)

(Apr 1-Sep 30, 2008)26.32

OSS (%)(Apr 1-Sep 30, 2008) 175.40





Cashpor Micro Credit (CMC)

Name Cashpor Micro Credit

Headquarter Varanasi, Uttar Pradesh

Legal Status Section 25 Company

Lending Model JLG




1,431

Borrowers

(As on September 30, 2008)303,935

Net Worth (` Mn)


93

Portfolio Yield (%)

(Apr 1-Sep 30, 2008)28.78

OSS (%)(Apr 1-Sep 30, 2008) 109.71





Grama Vidiyal Micro Finance Pvt Ltd (GVMFL)

Name Grama Vidiyal Micro Finance Pvt Ltd

Headquarter Tiruchirappalli, Tamil Nadu


Lending Model JLG




1,316

Borrowers

(As on September 30, 2008)288,311

Net Worth (` Mn)


231

Portfolio Yield (%)

(Apr 1-Sep 30, 2008)32.46

OSS (%)(Apr 1-Sep 30, 2008) 141.53





Grameen Financial Services Pvt Ltd (GFSPL)

Name Grameen Financial Services Pvt Ltd

Headquarter Bangalore, Karnataka


Lending Model JLG




1,287

Borrowers

(As on September 30, 2008)153,453

Net Worth (` Mn)


127

Portfolio Yield (%)

(Apr 1-Sep 30, 2008)18.77

OSS (%)(Apr 1-Sep 30, 2008) 106.41





May 2011

MICROFINANCE IN INDIA:

A CRISIS AT THE BOTTOM OF THE PYRAMID

How the Government of Andhra Pradesh has severely damaged private sector

microfinance and put 450 million of India’s rural poor at riskA Crisis at the Bottom of the Pyramid

Page 1 of 10

I. Introduction

The microfinance industry in India is in the midst of the most severe crisis in its 25 year history. The genesis of the crisis lies

with the actions taken by the government of the southern state of Andhra Pradesh in October 2010, when it passed

legislation effectively shutting down all private sector microfinance institutions (“MFIs”) operating in the state. In the first half

of FY2011, MFIs in Andhra Pradesh disbursed Rs 5,000 crore ($1.13 billion) to borrowers; in the second half of FY2011,

these same MFIs could only disburse Rs 8.5 crore ($1.9 million)

i

. The Andhra Pradesh Government's stated aim was to

protect the poor and yet its actions have resulted in a 600-fold decrease in financing to the very poorest of India’s citizens.

This should make everyone pause. The rural poor depend on access to consistent and dependable finance to help smooth

patchy income streams and avert financial crises. The AP government’s actions have effectively shut off finance to these

most vulnerable of India’s citizens. Indeed, as this paper discusses, the very premise of the Andhra Pradesh Microfinance

Institutions (Regulation of Money Lending) Act, 2010 (the “AP Act”) was fundamentally flawed. Quite apart from protecting

the poor, the AP Act does just the opposite and risks creating a near term financial and human crisis amongst the rural poor

in Andhra Pradesh, while also potentially jeopardizing the Indian government’s broader financial inclusion agenda.

II. Executive summary

• The direct effect of the enactment of the AP Act has been to deny millions of India’s poorest citizens access to basic

financial services. The impact of the AP Act has the potential to affect 450 million people. Since the AP Act was

adopted, MFI disbursements in AP alone have diminished from Rs 5,000 crore ($1.13 billion) to a mere Rs 8.5 crore

($1.9 million), creating a severe shortage of much needed finance to the rural poor, India’s most vulnerable citizens.

• The rationale for the AP Act is not to protect the poor, but to protect the uncompetitive government-backed SelfHelp Group (“SHG”) program run by the Society for the Elimination of Rural Poverty (“SERP”).

• The AP government’s claims that private sector MFIs are exploiting India’s poor by charging usurious interest rates

and practicing coercive recovery techniques cannot be substantiated and, based on numbers from SERP, it appears

that the suicide rates amongst MFI borrowers are dramatically lower than the statistical average in the entire state

of Andhra Pradesh.

• Private sector MFIs have demonstrated to be the most scalable and sustainable way of helping the Indian

government meet its stated policy of encouraging “financial inclusion” for the 450 million people in India who are

currently “unbanked”, i.e., with no access to basic finance.

• If the World Bank provides the much discussed $1 billion in funding to the government-backed SHG program in

AP, it will be complicit in snuffing out the private sector from Indian microfinance.

• The Reserve Bank of India (“RBI”) and central government must take immediate and decisive action to supersede,

suspend or repeal the AP Act and introduce sensible legislation on a federal level which allows the private sector to

grow and flourish.

• The Malegam Committee’s recommendations and their broad acceptance by the RBI give rise to a number of

concerns, and the constraints proposed around loan limits, interest rates, provisioning norms and capital

requirements must be revisited to avoid unintended and deleterious consequences that could permanently impact

private sector MFIs.

• MFIs represent the only viable way for lenders to recover their loans to MFIs, given their relationship with the end

customers. MFIs must be given the time to undo the damage inflicted by the AP Act and to recover the loans from

borrowers.A Crisis at the Bottom of the Pyramid

Page 2 of 10

III. Microfinance background

History

Microfinance in India can trace its origins back to the early 1970s when the Self Employed Women’s Association (“SEWA”)

of the state of Gujarat formed an urban cooperative bank, called the Shri Mahila SEWA Sahakari Bank, with the objective of

providing banking services to poor women employed in the unorganised sector in Ahmedabad City, Gujarat. The

microfinance sector went on to evolve in the 1980s around the concept of SHGs, informal bodies that would provide their

clients with much-needed savings and credit services. From humble beginnings, the sector has grown significantly over the

years to become a multi-billion dollar industry, with bodies such as the Small Industries Development Bank of India and the

National Bank for Agriculture and Rural Development devoting significant financial resources to microfinance. Today, the top

five private sector MFIs reach more than 20 million clients in nearly every state in India and many Indian MFIs have been

recognized as global leaders in the industry.

The Government of India and the RBI have a stated goal of promoting financial inclusion.

According to recent RBI estimates

ii

, there are over 450 million “unbanked people” in India, most of whom live in rural areas.

The term “unbanked” refers to people who have no access to formal financial services, but rather must rely on either family,

or informal providers of finance, such as the village moneylender. It is undisputed that access to finance is critical for enabling

individuals and communities to climb out of poverty. It is also generally agreed that relying on the limited resources of village

moneylenders exposes the poor to coercive lending practices, personal risks and high interest rates, which can be a much as

150%

iii

The goal of financial inclusion must include the private sector.

. Therefore the Indian Government and the RBI have a policy of “financial inclusion”. As part of this policy, the

government requires Indian banks to lend to “priority sectors”, one of which is the rural poor. Until recently, banks were

happy to lend money to MFIs who would then on-lend funds, primarily to poor women across rural India. The banks have

welcomed this policy because historically they tended to charge MFIs average interest rates of 12-13% and benefited from

100% repayment rates. Thus, by lending to MFIs, banks have been able to meet their “priority sector” lending requirements

with what historically has amounted to a risk-free and very profitable arrangement.

Microfinance in India is currently being provided by three sectors: the government, the private sector and charities. These

three sectors, as large as they are, have only a small fraction of the capital and geographic scale required to meet the

overwhelming need for finance amongst India’s rural poor.

The top 10 private sector microfinance providers in India together serve less than 5% of the unbanked population of India –

approximately 20 million clients

iv

. For example, SHARE Microfin Limited (“SHARE”) and Asmitha Microfin Limited

(“Asmitha”), two of the five largest MFIs in India, have almost Rs 4,000 crore ($900MM) loaned to over 5 million poor

women in 18 Indian states (prior to the crisis, the combined outstanding loan portfolio had been as high as Rs 6,750 crore

($1.525BN)). Yet, despite the size of MFIs like SHARE and Asmitha, only a fraction of the overwhelming need is being met.

Private sector MFIs have an essential role to play if the goal of financial inclusion is to be realized, as neither the government

nor charities have the capital nor business model required to meet the insatiable demand for finance in rural India. As the

public listing of SKS Microfinance underscored, private sector institutions are able to attract increasingly large amounts of

private capital, in order to accelerate the growth of the industry, which is essential to expanding financial inclusion as far and

as fast as practicable.

