Deprecated (16384): The ArrayAccess methods will be removed in 4.0.0.Use getParam(), getData() and getQuery() instead. - /home/brlfuser/public_html/src/Controller/ArtileDetailController.php, line: 150
 You can disable deprecation warnings by setting `Error.errorLevel` to `E_ALL & ~E_USER_DEPRECATED` in your config/app.php. [CORE/src/Core/functions.php, line 311]
Code Context


        trigger_error($message, E_USER_DEPRECATED);

    }
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 You can disable deprecation warnings by setting `Error.errorLevel` to `E_ALL & ~E_USER_DEPRECATED` in your config/app.php.'
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deprecationWarning - CORE/src/Core/functions.php, line 311
Cake\Http\ServerRequest::offsetGet() - CORE/src/Http/ServerRequest.php, line 2421
App\Controller\ArtileDetailController::index() - APP/Controller/ArtileDetailController.php, line 150
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Cake\Http\ActionDispatcher::_invoke() - CORE/src/Http/ActionDispatcher.php, line 120
Cake\Http\ActionDispatcher::dispatch() - CORE/src/Http/ActionDispatcher.php, line 94
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Cake\Http\Runner::__invoke() - CORE/src/Http/Runner.php, line 65
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Cake\Http\Runner::__invoke() - CORE/src/Http/Runner.php, line 65
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Cake\Http\Runner::__invoke() - CORE/src/Http/Runner.php, line 65
Cake\Error\Middleware\ErrorHandlerMiddleware::__invoke() - CORE/src/Error/Middleware/ErrorHandlerMiddleware.php, line 96
Cake\Http\Runner::__invoke() - CORE/src/Http/Runner.php, line 65
Cake\Http\Runner::run() - CORE/src/Http/Runner.php, line 51
Cake\Http\Server::run() - CORE/src/Http/Server.php, line 98

Deprecated (16384): The ArrayAccess methods will be removed in 4.0.0.Use getParam(), getData() and getQuery() instead. - /home/brlfuser/public_html/src/Controller/ArtileDetailController.php, line: 151
 You can disable deprecation warnings by setting `Error.errorLevel` to `E_ALL & ~E_USER_DEPRECATED` in your config/app.php. [CORE/src/Core/functions.php, line 311]
Code Context


        trigger_error($message, E_USER_DEPRECATED);

    }
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 You can disable deprecation warnings by setting `Error.errorLevel` to `E_ALL & ~E_USER_DEPRECATED` in your config/app.php.'
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deprecationWarning - CORE/src/Core/functions.php, line 311
Cake\Http\ServerRequest::offsetGet() - CORE/src/Http/ServerRequest.php, line 2421
App\Controller\ArtileDetailController::index() - APP/Controller/ArtileDetailController.php, line 151
Cake\Controller\Controller::invokeAction() - CORE/src/Controller/Controller.php, line 610
Cake\Http\ActionDispatcher::_invoke() - CORE/src/Http/ActionDispatcher.php, line 120
Cake\Http\ActionDispatcher::dispatch() - CORE/src/Http/ActionDispatcher.php, line 94
Cake\Http\BaseApplication::__invoke() - CORE/src/Http/BaseApplication.php, line 235
Cake\Http\Runner::__invoke() - CORE/src/Http/Runner.php, line 65
Cake\Routing\Middleware\RoutingMiddleware::__invoke() - CORE/src/Routing/Middleware/RoutingMiddleware.php, line 162
Cake\Http\Runner::__invoke() - CORE/src/Http/Runner.php, line 65
Cake\Routing\Middleware\AssetMiddleware::__invoke() - CORE/src/Routing/Middleware/AssetMiddleware.php, line 97
Cake\Http\Runner::__invoke() - CORE/src/Http/Runner.php, line 65
Cake\Error\Middleware\ErrorHandlerMiddleware::__invoke() - CORE/src/Error/Middleware/ErrorHandlerMiddleware.php, line 96
Cake\Http\Runner::__invoke() - CORE/src/Http/Runner.php, line 65
Cake\Http\Runner::run() - CORE/src/Http/Runner.php, line 51
Cake\Http\Server::run() - CORE/src/Http/Server.php, line 98

Warning (512): Unable to emit headers. Headers sent in file=/home/brlfuser/public_html/vendor/cakephp/cakephp/src/Error/Debugger.php line=853 [CORE/src/Http/ResponseEmitter.php, line 48]
Code Context
            if (Configure::read('debug')) {

                trigger_error($message, E_USER_WARNING);

