Microfinance: SKS in trouble Andhra Pradesh An Ethical Analysis

Submitted by: Group - B12

Methodology for the Project: We have started with literature survey to understand and analyze the Microfinance business model, their vision to provide financial services to poorest of poor and controversies triggered after IPO of SKS microfinance in 2010. This IPO was subscribed even more than any commercial business. It revealed how these organizations are highly profitable business enjoying monopoly in backward rural areas, as there is no banking services penetration in these areas. It also bought in focus exorbitant interest rates charged by SKS and coercive practises for recovery in case of default. So here emerges an ethical issue related to conflict in vision of these MFIs and actual business practises adopted. Are these MFIs working for benefits of poor or enjoying a business opportunity in an unexplored sector to reap hefty profits? We are analyzing these issues in context of MFI sector scrutiny and subsequent recommendations by various government and other agencies like RBI committee and GOI appointed Malegaon committee. We are also analyzing the situation from business ethics perspective. A brief summary of our findings and roadmap for further studies are as follows: Microfinance and Microcredit Business Model: The poor, like the rest of society, need financial products and services to build assets, stabilize consumption and protect themselves against risks. Microfinance serves as the lastmile bridge to the low-income population excluded from the traditional financial services system and seeks to fill this gap and alleviate poverty. Microfinance loans serve the lowincome population in multiple ways by: (1) Providing working capital to build businesses; (2) Infusing credit to smooth cash flows and mitigate irregularity in accessing food, clothing, shelter, or education (3) Cushioning the economic impact of shocks such as illness, theft, or natural disasters. Moreover, by providing an alternative to the loans offered by the local moneylender priced at 60% to 100% annual interest, microfinance prevents the borrower from remaining trapped in a debt trap which exacerbates poverty. Microfinance loans in India range in size from $100 to $500 per loan with interest rates typically between 25% and 35% annually. The microfinance model is designed specifically to help the low income population overcome typical challenges such as illiteracy, lack of financial knowledge and deficiency of collateralizable assets. At the same time, the model takes advantage of existing community support systems and networks to encourage financial discipline and ensure high repayment rates. The microfinance sector in India has developed a successful and sustainable business model which has been able to overcome challenges traditionally faced by the financial services sector in servicing the low income population by catering to its specific needs, capacities and leveraging pre-existing community support networks. The microfinance sector is maturing and beginning to diversify its product and service base to address other unmet financial and non-financial needs of the low income population either directly or by acting as a conduit for third-party providers savings, insurance, remittance and low cost education and healthcare services being some of the key examples. Given this growth and maturity dynamic, the Indian microfinance sector is increasingly becoming a viable investment sector with commercial investors joining social investors who have been nurturing the industry thus far.

Microfinance: SKS in trouble Andhra Pradesh An Ethical Analysis

Submitted by: Group - B12

Indian Microfinance crisis in case of AP SKS Microfinance Limited (SKS) is a non-banking finance company (NBFC), regulated by the Reserve Bank of India. 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. SKS Microfinance follows the Joint Liability Group (JLG) model. The methodology involves lending to individual women, utilising five member groups where groups serve as the ultimate guarantor for each member. In early 2010, the proposed IPO generated public debate about the ethics of transformation and wealth generation by promoters not just of SKS but other MFIs as well. On July 28, 2010, there was a highly successful IPO at a fabulous price, Rs985 ($22) compared to share sales at just Rs600 ($13) a few months earlier attracted high level of media attention. In early October, SKS MD & CEO Suresh Gurumani was sacked just two months after the completion of the IPO process media attention refocused on SKS. A few days later, Media uncovered suicides by microfinance clients, caused by multiple lending leading to overindebtedness & coercive collection practices. It accused MFIs of behaving like moneylenders. State government of Andhra Pradesh (AP) reacts immediately in mid-October by promulgating an ordinance (emergency law) requiring MFIs to register all their thousands of branches with district authorities within the next two weeks provide lists of clients, their outstanding amounts and the cost of debt to the client undertake collections only in the presence of elected local officials

It also provided for complaints by the public about coercive recovery practices leading to severe penalties for MFI staff (arrest and imprisonment). The local politicians and media advised the public to stop repayments immediately. The result: Microfinance in AP (which accounts for 25% of Indian microfinance) came to a virtual standstill. MFIs ran around frantically to fulfil registration requirements Extensive lobbying at various levels Legal challenge to ordinance in High Court/Supreme Court Collections came down to a fraction of the expected levels, 10-15% lower in some cases The Reserve Bank of India (central bank) appointed a committee to study issues affecting microfinance In the meantime, commercial bank lending to MFIs reduced to minimal taking the crisis countrywide. The allegations: Charging excessive interest rates 50-100% Multiple lending leading to over-indebtedness Coercive collection practices resulting from inability of clients to repay