IV. Legatum Ventures’ contribution to the microfinance sector in India

Legatum is a multi-billion dollar investment organization with a 25 year heritage of allocating capital successfully around the

globe. Legatum has been one of the largest private portfolio investors in India since 2005. Legatum has invested billions of

dollars in some of India’s leading companies, primarily focusing on banks and other financial institutions. In addition to its

investment business, Legatum has a very active philanthropic arm, the Legatum Foundation, which has since its inception

provided over $100 million to over 1,200 humanitarian projects in over 100 countries, including India. The Legatum

Foundation supports local grass-roots community-based initiatives that focus on issues ranging from health, education,

financial inclusion and human trafficking. Our investment in the microfinance sector was an effort to combine our investment

and philanthropic efforts to demonstrate that “good business is good development”.A Crisis at the Bottom of the Pyramid

Page 3 of 10

In 2007, Legatum Ventures invested $25 million in SHARE, which was at the time the single largest private equity investment

globally in microfinance, to help the company scale its operations to reach more clients while also improving its governance

and operations. At that time, SHARE was in distress due to the “Krishna crisis” (where local politicians told borrowers they

no longer needed to repay MFIs). With Legatum Ventures’ equity infusion, SHARE was able to survive the Krisha crisis and

grow. Over the last four years, SHARE, together with its sister organization, Asmitha, has expanded from under one million

clients to over five million. The combined company has grown from operating in 3 states to 18 across India. As of the

beginning of March 2011, the combined company had an outstanding loan portfolio of almost Rs 4,300 crore ($970MM) and

10,000 employees.

Legatum introduced world-class corporate governance standards and ensured that SHARE’s operations met with the highest

ratings from CRISIL and other agencies, while also overseeing SHARE’s transition to a “Big Four” audit firm (S. R. Batliboi &

Co., a member of Ernst & Young). SHARE has historically had one of the lowest interest rates of the large MFIs in India and

also one of the lowest operating expense ratios of just 7%.

V. The microfinance crisis in Andhra Pradesh – analysis of the AP Act

The Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act, 2010

In October 2010, with no warning or consultation with stakeholders, the Government of Andhra Pradesh issued the Andhra

Pradesh Microfinance Institutions (Regulation of Money Lending) Act, 2010 effectively shutting down all private sector

microfinance operations in the state. The AP Act does not however apply to AP’s government-backed microfinance business

which directly competes with private sector MFIs. This was a major blow to the entire microfinance industry as Andhra

Pradesh, widely regarded as the birthplace of private sector microfinance, accounts for over 40% of all loans by MFIs across

India according to some estimates

v

.

To justify its extraordinary action against private sector microfinance, the AP government claimed to be protecting the poor

from what they claimed to be rapacious lending practices by the MFIs. But, as discussed below, the facts prove otherwise.

Moreover, by its own terms, the AP Act aims to protect the government’s own microfinance programs which had been

losing market share to the more efficient and better run MFIs:

“Whereas these SHGs are being exploited by private Micro Finance Institutions (MFIs) through usurious

interest rates and coercive means of recovery resulting in their impoverishment & in some cases leading to

suicides, it is expedient to make provisions for protecting the interests of the SHGs, by regulating the money

lending transactions by the money lending MFIs and to achieve greater transparency in such transactions in the State

of Andhra Pradesh”

vi

No-one would object to protecting the poor from exploitation by institutions charging usurious rates, practicing coercive

recovery techniques, or driving clients to suicide. However, was there ever any real substance behind these alarming claims?

Indeed, when one looks for evidence to substantiate these allegations, it quickly becomes apparent that the services being

provided by private sector MFIs are valued by their clients, and are neither usurious nor violent. On the contrary, given the

size of the MFI sector, tales of exploitation are remarkably rare.

.

Let’s consider each of these three allegations in turn, again using SHARE and Asmitha as our case study:

1. Do private sector MFIs charge usurious interest rates?

SHARE and Asmitha, two of India’s largest MFIs, charge average interest rates of between 23.6-28.1% depending on

the maturity of the market in a particular state. These rates are lower than the average interest rate of 30% for

consumer credit cards in India

vii

. They are also among the lowest rates for microfinance in India and the world. These

rates are offered despite the high cost of providing “door-step services” (i.e., sending loan officers to meet the

borrowers in their villages), which allow clients to remain close to their homes, children, fields, livestock and

livelihoods. This is in contrast to the AP government’s SHG program which requires borrowers to pay at the local

or regional office behind closed doors.

Conclusion: MFI interest rates are commercial, reasonable and competitive. A Crisis at the Bottom of the Pyramid

Page 4 of 10

2. Do MFIs (need to) employ coercive collection practices?

By design, MFI processes have a number of in-built mechanisms to ensure repayment. From identification to

repayment, a larger group of borrowers is engaged in appraising MFI members and in ensuring on-time repayments.

The group pledges to cover for members and ensures credit discipline. In addition, the small, frequent payment

structure eases this process. In a few instances where repayments have posed a hardship for clients, MFIs have

restructured loans to support clients. Thus, there is little need for MFIs to employ coercive measures. Finally, clients

rely on ongoing access to finance in the same manner as any borrower in the formal banking sector; and the failure

to repay results in the client’s inability to take future loans which can be important for business and other needs. A

good credit history is as valuable to the poor as it is to the wealthy.

Established MFIs such as SHARE and Asmitha have strict policies against physical coercion being used to force

repayment, and the consequences for doing this can be severe and result in immediate termination. In addition,

both the Sa-dhan and MFIN code of conduct have clauses on fair recovery practices which all major MFIs in India

have signed and are committed to.

Conclusion: loan repayments are professionally managed and humanely carried out.

3. Are MFI clients being pushed to commit suicide?

Suicide for any reason is a profound tragedy. In a report published in Microfinance Focus in October 2010, the

gender unit of SERP asserted that 54 microfinance borrowers residing in AP had tragically committed suicide as a

consequence of MFI lending practices

viii

. Although 54 deaths may seem a substantial number to be allegedly caused

by MFI lending practices, it is not until one contrasts this number with the suicide statistics for the state of Andrah

Pradesh as a whole that one can begin to put these numbers into perspective. There were over 14,500 people who

committed suicide in Andhra Pradesh in 2009 alone, most being attributed to agricultural failure or grief over

political developments

ix

. Based on an estimated population of 75 million in Andhra Pradesh, for every 6 million AP

residents, 1,160 of them might be expected to commit suicide in any given year based on statistical norms. Given

the estimated 6 million microfinance borrowers in AP, SERP’s assertion that there were 54 deaths allegedly caused

by MFI lending practices therefore appears not to be unusual, based on what national statistics demonstrate.

Additionally, based on the numbers from SERP (formally a non-governmental organization, but it receives its

funding from the AP government and the state’s Chief Minister chairs its governing board), it appears that the

suicide rates amongst MFI borrowers are dramatically lower than the statistical average in the entire state of Andhra

Pradesh. In other words, borrowers from private sector MFIs appear less likely to commit suicide than their fellow

residents in Andhra Pradesh. This should, of course, not be very surprising, given the manner in which MFI clients

benefit from the services provided.

Conclusion: there is no proven correlation or causal link between MFIs and suicides.

It can be seen from the foregoing that the factual basis for the AP Act is, in fact, deeply flawed. This does not mean to say

that the prevailing system, with thousands of staff and millions of clients, is perfect. All MFIs need to work hard to build a

common culture and mitigate the risk posed by overzealous loan officers. Yet shutting down an entire industry because of

anecdotal evidence of occasional problems would be like closing all schools because a few teachers provide poor or

misguided teaching to their students.

Additionally, this raises the question: what was the real reason that such draconian measures were taken to stifle private

sector MFI activity in Andhra Pradesh? It will be seen in the next section that, rather than doing a bad job, private sector MFIs

have been doing their job too well – too well for their competition within the state of AP. Regardless of the motivation

behind the AP Act, serious damage has already been done to the microfinance sector, as well as to the climate for business

and investment in AP and India.A Crisis at the Bottom of the Pyramid

Page 5 of 10

VI. The source of the AP Act and the microfinance crisis

Where did the allegations of suicides and violence come from?

If the extremely serious assertions of MFI wrongdoing are in fact not true, then this demands an answer to the question

“Where did these allegations come from?” Who could possibly gain from shutting down the private sector MFI industry in

Andhra Pradesh, and from denying the rural poor access to their services? The answer is not difficult to find. The number

one competitor of private sector microfinance in AP is the state-run microfinance business, SERP.