            } else {
$response = object(Cake\Http\Response) {

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SKS Microfinance, India's largest microfinance player, arrived with a bang with its hugely successful IPO in August. However, the recent sacking of its MD and CEO Suresh Gurumani&nbsp; has opened up a pandora's box that is now threatening to expose..."/>
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SKS Microfinance, India's largest microfinance player, arrived with a bang with its hugely successful IPO in August. However, the recent sacking of its MD and CEO Suresh Gurumani&nbsp; has opened up a pandora's box that is now threatening to expose..." />
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    <h1 class="cat-box-title">The ugly underbelly of Microfinance by Roli Srivastava, Swati Bharadwaj-Chand & Partha Sinha</h1>
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		 Published on</span><span class="text-date"> Oct 18, 2010</span>
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                            <font ><br /></font><div align="justify"><font >SKS Microfinance, India's largest microfinance player, arrived with a bang with its hugely successful IPO in August. However, the recent sacking of its MD and CEO Suresh Gurumani&nbsp; has opened up a pandora's box that is now threatening to expose the ugly underbelly of the sector which, many allege, is teeming with players who are no better than moneylenders but have so far been able to operate under the pious garb of poverty eradicators.</font><br /><br /><font >TOI spoke to a cross-section of people associated with the sector and found that most are of the opinion that far from pursuing their socalled vision of eradicating poverty and being poor-friendly , private MFIs are actually in it just for profiteering as they are lending to the poor at interest rates as steep as those charged by moneylenders, or 'Pathaani Vyaaj' , a sobriquet derived from the ruthless moneylenders of Afghan origin who operated during the early 20th century.</font><br /><br /><font >Those familiar with the functioning of MFIs point out that the lending model of for-profit MFIs is not exactly pro-poor . While offering a loan, they often quote a &quot;10% flat&quot; rate of interest, which, on the face of it, appears like a good deal. However, there is a catch. This 'flat' rate of interest means that it will not be calculated on reducing balance. It implies that even after the borrower has paid a few installments, the interest would still be calculated on the initial sum borrowed, and not on the balance loan amount. The result is a (hidden) final rate of interest of 24-30 %, or even higher for the poor who can barely afford a square meal a day. &quot;Microfinance, as practised by MFIs is unethical to the extent that it evades the truth in lending,&quot; said R Balakrishnan, a financial market veteran turned independent adviser . The high rate of interest is also leading to defaults and fraud. Recently , there has been a spurt in suicides in Andhra Pradesh and Orissa, allegedly due to harassment by MFI agents who started resorting to strong-arm tactics to recover loans as chances of default rise. M Subba Rao, of NGO Masses, who trained under Grameen Bank founder and Nobel prize winner Muhammad Yunus in Bangladesh, describes the cases of alleged harassment by MFIs as the result of 'irresponsible lending' . &quot;There is high pressure on the staff (of private MFIs) to lend. They have targets to meet and they dump money (on people),&quot; said Rao.</font><br /><br /><font >Consider this: The loan outstanding , according to the latest estimate by Microfinance Institutions Network (MFIN), the organization of 40 MFIs, is about Rs 30,000 crore with about 3 crore poor banking on MFIs for their financial needs. While the four southern states of AP, Tamil Nadu , Karnataka and Kerala account for a chunk of this borrowing, West Bengal and Orissa too have rural poor relying on MFIs. Besides, the sector is also on an uptick in UP and Haryana.</font><br /><br /><font >SKS Microfinance founder and chairman, Vikram Akula, is at great pains to ensure that everything is above board in the company. And more so due to the bad publicity the company got after its board sacked Gurumani. &quot;We believe there is a right way to do microfinance and we have been practising it over the past 13 years with not a single case of unethical practice against us.&quot; The company, Akula said, clearly communicates to the borrowers that though the loan was at a flat rate of 12.5%, it effectively works out to over 26% because there is an &quot;extraordinarily high cost of doing microfinance&quot; . Since most of its lenders don't understand rate of interest, SKS' agents communicate to its borrower how much they have to pay in terms of rupees per week.</font><br /><br /><font >Akula, whose company is the largest MFI in the country with over 73 lakh customers, also denies the possibility of its staff using strongarm tactics or misleading borrowers . Instead, he blames the bad name that the sector is getting to new MFIs jumping into the fray sensing a lucrative business.</font><br /><br /><font >Of course, eradicating poverty through the MFI route, for some, is a lucrative business. The IPO document by SKS disclosed that Gurumani was drawing an annual salary of Rs 1.5 crore, an equal amount or more as performance bonus, and also a one-time bonus of Rs 1 crore. Akula is entitled to up to 1% of SKS's net profit, in addition to ESOPs.