Last week, the Andhra Pradesh government took a fresh step towards encouraging its citizens to violate their contracts en masse. Claiming to be speaking on behalf of self-help groups in his state, the principal secretary, AP Department of Rural Development, told microfinance institutions (MFIs) that borrowers would resume paying loans if interest amounts paid were now treated as principal, if interest rates were halved -- from 24% to 12% -- and if repayment was now on a monthly rather than a weekly basis.
With over Rs 10,000 crores of loans outstanding, and no fresh funds available, at least some MFIs operating in AP will accede to the new conditions, just as some parents will pay ransom charges to kidnappers. The question, though, is whether the role of the state is to hold a gun to business, or to reinforce the sanctity of contracts.
Andhra Pradesh has been at the forefront of the Indian microfinance initiative to take credit to rural areas, while the formal banking sector has made scant progress in expanding into India's villages. In 1969, Indira Gandhi nationalised India's 14 largest commercial banks, firing off the shoulder of a report commissioned by the then Young Turk, Chandra Shekhar. One of the key objectives of the move was to "vigorously pursue expansion programmes to cover rural areas, smaller towns and lower income groups." More than 40 years and several reports and committees later, barely 5% of India's villages have banks.
By any measure, SKS Microfinance was doing a good job of extending rural credit. At its peak, it had outstanding loans of over Rs 4000 crore, extended to 7 million borrowers. Since Indian MFIs do not take deposits, their traditional source of funding has been a mix of grants and low-cost funds from donor agencies, and loans from conventional banks for whom they act, in effect, as an outreach mechanism. In a move designed to scale up operation significantly, SKS's promoter, Vikram Akula, decided to tap India's capital markets to generate more loanable funds.
The public offering (IPO) was a commercial success, and SKS's share surged to a peak of Rs 1490. Politically, though, it was a disaster, and India's press was buzzing with concern about whether lending to the poor should be profitable, and whether the interest rates charged by MFIs amounted to usury. Few bothered to examine the really relevant issues - why bank nationalisation had failed to reach rural areas; the costs involved in servicing large numbers of small loans; and whether pushing out MFIs was not consigning rural borrowers to good old money-lending, at 10% per month.
But the mud that really stuck was the charge that MFIs efforts to obtain repayment were setting off a wave of suicides in Andhra Pradesh. Political and ideological warriors have used the fact of suicides to flog everything from genetically modified seeds to India's so-called liberalisation, regardless of the fact that our suicide rate stands roughly in the middle of the spectrum of suicide rates in the world — at 10.6 per 100,000 per year. Suicide seems to have little correlation with economic deprivation — Japan and South Korea have among the highest suicide rates in the world; nor with free markets — Sweden and Finland are a lot more morose than the UK and the US.
Nevertheless, by shouting 'Suicide!', the Andhra Pradesh government found political sanction to murder MFI activity in its state. Borrowers were encouraged not to repay loans, and banks were arm-twisted into choking off funds needed by MFIs to keep their operations running. The SKS share dropped to 1/3rd of its peak.
Back in Delhi, our nation is still waiting for a microfinance bill, whose draft was supposed to be the outcome of several high-powered bodies, most recently the sub-committee headed by YH Malegam. In the absence of sound policy, politics will rule banking, as it has long done, from nationalisation, to loan melas, to bank waivers.
Bank waiver, edition 2008, is too recent to assess, but the Devi Lal edition, circa 1990, was followed by a pronounced slump in rural bank credit. Andhra-based MFIs, too, will extricate themselves from the mess created by politicians promising a cheap lunch. The highly concerned members of civil society have long moved on to their next cause celebre. Soon, the only diners left at the Andhra party will be the local moneylenders, who are doubtless licking their chops in anticipation of a renewed surge in business.
Mohit Satyanand is an entrepreneur and portfolio investor.