Behind the scenes, the AP Act was written and championed by SERP, the agency responsible for running the AP

government-backed microfinance SHG program. Evidence shows that SERP has been losing the struggle to compete with

private sector MFIs.

The effect of the AP Act is not to protect the poor, but to protect the uncompetitive government-backed SHG

program run by SERP.

The AP government-backed SHG program competes directly with the private sector MFIs. The SHG program however is

failing to keep up and has lost significant market share to the MFIs. Why? According to the October 2010 Intellecap White

Paper, the government programs have “…neither the discipline needed for long-term sustainability, nor a business model that can

be scaled up effectively”

x

. Additionally, there is a widespread belief that the World Bank is on the point of providing an

additional $1 billion

xi

in funding support to SERP or a successor program. The case for this extension is believed to be

strengthened if the commercial MFI industry is weakened.

An AP Act that eliminates law-abiding private sector participants in the market and directly benefits the government-backed

provider is unfair at best and illegal at worst. Given that it will negatively impact millions of borrowers amongst India’s rural

poor, it is also unconscionable. As Vijay Mahajan, Chairman of BASIX, has stated, the AP government “is an unfair referee as it

is both player and referee.” The AP Act does not try to hide its anti-competitive aims. The text of the Act states that its goal is

“to [protect] the interests of the SHGs”

xii

. If the World Bank provides the much discussed $1 billion in funding to the SHG

program in AP, it will be complicit in snuffing out the private sector from Indian microfinance. According to David Roodman

of the Center for Global Development in his blog on the crisis in AP, “World Bank money has…beefed up a political economy

hostile to private sector solutions”

xiii

.

VII. The superior performance of private sector microfinance

Private sector microfinance has grown dramatically because it offers the best products and services to meet the

massive demand for credit amongst India’s rural poor.

Between 2008 and 2010 the number of clients of MFIs grew by an average of 61% each year, with loan portfolios growing

85% per year. The AP government-backed microfinance SHG program, on the other hand, only grew its client base by 13.6%

during the same period and its loan portfolio by 28%

xiv

. As an October 2010 White Paper by Intellecap stated “the MFI’s

combination of door-step service, easy credit, frequent small-value repayments and the group guarantee is attracting borrowers –

who are no longer so naïve that they cannot weigh the attractions of these factors against the lower rates of government programs”

xv

.

Additionally, a World Bank report found that government loan administrators sometimes demand bribes of up to 20%

xvi

of

the loan amount before loan requests are granted. If true, this would help explain why borrowers prefer accessing loans

through MFIs which are provided in a transparent manner, over the potentially coercive manner some SHG loan officers

provide loans. Moreover, if a borrower must pay interest of 3% per annum (typical SHG interest rate) and a bribe of 20% of

the loan amount, then the borrower’s actual cost of capital is similar to (if not greater than) interest rates charged by MFIs.

When one takes the better service offered by MFIs into account, it becomes easy to understand why MFIs are taking market

share from SHGs. A Crisis at the Bottom of the Pyramid

Page 6 of 10

VIII. The Krishna precedent – having been here before, MFI clients in Krishna choose to

continue to pay.

Industry observers who have been following the microfinance sector in India for some time will recall the politically

motivated attacks on MFIs in the AP district of Krishna in 2006 (where local politicians essentially told clients of MFIs they

were no longer required to repay their loans) which almost destroyed a number of MFIs. A little known fact that has

emerged since the issuance of the Andhra Pradesh Microfinance Institutions Ordinance

xvii

in October 2010 is that, within AP,

the Krishna district is currently reporting the highest recovery rates (approximately 40% vs. 10-20% for other districts across

AP).

How can this be explained? One plausible explanation is that during the time of the 2006 crisis when MFIs were no longer

actively providing fresh loans, clients were forced to return to other avenues for financing - essentially either the

government-sponsored SHGs or the village moneylenders. Like everyone else, the poor have long memories when it comes

to facing less attractive choices.

IX. Consequences of the AP Act

Unless repealed or overruled immediately, the AP Act will continue to cause irreparable damage to the wellbeing of

the rural poor by destroying a large part of the private sector microfinance industry, cause large write-offs for public

and private sector banks in India and put the policy goal of financial inclusion in jeopardy.

The AP Act made it illegal for MFIs to collect outstanding loans in the field in the manner in which they and their client base

had become accustomed to. It provided that all MFIs must now register at the district level and require prior approval from

the respective District Authorities to disburse any loan. At the same time, repayments must now only be collected at

government notarized locations, a big departure from the village center meetings designed to maximize efficiency and benefit

for the client. Previously, MFIs were able to conduct weekly meetings in small groups of 40 women, which formed a critical

aspect for building and maintaining a strong credit culture and financial discipline. With MFIs now only able to collect loans

monthly as opposed to weekly, this strong repayment culture has eroded significantly. As a result, there has been a complete

standstill of disbursements and repayments in the state of AP, with adjoining states now also witnessing a spillover effect.

While this puts MFIs and banks in jeopardy, the ones who lose the most, of course, are those with no voice: the millions of

poor families across India with no access to finance in the planting season.

It is possible to get a sense of the extent of the consequences that would flow from the collapse of the private sector MFIs

by looking at the position of SHARE and Asmitha alone:

• Five million poor women in 18 states across India will lose access to finance. Without private sector MFIs,

these clients will need to rely on the limited resources, inefficiencies, and frequently unethical practices of other

sources of rural finance. Most states outside AP do not have government-backed competing microfinance

institutions, leaving these borrowers with no alternative other than the village moneylender. Five million of India’s

poorest citizens would be impacted by the collapse of SHARE and Asmitha alone - a broader collapse of private

sector MFIs across India would cause this number to multiply, putting many millions more at risk.

• Indian private Sector MFIs will ultimately fail. Due solely to the AP Act, SHARE and Asmitha are prevented from

collecting the amounts owed to them, and are therefore unable to repay these amounts to their 40 lenders. As per

recent news reports, the Corporate Debt Restructuring (“CDR”) Cell of the RBI admitted loans in excess of Rs

6,000 crore ($1.35BN) for restructuring in March 2011, involving five MFIs. However, such is the depth of the

prevailing crisis in AP that even the most forgiving of CDR packages is only likely to provide a temporary fix. It

seems clear that the effects of the AP Act on MFIs have been extremely severe. Unlike other companies that

typically end up in the CDR process, the current plight of the private sector MFIs was attributable to external

factors, i.e. the passing of the AP Act, rather than any credit weakness or operational negligence committed by the

MFIs themselves. It seems incredible and tragic that an ill-advised law passed by a state government in India can

cause the demise of several otherwise healthy and productive companies, and potentially imperil an entire sector.

• The financial inclusion agenda will suffer. To fulfill the vision of financial inclusion, billions of dollars must be lent

and collected across India. There is room for all providers of microfinance given that the needs are so great. The AP A Crisis at the Bottom of the Pyramid

Page 7 of 10

Act has the underlying potential to kill leading private sector providers of microfinance, cause massive write-offs for

the banking sector and reduce the supply of both debt and equity capital to this “priority sector”, turning the clock

back 20 years when finance for the poor was primarily provided by moneylenders, poorly managed government

agencies of questionable governance and charitable organizations with limited capital. Not having been able to

conduct its normal business since October 2010, and with planting season approaching, SHARE and Asmitha are

now seeing large numbers of women coming to its branches demanding loans but who, due to the AP Act, must

leave empty-handed.

• Indian private and public sector banks will suffer substantial losses. SHARE and Asmitha alone have over Rs

2,100 crore ($475MM) in loans made to borrowers in AP. The AP Act has made it impossible for SHARE and

Asmitha to collect the amounts due for repayment. The repayment rate in AP for all MFIs is down to an average of

15%, from 98% before the Act was passed. While the terms of the CDR packages remain to be seen, the potential

for future default by SHARE and Asmitha remains material and any such default would lead to significant writedowns at 40+ lenders of the two MFIs. Defaults by other MFIs are also a real possibility. With SKS Microfinance the

only likely large survivor of the crisis (ironically, given how much equity was raised in its IPO, SKS can afford to

write-down its entire AP portfolio without wiping out all of its equity), it is highly doubtful that lenders will ever

again extend credit to the microfinance sector.