</font><br /><br /><font >Not surprisingly the 'success' of some of the MFIs and the mega-listing of SKS recently have stunned even seasoned bankers. When asked about the success of the MFI business in India, during a recent interview with TOI, SBI chairman O P Bhatt said even he was surprised by their numbers. He wanted to go deeper into their finances and business model to understand how MFIs, which borrow from banks including SBI, can make profits which these very banks can't make. After all, like mobile tariff plans, no financial product is protected by patents and IPRs and the uniqueness of any new and lucrative one cannot last for more than 24 hours.</font><br /><br /><font >The problem seems to be with the business model, and not the approach . In India, there are three kinds of MFIs: The government-supported self-help groups, non-profit NGOs and the private for-profit firms. While private MFIs say that the smaller entities have earned the sector a bad name, social workers and industry veterans at the grassroots say that bigger players with bigger targets have led to such incidents. In many instances, multiple MFIs lend to the same clients, resulting in repayment problems and eventually to defaults.</font><br /><br /><em><font >'MFIs have lost ethical values'</font><br /></em><br /><font >ANABARD-funded study says Vijay Mahajan's Basix Microfinance &mdash; with funding from Ford Foundation , Swiss Agency for Development and Cooperation and Sri Ratan Tata Trust &mdash; became the first MFI with a 'forprofit model' not only in AP but also India.</font><br /><br /><font >Industry observers point to a trend: Register a company under Section 25 of Companies Act, 1956 as a not-forprofit entity, use grants &mdash; local as well as foreign &mdash; and do social lending to build a book, buy an NBFC (preferably a dormant one), do a reverse merger and become a for-profit MFI. Says the head of a financial services company : &quot;The problem starts when shareholders of forprofit companies put pressure for return.&quot;</font><br /><br /></div>                                                           
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    <br><a href="http://timesofindia.indiatimes.com/business/india-business/The-ugly-underbelly-of-Microfinance/articleshow/6766589.cms" class="re" target="_blank">The Times of India, 18 October, 2010, http://timesofindia.indiatimes.com/business/india-business/The-ugly-underbelly-of-Microfinance/articleshow/6766589.cms</a><div class="clear"></div>
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    <h1 class="cat-box-title">The ugly underbelly of Microfinance by Roli Srivastava, Swati Bharadwaj-Chand & Partha Sinha</h1>
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                            <font ><br /></font><div align="justify"><font >SKS Microfinance, India's largest microfinance player, arrived with a bang with its hugely successful IPO in August. However, the recent sacking of its MD and CEO Suresh Gurumani&nbsp; has opened up a pandora's box that is now threatening to expose the ugly underbelly of the sector which, many allege, is teeming with players who are no better than moneylenders but have so far been able to operate under the pious garb of poverty eradicators.</font><br /><br /><font >TOI spoke to a cross-section of people associated with the sector and found that most are of the opinion that far from pursuing their socalled vision of eradicating poverty and being poor-friendly , private MFIs are actually in it just for profiteering as they are lending to the poor at interest rates as steep as those charged by moneylenders, or 'Pathaani Vyaaj' , a sobriquet derived from the ruthless moneylenders of Afghan origin who operated during the early 20th century.</font><br /><br /><font >Those familiar with the functioning of MFIs point out that the lending model of for-profit MFIs is not exactly pro-poor . While offering a loan, they often quote a &quot;10% flat&quot; rate of interest, which, on the face of it, appears like a good deal. However, there is a catch. This 'flat' rate of interest means that it will not be calculated on reducing balance. It implies that even after the borrower has paid a few installments, the interest would still be calculated on the initial sum borrowed, and not on the balance loan amount. The result is a (hidden) final rate of interest of 24-30 %, or even higher for the poor who can barely afford a square meal a day. &quot;Microfinance, as practised by MFIs is unethical to the extent that it evades the truth in lending,&quot; said R Balakrishnan, a financial market veteran turned independent adviser . The high rate of interest is also leading to defaults and fraud. Recently , there has been a spurt in suicides in Andhra Pradesh and Orissa, allegedly due to harassment by MFI agents who started resorting to strong-arm tactics to recover loans as chances of default rise. M Subba Rao, of NGO Masses, who trained under Grameen Bank founder and Nobel prize winner Muhammad Yunus in Bangladesh, describes the cases of alleged harassment by MFIs as the result of 'irresponsible lending' . &quot;There is high pressure on the staff (of private MFIs) to lend. They have targets to meet and they dump money (on people),&quot; said Rao.