V. Vaidyanathan, the whiz-kid CEO of Capital First, once jokingly said that the business of money lending is an easy one because there is no dearth of customers willing to take the funds.
“The problem arises when you seek to recover the loans” he added with a chuckle.
Ira Dugal, the veteran editor of Mint, knows that a picture is worth a thousand words. She carefully chose the image of a financially disadvantaged couple signing on a piece of paper to collect a loan from a micro-finance company to highlight the potential difficulties of recovery of loans.
(Image Credit: Mint)
Ramesh Damani, the Nawab of Dalal Street, knows that privileged folk like us cannot be judgmental about our less fortunate brethren. We cannot grudge them the right to take loans and we cannot prejudge their ability to repay. However, at the same time, one has to be practical. It would be better if the economically disadvantaged receive funds through NGOs rather then through moneylenders masquerading as micro-finance institutions is Ramesh Damani’s point.
There are a number of alarm bells ringing that micro-finance companies may face heavy weather.
M.S. Sriram, a professor at IIM Bangalore, has conducted a detailed study of the micro-finance sector. He referred to “irresponsible lending practices” being followed by MFIs where people are lending their names and identity to someone else who will borrow. He also stated that “aggressive growth targets” for the credit officers by MFIs mean that “credit checks of identity, pipelining and utilization” are being short-changed.
“At this time, we have all the ingredients of a potential crisis” Sriram warned. He also pointed that there have been “hundred suicides of microfinance clients” and that this cannot be termed “sporadic”.
(Image Credit: Mint)
Sahib Sharma warned that the fact that the loans have grown 84% even though the number of clients has grown by only 44% means that the micro-finance sector is “growing too fast yet again for its own good”.
Ira Dugal has drawn heavily from the research report of Parag Jariwala and Vikesh Mehta of Religare Capital Markets and referred to the various alleged malpractices being carried on in the sector.
“There is enough reason to keep a skeptical eye out on what is happening in the space” Ira Duggal warned.
Shyam Sekhar, a stock market expert who refers to himself as “Chief Ideator”, has added a new dimension to the entire debate. His point is that not only is the risk of NPAs abnormally high owing to the profile of the borrowers but the entire business is one of “organized usury” and that adverse action from the Government is imminent.
Shyam Sekhar explained that unlike traditional Banks where the lenders/ depositors support aggressive recovery from recalcitrant borrowers in order to save their own money, micro-finance banks do not have the same level of support.
“A micro-finance company has zero stakeholders (depositors) on one side and all stakeholders (borrowers) ranged on the other side” he said.
“What happened in Andhra Pradesh (where the Government banned recovery by MFIs owing to a spate of suicides from over-indebtedness) can happen anytime, anywhere in the Country” he added with a flourish.
He also emphasized that micro-finance is “structurally a weak business” and that it “lacks the management bandwidth” to manage growth in a prudent manner.
“The business has no future in an era of falling interest rates” he warned in a grim tone.
“I would not give a PE multiple to usury … that’s my simple view on microfinance” Sekhar added, making his contempt for the MFI business model amply clear.
Laws against usurious/ extortionate lending by moneylenders in India:
Shyam Sekhar’s point that the business of lending at high rates of interest to the poor and vulnerable is akin to “organized usury” is a dangerous proposition because there are strict laws against money lenders seeking to recover usurious loans. According to the Usurious Loans Act, 1918, if the Court is of the view that the interest is “excessive” or the transaction is “unfair”, there are draconian consequences for the lender, including non-recovery of the loan.
There is also a stringent law in Kerala called the Kerala Excess Interest Prohibition Act, 2012 which seeks to rein in “loan sharks who feed on economically underprivileged sections such as daily wage labourers and small scale vendors”.
“100 suicides” of the downtrodden will attract heavy duty politicians:
M.S. Sriram of IIM Bangalore hinted that the “hundred suicides” of microfinance clients is not a “sporadic” episode.
An emotive issue like mass suicides of the downtrodden who are unable to repay their loans and are being harassed by large corporate, coupled with the allegation that the loans were in the first place “usurious”, will attract heavy-duty politicians to lend a shoulder to the downtrodden.
Super-normal profits of MFIs supports theory of “usury”/ extortionate terms of lending:
Bharat Financial Inclusion Ltd (earlier known as SKS Microfinance), is the flagship of the microfinance industry. It reported eye-popping Q1FY17 results. The revenues grew 53% while the net profit increased a mind-boggling 285%.
|BHARAT FINANCIAL INCLUSION LTD – FINANCIAL RESULTS|
|PARTICULARS (Rs CR)||JUN 2016||JUN 2015||% CHG|
The other micro-finance companies like Ujjivan, Equitas, Armaan etc have also reported similar blockbuster results.
These figures give adequate fodder to politicians to argue that the fact that the micro-finance companies are raking in mega profits shows that they are taking advantage of the downtrodden by charging excessive rates of interest.
There are no prizes for guessing who will win such a battle if it ever happens!