• Thousands of people employed in the microfinance sector will lose their jobs. SHARE and Asmitha together

employ approximately 10,000 people across India. Remarkably, private sector microfinance provides employment

to more people in AP than the Information Technology industry. It is noteworthy that the IT industry as a whole was

not forced to close down when the $1 billion Satyam scandal came to light; no more so should the microfinance

industry be forced to close down, especially when, unlike Satyam, MFIs have not committed any malfeasance.

X. The Malegam Committee Recommendations:

Even if the AP Act fails to quickly destroy private sector microfinance, the Malegam Committee recommendations, if

adopted without change, will likely achieve the same result, albeit more slowly.

The RBI is responsible for regulating non-banking financial companies (“NBFCs”), not the state governments. As a first step

toward resolving the jurisdictional breach caused by the AP government’s purported regulation of NBFCs, the RBI set up the

Malegam Committee to study the issue and make recommendations. In its draft report, the Malegam Committee thankfully

legitimized MFIs and the private sector’s involvement in microfinance and called for continued priority sector lending support

to MFIs. However, the Malegam Committee’s recommendations also gave rise to a number of concerns, as discussed below.

• Loan limits. A limit on loans of Rs 25,000 to borrowers with household income of less than Rs 50,000. This could

result in a disincentive for these clients to state their true income, or even to increase their household income for

fear of losing access to finance from MFIs. And the millions of borrowers who now cannot avail themselves of

microcredit will have limited alternatives, most likely needing to return to the village moneylender.

• A cap on interest rates and margins. It is well known that price controls create benefits for the few and shortages

for the many - in this case, the result will be a shortage of available finance. To make broad-based financial inclusion

a reality in India, the sector will need to attract billions of dollars from global capital markets. If the RBI chooses to

set pricing and margins, instead of letting competition and the market set prices, this will dramatically reduce the

amount of investment capital flowing to these MFIs, especially the equity capital they will need to maintain minimum

capital adequacy going forward while still growing.

• Provisioning norms. The report recommends much higher provisioning norms than are currently in place. If these

are implemented, because of the current situation in AP, many of the large MFIs will have to provide for and writeoff their portfolios in AP which would ultimately lead to bankruptcy.

• Increased capital requirement. An increase in the minimum capital requirement from Rs 2 crore ($450,000) to Rs

15 crore ($3.4MM), represents a 7.5 fold increase for an industry with historical repayment rates of 98% and

higher. Such a draconian and arbitrary requirement will make it nearly impossible for new companies to start or

survive, therefore reducing competition and ultimately denying potential borrowers access to financial inclusion.A Crisis at the Bottom of the Pyramid

Page 8 of 10

The framework of regulations recommended by the Malegam Committee has now been broadly accepted by the RBI in its

monetary policy statement for 2011-2012. Some of the parameters recommended by the Committee have, however, been

adjusted. For example, the RBI has increased the annual income limits for eligible households to Rs 60,000 in rural villages and

to Rs 120,000 in urban or semi-urban districts. The limit on loans has also been increased to Rs 35,000 in the first cycle and

Rs 50,000 in subsequent cycles, and the interest rate cap has been raised to 26% (compared with 24% recommended by the

Committee). Detailed regulations are expected in due course.

While these adjustments are welcome, they do not go far enough - it is estimated that more than 50% of the clients of

private sector MFIs in India are above the Rs 60,000 income bracket, and the concerns around provisioning norms and capital

requirements remain. These concerns must be addressed by the RBI and central government, as the Committee itself

recognized the dangers of crippling the flow of funds to borrowers “…The Sub-Committee has cautioned that while recognizing

the need to protect borrowers, it is also necessary to recognize that if the recovery culture is adversely affected and the free flow of

funds in the system interrupted, the ultimate sufferers will be the borrowers themselves as the flow of fresh funds to the microfinance

sector will inevitably be reduced”

xviii

.

XI. Equity investment needed for financial inclusion

Legatum is hopeful that the RBI and the Ministry of Finance will take an active role in resolving the crisis and in bringing much

needed clarity to the regulatory landscape for microfinance. It is encouraging that the Malegam Committee has conducted

significant research and invited many industry participants to provide feedback on its draft recommendations. It is concerning,

however, that both the Committee and the Ministry of Finance may not have had the opportunity to hear from one key

stakeholder – equity investors.

Given Legatum’s significant experience in the microfinance sector, we believe it might be helpful for policymakers to hear

equity investors’ perspective on the crisis and the current recommendations. Legatum is, of course, concerned that it may

lose 100% of its investment in SHARE in a very short time. But this pales in comparison to the loss of the real victims of the

crisis – the millions of clients who no longer have access to credit to purchase seed or fertilizer in the planting season, or to

run their small enterprises which provide for their families or to send their children to school. Legatum is also focused on the

potential long-term consequences of the AP crisis and the regulatory response, and we would like to do everything possible

to ensure that as the sector recovers it can continue to avail itself of the significant amount of equity capital required to attain

the goal of financial inclusion.

XII. What is to be done?

Prior to the enactment of the AP Act prohibiting the normal operations of the private sector MFIs, repayment rates

were over 98% and the industry was healthy and growing rapidly. The source of the current crisis is also the solution

to the current crisis – namely the repeal of the AP Act.

1. Urgently repeal the AP Act. Immediately supersede, suspend or repeal the AP Act, which is the source of the

crisis. The only way to address the extensive damage being done by the Act’s effective prohibition against private

sector MFI operations is to remove it. Removal would achieve the following goals:

• Allow MFIs to collect the amounts owed to them in AP

• Allow the MFIs to meet their commitments to lenders

• Avoid the wholesale destruction of several leading MFIs

• Avert a banking crisis

• Aid the rural poor by ensuring that they retain access to microfinance services

2. Removal would also redress the current balance of power issue, ensuring that regulation of those MFIs classified as

NBFCs is returned to its rightful controller, namely the RBI.

3. Consult with equity stakeholders to ensure the new regulations do no harm. The RBI and central government

must take the time to do a full analysis with input from all stakeholders to ensure that the regulations ultimately

introduced are beneficial and that any unintended consequences have been identified and fully considered. A

cautionary tale regarding investment in India has unquestionably already been written and how the RBI and central A Crisis at the Bottom of the Pyramid

Page 9 of 10

government craft the new regulations will ultimately determine whether the flow of equity and debt capital to the

microfinance sector is severed for years to come.

4. Facilitate fair restructuring of loans to MFIs to allow time for recovery. It is clear that if any meaningful

recoveries are to take place, lenders and MFIs must work together through a mutually supportive approach to

achieve a mutually beneficial outcome. With an exposure of over Rs 6,500 crore ($1.470BN) outstanding in AP,

MFIs represent the only viable way for lenders to recover their loans to MFIs, given their relationship with the end

customers. MFIs must be given the time to undo the damage inflicted by the AP Act, and to recover the loans from

borrowers. In this regard, the terms and conditions applicable to the repayment of loans admitted by the CDR Cell

for restructuring must be favorable to the MFIs to ensure they are not penalized due to the external business

factors created by the AP Act.

XIII. Conclusion

The social and economic consequences of the AP Act are stark and disquieting. Millions of poor people across India are

presently denied their fundamental right to make their own financing choices and are without access to basic financial

services, thousands of people employed in the microfinance sector have lost their jobs, countless MFIs are on the brink of

financial ruin and the long-term fate of some of the largest MFIs in India is hanging in the balance. Private sector MFIs have an

essential role to play if the goal of financial inclusion is to become a reality for the millions of India’s “unbanked”, and the RBI

and central government must take immediate action to supersede, suspend or repeal the AP Act and introduce sensible

legislation on a federal level which allows the private sector to grow and flourish.

The Malegam Committee has proposed a number of welcome recommendations and indeed affirms the value that MFIs

bring to the microfinance sector in rural India. These recommendations have now been broadly accepted by the RBI, subject

to certain adjustments. However, the constraints proposed around loan limits and interest rates, as adjusted by the RBI,

together with those around provisioning norms and capital requirements must be revisited to avoid unintended and

deleterious consequences that could permanently impact private sector MFIs. The one thing that the RBI and central

government would benefit from at this stage is being afforded the time to further develop, modify and refine the Malegam

Committee recommendations in collaboration with stakeholders to ensure that the new regulatory framework introduced

allows the sector to continue in its quest to meet the burgeoning social and economic needs of a rapidly growing India. A Crisis at the Bottom of the Pyramid

Page 10 of 10

About Legatum

Legatum is a private investment group with a 25 year heritage of global investment, allocating proprietary capital in the global

markets and to businesses and programs that promote sustainable human development. Legatum Ventures invests private

capital in growing enterprises that promote prosperity in the developing world by delivering both a financial and social return.

Find more information about the Legatum Group at www.legatum.com

Legatum Head Office

Level 9

Convention Tower

Dubai, 71082

U.A.E.

t: +971 4 317 5800

f: +971 4 317 5811

e: [email protected]

Media Contacts

Legatum: Adfactors PR Pvt Ltd:

Hamish Banks Arwa Husain

Head of Corporate Communications Vice President – Financial Services Practice

t: +971 4 317 5800 t: +91 22 2281 3565

f: +971 4 317 5811 f: +91 22 2281 3569

e: [email protected] e: [email protected]

i

http://www.livemint.com/2011/04/25212545/Six-months-on-loan-defaults-m.html?atype=tp

ii

The actual number could be higher as these estimates do not account for multiple accounts by a single individual. Source:

“Financial Inclusion – The Indian Experience” Speech by Smt. Usha Thorat, Deputy Governor, Reserve Bank of India at the

HMT-DFID Financial Inclusion Conference 2007, Whitehall Place, London, UK on June 19, 2007.

iii

http://www.livemint.com/2011/01/17213953/Moneylenders-push-up-interest.html?atype=tp

iv

Consolidation of data on Indian MFIs at www.mixmarket.org.

v

Intellecap estimates.

vi

http://indiamicrofinance.com/wp-content/uploads/2010/10/Andhra-MFI-Ordinance.pdf

vii

Interest rates on credit cards in India range from 29.88% to over 45%.

viii

http://www.microfinancefocus.com/content/exclusive-54-microfinance-related-suicides-ap-says-serp-report

ix

14,500 suicides occurred in Andhra Pradesh in 2009 according to the National Crime Records Bureau

x

http://www.intellecap.com/assets/82/Intellecap_Microfinance_White_Paper_Oct_2010_.pdf

xi

http://blogs.cgdev.org/open_book/2010/11/when-indian-elephants-fight.php

xii

AP Microfinance Ordinance - “Whereas these SHGs are being exploited by private Micro Finance Institutions (MFIs)

through usurious interest rates and coercive means of recovery resulting in their impoverishment & in some cases leading to

suicides, it is expedient to make provisions for protecting the interests of the SHGs, by regulating the money lending

transactions by the money lending MFIs and to achieve greater transparency in such transactions in the State of Andhra

Pradesh”

xiii

http://blogs.cgdev.org/open_book/2010/11/when-indian-elephants-fight.php

xiv

Intellecap analysis of data on MFIs at www.mixmarket.org and NABARD’s data on SHGs

xv

http://www.intellecap.com/assets/82/Intellecap_Microfinance_White_Paper_Oct_2010_.pdf

xvi

‘Scaling-up Microfinance for India’s rural poor’ - World Bank Policy Research Working Paper 3646, June 2005

xvii

The Ordinance became law in December 2010 with the enactment of the AP Act.

xviii

http://indiamicrofinance.com/wp-content/uploads/2011/01/Malegam-Report-Issues-Microfinance-India.pdf

Current Status of Microfinance Credit Reporting in India inShare1

in

Asia

IFC’s South Asia Regional Workshop on Microfinance Credit Reporting

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Microfinance Focus, December 14, 2011: During the International Finance Corporation's (IFC) South Asia Regional

Workshop on Microfinance Credit Reporting, Alok Prasad from Microfinance Institutions Network (MFIN) and

Siddharth Das from High Mark credit bureau discussed the current status of microfinance credit reporting in India.

While Siddharth Das, presented the ‘Credit Bureau Adoption and Usage in the Microfinance Industries’, Alok Prasad

shared his experience of MFIN from the industry standpoint on this issue.

Siddharth introduced High Mark as a credit bureau not just for the microfinance sector because borrowers of

microfinance today should become regular borrowers tomorrow. It is India’s first and the world’s largest microfinance

bureau with over 61 million records corresponding to over 32 million MFI borrowers from 68 MFIs .

In the report, ‘Credit Bureau Adoption and Usage in the Microfinance Industries’ by High Mark, there is analysis on

the credit bureau report usage by MFIs. On the national level, the top 12 national MFI members account for about

88% of the total data and the top 12 have generated 86% of the inquiries so far. However, the distribution is skewed.

Just two MFIs together made 72% of these inquiries and remaining 10 put together 28%. Of this ten, two MFIs

haven’t done inquiries at all.

Siddharth concluded saying “Infrastructure help is needed beyond this point to make further substantial progress. The

missing piece is SHG for this sector to be bureau enabled to have all that information to be in the system. To make

this society bureau effective needs a lot of work that cannot be solved tomorrow. A lot has been done and a lot more

can be done.”

Alok Prasad from MFIN provided a perspective from the industry standpoint. He says, “From our standpoint, we’ve

done a fair bit. I feel quite proud of the progress we’ve made over 18 months.” He thanked IFC and Omidyar Network

for their support.

He gave an overview of MFIN that is the industry body for NBFC-MFIs with 48 members. This constitutes about 90%

of the sector. MFIN’s focus is to be the SRO for the industry with a strong development focus. Creating the necessary

infrastructure to ensure as the industry grows and moves forward that all the right things happen.

MFIN activities include self-regulation, policy advocacy, and sector-wide development initiatives. Alok shared that

they have had a “strong collaborative approach from the early days and was clear about what we need to be doing is

to adopt a multi bureau approach.”

There has been engagement with Credit Information Bureau India Ltd. (CIBIL), Equifax, Experian and High Mark to

encourage extension of Credit Bureau services to MFIs and development of dedicated solutions for the sector. There

needs to be adequate customization for microfinance client data, competitive pricing for MFIs and innovation products

and services.

Alok stressed the standardization of processes for efficient sharing of data. Also the standardization of customer data

points such as borrower name, key person name and relationship, father’s name, borrower address and borrower

age as on date or date of birth. MFIN aims for the standardization of reporting format.

Alok commented, “All members have been told this is the set of measures you have to adopt. A lot of hard work has

to go into it. There is no easy answer no easy solution. Everyone has to come together or it just would not work out.

The nature of the challenge I would not like to underestimate at all.”

He pointed out the challenges MFIN faced were capacity and technological challenges vis-à-vis participation of

smaller MFIs. Also data and report quality, report. The linkage of client data among different bureaus is a concern

and the non-availability of SHG data.

The next steps forward for MFIN are ongoing efforts to have all MFIN members start using bureau reports. It is going

forward to encourage other mainstream credit bureaus to enter the microfinance space.

SKS Microfinance Limited (SKS) is a non-banking finance company (NBFC), regulated by the Reserve

Bank of India. SKS claims its mission is to eradicate poverty by providing financial services to the poor.

The company operates across these 19 states of India: Andhra

Pradesh, Karnataka, Maharashtra, Orissa, Madhya Pradesh,Bihar, Uttar

Pradesh, Rajasthan, Uttaranchal, Himachal Pradesh, Haryana, West

Bengal, Jharkhand, Chhattisgarh, Gujarat, Kerala, Tamil Nadu, Punjab and Delhi.

According to a CRISIL Report on Top 50 Indian Microfinance Institutions (MFIs), SKS Microfinance is the

largest MFI in India in terms of number of borrowers, number of branches and total loans as of September

30, 2008.[1] SKS was founded in 1997 by Vikram Akula, who also served as its executive chairperson until

November 2011[2]. As of December 31, 2010, SKS had 7.7 million clients [3] in 2,403 branches in the 19

states across India. SKS charges an annual effective interest rate between 26.7% and 31.4% for core

loan products.[4] At the end of 2010's financial year on 31 March 2011, the company listed a gross loan

portfolio of US$925,844,433 with 6,242,266 female active borrowers.[5]

SKS hopes "to serve 50 million households across India and other parts of the world and also to create a

commercial microfinance model that delivers high value to our customers".[6] The hope is that much

poverty can be alleviated by providing financial services to low-income households.[7]

SKS practices a standardised processes of delivering and recovering loans, which enables them to reach

out to the most customers cost effectively. They are able to expand the business to reach further villages

by charging a small interest rate, one that clients are willing to pay in order to avoid starvation, poor

money management, or government loan sharks.

An in-depth Associated Press report on February 24, 2012, implicated SKS in a number of suicides linked

to the company's loan collection policies. Company officials denied the claim, but the Associated Press

said internal documents, as well as interviews with more than a dozen current and former employees,

independent researchers and videotaped testimony from the families of the dead, showed top SKS

officials had information implicating company employees in some of the suicides.[8]

Awards

SKS was ranked as the number 1 MFI in India and number 2 in the world by MIX Market. Business

Week has rated SKS as one of the most influential companies. SKS has received numerous awards

including the CGAP Pro-Poor Innovation Award, the ABN-Ambro/Planet Finance Process Excellence

http://en.wikipedia.org/wiki/Business_Week

http://en.wikipedia.org/wiki/Business_Week

http://en.wikipedia.org/wiki/MIX_Market

http://en.wikipedia.org/wiki/SKS_Microfinance#cite_note-7







http://en.wikipedia.org/wiki/Vikram_Akula


http://en.wikipedia.org/wiki/Delhi

http://en.wikipedia.org/wiki/Punjab,_India

http://en.wikipedia.org/wiki/Tamil_Nadu

http://en.wikipedia.org/wiki/Kerala

http://en.wikipedia.org/wiki/Gujarat

http://en.wikipedia.org/wiki/Chhattisgarh

http://en.wikipedia.org/wiki/Jharkhand

http://en.wikipedia.org/wiki/West_Bengal

http://en.wikipedia.org/wiki/West_Bengal

http://en.wikipedia.org/wiki/Haryana

http://en.wikipedia.org/wiki/Himachal_Pradesh

http://en.wikipedia.org/wiki/Uttaranchal

http://en.wikipedia.org/wiki/Rajasthan

http://en.wikipedia.org/wiki/Uttar_Pradesh

http://en.wikipedia.org/wiki/Uttar_Pradesh

http://en.wikipedia.org/wiki/Bihar

http://en.wikipedia.org/wiki/Madhya_Pradesh

http://en.wikipedia.org/wiki/Orissa

http://en.wikipedia.org/wiki/Maharashtra

http://en.wikipedia.org/wiki/Karnataka

http://en.wikipedia.org/wiki/Andhra_Pradesh

http://en.wikipedia.org/wiki/Andhra_Pradesh

Award, Citibank Information Integrity Award, the Digital Partners SEL Award, SHG Foundation funding

and the Grameen Foundation USA Excellence Award. SKS is the only MFI in India to receive the MIX

Transparency Certification. SKS was selected by Unitus as the most promising microfinance organization

in India.

Suicide link allegation

An independent investigation commissioned by the company linked SKS employees to at least seven

suicides, according to a report by the Associated Press. A second investigation commissioned by an

industry umbrella group that probed the role of many microfinance companies did not draw conclusions

but pointed to SKS involvement in two more cases that ended in suicide, the report said. Neither study

has been made public. According to the Associated Press report, "More than 200 poor, debt-ridden

residents of Andhra Pradesh killed themselves in late 2010, according to media reports compiled by the

government of the south Indian state. The state blamed microfinance companies — which give small

loans intended to lift up the very poor — for fueling a frenzy of overindebtedness and then pressuring

borrowers so relentlessly that some took their own lives."

February 25, 2012

Mr Ravi Nessman

Chief of Bureau

Associated Press

B 101-B/02 Statesman House

Barakhamba Road.

New Delhi - 110001

Dear Mr Nessman,

This has reference to your report, ‘Lender's own probe links it to suicides’, which was

disseminated by The Associated Press on Thursday, February 24, 2012, making baseless

allegations against SKS Microfinance Limited.

At the outset, SKS Microfinance Limited deplores such irresponsible journalism.

To ensure that the facts are correctly disseminated, it may please be noted that:

1. The AP report is a mere repetition of the charges made against the MFI sector one

and a half years back and a restatement of the earlier unsubstantiated allegations,

particularly regarding alleged microfinance-related suicides around October 2010 in

the State of Andhra Pradesh. For reasons best known to itself, The Associated

http://en.wikipedia.org/wiki/M._R._Rangaswami#The_SHG_Foundation

Press has used these old reports and presentations/ videos to malign the reputation

of SKS Microfinance Limited.

2. The Associated Press has done this despite the fact that the Andhra Pradesh police

investigation/ courts have exonerated the Company in 14 out of 15 alleged suicide

cases. Trial is pending in one case, and SKS Microfinance is confident that its

employee will be exonerated in this case as well. The 15 alleged suicide cases

were part of a list of 76 names of alleged suicide victims submitted by the Andhra

Pradesh Government in its Supreme Court affidavit verified by a notary on July 19,

2011.

3. The Board of SKS Microfinance Limited has not authorized any private investigation

into the alleged suicides in the later part of 2010 in the State of Andhra Pradesh.

Such investigations, in matters related to criminal cases, are the preserve of the

Government and SKS has always extended all possible cooperation to the official

machinery in such cases. The Board’s Minutes, signed by then Executive

Chairman, Dr Vikram Akula, would confirm the fact that there was neither any study

authorised by the Board nor did the Board ever discuss the alleged report.

4. It is pertinent to note that the Associated Press report does not disclose any

timelines with regard to the alleged reports – as to when they were allegedly

commissioned and submitted, giving the impression that they are fresh insights.

The alleged suicides have been investigated and in almost all cases SKS

employees have been exonerated already by Governmental agencies/ courts.

5. The reporter from AP has relied on sources with doubtful credibility while doing this

report. An internal investigation into misappropriation/ dereliction charges against certain employees of the Company began in November 2011. In fact, Mr Ramesh

Vautrey, whose name has been cited in the AP report himself had authorised the

termination of one of his immediate reportees in December 2011 after the

employee concerned confessed, pleaded guilty to all charges and returned the

misappropriated/ misused cash funds of the Company. Mr Ramesh Vautrey

himself is currently facing enquiry for serious charges of misconduct. The enquiry

against him has begun well before the AP report appeared. Mr Ramesh Vautrey,

who has been stripped of all his official responsibilities in January 2011, is

ironically portrayed in the AP report as a whistleblower.

6. It is pertinent to note that SKS Microfinance is known for its pioneering initiatives

with regard to Customer Protection Principles. It was the first microfinance

company in India to start a Toll-free Member Helpline in July 2009. The Helpline is

now operational in eight Indian languages.

SKS Microfinance has already announced in December 2011 its plans to integrate

Customer Protection Principles into the business model of the Company and

realign the employee incentive system by integrating customer protection into the

KRAs. As part of this effort to build responsible customer interface culture, the

Company has already capped its interest rates well below RBI rates and proposes

to cap its Return on Asset in the core microfinance business. SKS Microfinance

has further created an independent vertical – an Ombudsman -- for proactively

handling customer approaches and complaints. Mr Verghese Jacob, a seasoned

corporate and social sector expert with three decades of experience, has been

appointed as its Ombudsman to drive its customer protection policies.

SKS Microfinance is currently examining all legal options available to itself against the

report.

SKS Microfinance requests you to disseminate a rejoinder stating all the above-mentioned

facts immediately and at least as prominently as your libellous report. The Company

reserves all our rights against The Associated Press and any publication which

disseminates your scurrilous report. Further, SKS Microfinance reserves the right to report

and the Company intends to fully cooperate in any regulatory proceedings against your

publication, the journalist in question and your “sources” for a deliberate attempt at market

manipulation.

Faithfully yours,

J S Sai

Executive Vice President - Public Affairs

Probe links SKS Microfinance to suicidesMumbai: First they were stripped of their utensils, furniture, mobile phones, televisions, ration cards

and heirloom gold jewellery. Then, some of them drank pesticide. One woman threw herself in a

pond. Another jumped into a well with her children.

Sometimes, the debt collectors watched nearby.

More than 200 poor, debt-ridden residents of Andhra Pradesh killed themselves in late 2010,

according to media reports compiled by the government of the south Indian state. The state blamed

microfinance companies which give small loans intended to lift up the very poor for fueling a frenzy

of over indebtedness and then pressuring borrowers so relentlessly that some took their own lives.

The companies, including market leader SKS Microfinance, denied it.

However, internal documents obtained by The Associated Press, as well as interviews with more

than a dozen current and former employees, independent researchers and videotaped testimony

from the families of the dead, show top SKS officials had information implicating company

employees in some of the suicides.

An independent investigation commissioned by the company linked SKS employees to at least

seven of the deaths. A second investigation commissioned by an industry umbrella group that

probed the role of many microfinance companies did not draw conclusions but pointed to SKS

involvement in two more cases that ended in suicide. Neither study has been made public.

Both reports said SKS employees had verbally harassed over-indebted borrowers, forced them to

pawn valuable items, incited other borrowers to humiliate them and orchestrated sit-ins outside their

homes to publicly shame them. In some cases, the SKS staff physically harassed defaulters,

according to the report commissioned by the company. Only in death would the debts be forgiven.

The videos and reports tell stark stories:

One woman drank pesticide and died a day after an SKS loan agent told her to prostitute her

daughters to pay off her debt. She had been given Rs 150,000 ($3,000) in loans but only made Rs

600 ($12) a week.

Another SKS debt collector told a delinquent borrower to drown herself in a pond if she wanted her

loan waived. The next day, she did. She left behind four children.

One agent blocked a woman from bringing her young son, weak with diarrhea, to the hospital,

demanding payment first. Other borrowers, who could not get any new loans until she paid, told her

that if she wanted to die, they would bring her pesticide. An SKS staff member was there when she

drank the poison. She survived.

An 18-year-old girl, pressured until she handed over Rs 150 ($3) meant for a school examination fee

also drank pesticide. She left a suicide note: "Work hard and earn money. Do not take loans."

In all these cases, the report commissioned by SKS concluded that the company's staff was either

directly or indirectly responsible.

Caught in the despair of poverty, tens of thousands of impoverished Indians kill themselves every

year, often because of insurmountable debt. The supportive structure of the microfinance companies

was supposed to change that.

But Davuluri Venkateswarlu, director of Glocal Research in Hyderabad, which conducted the

industry wide investigation, said in an interview that he told SKS executives there was "clear

involvement of SKS personnel" in some suicides.

SKS continues to deny all responsibility for the deaths and says it never commissioned an

independent inquiry. SKS spokesman JS Sai, who flew to Mumbai from the company's Hyderabad

headquarters to discuss the AP findings, said the company stands by its September 2011 affidavit

before India's Supreme Court. In that affidavit, chief executive MR Rao says SKS "is neither the

cause of nor responsible for any suicides in the state of Andhra Pradesh."

The deaths came after a period of hyper growth leading up to the company's hugely successful

August 2010 initial public offering.

Originally developed as a non profit effort to lift society's most downtrodden, microfinance has

increasingly become a for-profit enterprise that serves investors as well as the poor. As India's

market leader, SKS has pioneered a business model that many others hoped to emulate.

But the story of what went wrong at SKS has led current and former employees and even some

major shareholders to question that strategy and raises fundamental questions for the multibillion-

dollar global microfinance industry.

Meanwhile, whistleblowers at SKS say that they have been targeted for retaliation and that the

company has failed to correct structural flaws that contributed to the suicides.

"At the end of it," said Alok Prasad, chief executive of the Microfinance Institutions Network, the

industry group that commissioned the Glocal report, "you come down to a handful of cases where

some things went wrong. Is that indicative of the model being bad or very rapid expansion leading to

a loss of control?"

Microfinance was born in desperation. Amid the 1970s famine in Bangladesh, Muhammad Yunus

began giving small loans to poor women with his own money. Despite the predictions of bankers, the

women paid him back.

The core idea of Yunus' Grameen Bank was the borrower group. Five women from a village

determine how large a loan each member gets and act as guarantors. If even one member is

delinquent, no new loans are issued. Group members apply pressure — and support — that has

kept repayment rates near 100 per cent.

Yunus' innovation won him the Nobel Peace Prize in 2006.

In 1997, Yunus acolyte Vikram Akula founded his own microcredit organisation, Swayam Krishi

Sangam, Sanskrit for "self-help society." In 2005, SKS started operating as a for-profit company and

Akula began chasing private investment to achieve the massive scale required to dent global

poverty.

In August 2010, SKS Microfinance then India's largest microlender went public. Exuberant investors

oversubscribed the $350 million offering nearly 14 times. The stock surged more than 10 per cent its

first day. The company handed out 21,000 watches to employees in celebration.

Then media reports began to surface that over-indebted borrowers were killing themselves.

In October 2010, a mob of 150 people surrounded SKS's Hyderabad headquarters, protesting the

suicide of a borrower's husband. They threatened to drag the corpse inside and demanded $20,000.

It was one of dozens of deaths the government of Andhra Pradesh blamed on aggressive tactics by

microfinance companies. Police jailed microfinance employees, including dozens from SKS. Among

the charges was abetment to suicide, essentially driving people to kill themselves, a crime under

Indian law.

Authorities investigated 76 cases in which employees from SKS and other microfinance companies

were blamed for driving borrowers to take their own lives. The state passed a law designed to clamp

down on abuses with new restrictions on loan disbursement and collection and onerous registration

requirements on the companies. Microlending in India's largest microcredit market was effectively

shut down.

Microfinance officials fought the new law and denied the charges, accusing the state government of

trying to gain traction with voters and punish companies for capturing valuable market share from

state-run lending groups.

Established microlenders such as SKS said loan sharks operating under the guise of microfinance

were behind the excesses. SKS and other companies asked a court to stop the arrest of their

employees. The court issued a stay on new arrests. Today, no one is in jail.

In a November 2010 letter to India's finance minister, Akula defended his company and included

supportive articles from The Wall Street Journal and the Financial Times.

At the same time, the industry group Microfinance Institutions Network hired Glocal to investigate 44

deaths among debtors of microfinance companies, including SKS.

Venkateswarlu, the Glocal director, presented the findings to executives at three lenders. In January

2011, he delivered startling news to Akula and Rao: SKS employees had clear involvement in the

suicides of four borrowers, meaning that their actions appeared strongly linked to the subsequent

deaths, according to their investigation.

The AP obtained a four-page section of the Glocal report that deals with the SKS case studies. It

related the financial history of borrowers, the loans obtained, the nature of pressure or harassment

for repayment and the microfinance company involved. Venkateswarlu verified that it was the

material he presented to Akula and Rao.

"They said they'd look into the issue and take some appropriate action," Venkateswarlu said.

SKS sent internal audit teams to the field. Their reports exonerated the company.

Unable to reconcile the two sets of findings, SKS hired Guardian's Human & Civil Rights Forum and

Third Eye, a private investigative agency, to do a more thorough, independent inquiry, according to

Ramesh Vautrey, head of administration at SKS, who oversaw the investigation, and Rajender

Khanna, the president of Guardian's.

A Jan. 17, 2011, letter from SKS, signed and stamped by Vautrey, asked Khanna to "carry out a fact

finding enquiry on the causes of suicide and complicity of our field staffs without any prejudice,"

according to a copy of the letter obtained by AP. The AP was shown invoice numbers for SKS

payments to Third Eye and emails indicating the findings were sent to top management.

PH Ravikumar, who became interim chairman of the SKS board last November, said neither

management nor the board authorised an independent inquiry into borrower deaths.

"Our enquiries from 2009 to 2011 have revealed that neither SKS nor its employees have been the

cause for any of the suicides in the state of Andhra Pradesh," the company said in a statement. The

company also said SKS employees have been acquitted in two borrower suicide cases in Andhra

Pradesh and that only one criminal case remains outstanding.

Khanna sent teams to speak with families of the dead, village leaders, neighbors and loan agents,

videotaping the interviews. Their report said SKS employees bore direct or indirect responsibility for

at least seven suicides, including two that overlapped with the Glocal findings.

The interview videos were shown to the AP by Uma Maheshwari, who said she was present during

one set of recordings and visited several of the families personally. She left SKS in July.

In one video, the daughter of borrower Dhake Lakshmi Rajyam cries, gasping as she talks to an

investigator in Tadepalligudem, Andhra Pradesh.

Rajyam was unable to pay off $2,400 owed to eight different companies. Employees of microfinance

companies, including SKS, urged other borrowers to seize the family's chairs, utensils and wardrobe

and pawn them to make loan payments, her family told investigators. Unable to bear the insults and

pressure of the crowd of borrowers who sat outside her home for hours to shame her, Rajyam drank

pesticide on Sept. 16, 2010, and died, the family says.

"We have lost my mother," her daughter says. "Nobody will support us."

The investigator's conclusions lay the blame on SKS employees, saying they failed to comply with

company policies "and even basic moral rights."

Vautrey said he sent the case studies to three top managers, including Rao. Emails obtained by AP

indicate that summary reports were emailed to the managers.

Rao did not respond to multiple requests from AP seeking comment.

Vautrey went to Akula's office one night and told him what they were doing was bad karma.

"I don't want to be part of a team abetting suicides," Vautrey said in an interview. "It is systemic

failure. We have no right to kill anybody for our own business. Let's close down our business if we

can't do it right."

A profound shift in values and incentives at SKS began in 2008.

In October, Boston-based Sandstone Capital, now SKS' largest investor, made a major investment.

It joined U.S. private equity firm Sequoia Capital, which funded Google and Apple and is SKS'

largest shareholder, on the board of directors.

Akula, who had been chief executive in the company's early days, stepped down in December 2008

but stayed on as chairman. The company brought in new top executives from the worlds of finance

and insurance.

SKS also began transferring more loans off its books, selling highly rated pools of loans to banks,

which then assumed most of the associated risk of borrower default. That freed SKS to push out

more and bigger loans.

In December 2009, SKS launched a massive sales drive. The "Incentives Galore" program ran

through February 2010 just one month before the company filed its IPO prospectus.

Agents won prizes worth up to 10 times their average monthly salary for signing huge numbers of

new borrowers. Vautrey said he coordinated the shipment of 8,800 televisions, refrigerators, gold

coins, mixers, washing machines and DVDs as rewards for more than 3,000 districts nationwide.

One loan officer signed up 273 groups in a month. Under training protocols, the ideal number of

groups formed per month is 12, the maximum is 36, according to field agents and reports written by

Akula.

"The focus is only on targets," Ramulu Sirgapur, who spent a decade at SKS before he left in

December, told AP. "Even if we've given feedback, there might be recovery or repayment issues.

That's OK. Just concentrate on growth."

The result: Management had a great set of numbers to show investors as it shopped the IPO. In a

month, SKS could add 400,000 borrowers and 100 branches, and train more than 1,000 new loan

officers. SKS had 6.8 million borrowers and had disbursed $3.2 billion in loans. India was pimpled

with SKS branches, which bloomed in nearly 100,000 villages.

SKS said it was the fastest growing microfinance company in the world.

But basic principles of lending were overlooked, according to interviews with current and former

employees, as well as correspondence and internal PowerPoint presentations by Akula.

Six current and former SKS staffers with experience in the field told the AP they no longer had time

to check a borrower's assets or follow up and make sure a loan was put to productive use. They said

that they were pressured to push more debt onto people than they could handle and that the number

of days devoted to borrower training was cut in half.

"You have a (borrower group), and a loan officer goes out and trains them, educates them, then they

give the loan. That's the SKS I'd seen in 1999. That was the whole model on which microfinance is

supposed to work. In the quest for growth, a lot of these things got neglected," said Ankur Sarin,

director of the SKS trusts, which are the fourth largest shareholder in the company and tasked with

looking out for borrower interests.

As the relationships between heavily indebted borrowers and loan agents broke down, it became

harder to collect.

Frustrated agents began working together and going door to door to collect, rather than taking

payments only in public — a company rule designed to limit coercion. They began using other

borrowers to pressure defaulters into repaying.

"The growth was very rapid. That growth led to some suboptimal outcomes," said Ashish Lakhanpal,

managing director of Kismet Capital, one of SKS's largest shareholders, who was on the SKS board

until October 2010. "Were there lapses? Absolutely."

While the board was concerned about fast credit growth, the company never believed it was harming

borrowers, Lakhanpal said.

"Mistakes were made, but I find it difficult to believe there was anything people did at a managerial

level to encourage field officers to do that," he said.

In spring 2011, Akula began circulating a plan to spend $10 million to train financial counselors who

would make sure clients weren't getting into too much debt and used their loans productively,

according to Sarin, Vautrey and others with firsthand knowledge of the proposal.

The plan was never adopted.

Publicly, Akula continued to deny that SKS bore any responsibility for suicides. "Whatever happened

was due to external factors and was not reflective of any fundamental flaw in our model," he told

India's Business Today.

Privately, Akula prepared a 55-page presentation for the board that detailed the seven suicides that

SKS' outside investigation had blamed on the company. The presentation showed how the pre-IPO

push for growth led to a systemic breakdown, and again urged core reforms to restore training and

lending discipline.

Board members received copies of Akula's presentation at a July 26, 2011, meeting, said a former

employee who helped prepare the material and spoke anonymously for fear of retribution.

The minutes of the meeting, however, make no mention of the report.

"As per my notes, this was not part of the board proceedings," company secretary Sudershan Pallap

wrote in a Sept. 26 email to Akula, who had complained of the omission.

Ravikumar, who would become interim chairman when Akula resigned, said the board was never

informed that SKS employees were implicated in any suicides, and denied Akula presented any

such findings to the board.

"There was no presentation from Vikram Akula at that board meeting. This will be reflected in the

minutes, as signed by Vikram Akula," he said.

Ravikumar said the board reviewed reports from the Microfinance Institutions Network, but none of

them implicated SKS employees.

Akula continued to complain to the board that his presentation had been ignored. He summarised

his concerns about the company's direction in emails, obtained by the AP, to seven board members,

including Sequoia's Sumir Chadha, Sandstone's Paresh Patel and three independent directors:

Ravikumar, Harvard's Tarun Khanna, and Pramod Bhasin, the former chief executive of Genpact.

Chadha, Patel and Khanna did not respond to multiple requests for comment. Ravikumar declined to

comment on what he said was personal correspondence. Bhasin said reports claiming SKS bore

responsibility for borrower suicides were "unsubstantiated." "Any issues raised to the Board at

various times were fully investigated by external parties and found to be unsubstantiated or without

evidence or actions were taken on them where appropriate," he wrote in an email.

Rancor within the company was intensifying. Board members felt Akula was suffering from a bad

case of "founder's syndrome," that he couldn't stand to share power at a company that had become

too big for him to run.

Finally, on Nov. 23, 2011, Akula resigned.

Vautrey said he was targeted, and SKS began termination proceedings against him on Feb. 6. Three

members of his staff have been fired and have filed wrongful termination complaints with the state.

On Feb. 6, SKS also sold Rs 2.43 billion ($49 million) in securitised loans. The stock price surged 10

per cent. Top executives have been on the road, hoping to raise Rs 5 billion ($100 million) from

international investors.

Sai, the company spokesman, said SKS has hired an ombudsman, is spending $3 million to improve

its customer grievance program and has revamped training to ensure that employees comply with

current regulations and do not lend to over-indebted borrowers. He said the company would like to

reorganise incentives to maintain rapid growth while ensuring loan quality. Those changes have yet

to be implemented, he said.

icrofinance in India: The Case of ICICI BankCode :BSM0060A

Year : 2008

Industry : Banking, Insurance and Financial

Region : India

Teaching Note:Available

Structured Assignment :Available

Services

Abstract: Since its entry into Indian microfinance sector in 2001, ICICI Bank, one of the largest private sector banks in India achieved remarkable progress in its portfolio. Instead of the conventional branch-banking model, it opted to differentiate it operational model, to foray into rural markets to tap lucrative opportunities in the Indian microfinance sector. Apart from basic microfinance services, it planned to offer various financial products like weather insurance, health insurance, remittance services and commodity derivatives to rural masses. But, it faced stiff competition from commercial and other foreign banks, which were determined to boost their presence in the Indian microfinance sector. Apart from that, the bank faced major challenges like information irregularity, inability of poor people to offer collaterals and lack of details of credit history. The case facilitates discussion on whether ICICI Bank will able to sustain its partnership model as the Indian microfinance sector becomes lucrative.

http://www.ibscdc.org/Case_Studies/Strategy/Business%20Models/BSM0060A.htm

http://www.ibscdc.org/Case_Studies/Strategy/Business%20Models/The%20Case%20of%20ICICI%20Bank-Case.htm

http://www.ibscdc.org/Case_Studies/Strategy/Business%20Models/The%20Case%20of%20ICICI%20Bank-Case%20Study.htm

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