</font><br /><br /><font >Consider this: The loan outstanding , according to the latest estimate by Microfinance Institutions Network (MFIN), the organization of 40 MFIs, is about Rs 30,000 crore with about 3 crore poor banking on MFIs for their financial needs. While the four southern states of AP, Tamil Nadu , Karnataka and Kerala account for a chunk of this borrowing, West Bengal and Orissa too have rural poor relying on MFIs. Besides, the sector is also on an uptick in UP and Haryana.</font><br /><br /><font >SKS Microfinance founder and chairman, Vikram Akula, is at great pains to ensure that everything is above board in the company. And more so due to the bad publicity the company got after its board sacked Gurumani. &quot;We believe there is a right way to do microfinance and we have been practising it over the past 13 years with not a single case of unethical practice against us.&quot; The company, Akula said, clearly communicates to the borrowers that though the loan was at a flat rate of 12.5%, it effectively works out to over 26% because there is an &quot;extraordinarily high cost of doing microfinance&quot; . Since most of its lenders don't understand rate of interest, SKS' agents communicate to its borrower how much they have to pay in terms of rupees per week.</font><br /><br /><font >Akula, whose company is the largest MFI in the country with over 73 lakh customers, also denies the possibility of its staff using strongarm tactics or misleading borrowers . Instead, he blames the bad name that the sector is getting to new MFIs jumping into the fray sensing a lucrative business.</font><br /><br /><font >Of course, eradicating poverty through the MFI route, for some, is a lucrative business. The IPO document by SKS disclosed that Gurumani was drawing an annual salary of Rs 1.5 crore, an equal amount or more as performance bonus, and also a one-time bonus of Rs 1 crore. Akula is entitled to up to 1% of SKS's net profit, in addition to ESOPs.</font><br /><br /><font >Not surprisingly the 'success' of some of the MFIs and the mega-listing of SKS recently have stunned even seasoned bankers. When asked about the success of the MFI business in India, during a recent interview with TOI, SBI chairman O P Bhatt said even he was surprised by their numbers. He wanted to go deeper into their finances and business model to understand how MFIs, which borrow from banks including SBI, can make profits which these very banks can't make. After all, like mobile tariff plans, no financial product is protected by patents and IPRs and the uniqueness of any new and lucrative one cannot last for more than 24 hours.</font><br /><br /><font >The problem seems to be with the business model, and not the approach . In India, there are three kinds of MFIs: The government-supported self-help groups, non-profit NGOs and the private for-profit firms. While private MFIs say that the smaller entities have earned the sector a bad name, social workers and industry veterans at the grassroots say that bigger players with bigger targets have led to such incidents. In many instances, multiple MFIs lend to the same clients, resulting in repayment problems and eventually to defaults.</font><br /><br /><em><font >'MFIs have lost ethical values'</font><br /></em><br /><font >ANABARD-funded study says Vijay Mahajan's Basix Microfinance &mdash; with funding from Ford Foundation , Swiss Agency for Development and Cooperation and Sri Ratan Tata Trust &mdash; became the first MFI with a 'forprofit model' not only in AP but also India.</font><br /><br /><font >Industry observers point to a trend: Register a company under Section 25 of Companies Act, 1956 as a not-forprofit entity, use grants &mdash; local as well as foreign &mdash; and do social lending to build a book, buy an NBFC (preferably a dormant one), do a reverse merger and become a for-profit MFI. Says the head of a financial services company : &quot;The problem starts when shareholders of forprofit companies put pressure for return.&quot;</font><br /><br /></div>                                                           
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    <br><a href="http://timesofindia.indiatimes.com/business/india-business/The-ugly-underbelly-of-Microfinance/articleshow/6766589.cms" class="re" target="_blank">The Times of India, 18 October, 2010, http://timesofindia.indiatimes.com/business/india-business/The-ugly-underbelly-of-Microfinance/articleshow/6766589.cms</a><div class="clear"></div>
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        LATEST NEWS UPDATES | The ugly underbelly of Microfinance by Roli Srivastava, Swati Bharadwaj-Chand & Partha Sinha    </title>
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SKS Microfinance, India's largest microfinance player, arrived with a bang with its hugely successful IPO in August. However, the recent sacking of its MD and CEO Suresh Gurumani&nbsp; has opened up a pandora's box that is now threatening to expose..."/>
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SKS Microfinance, India's largest microfinance player, arrived with a bang with its hugely successful IPO in August. However, the recent sacking of its MD and CEO Suresh Gurumani&nbsp; has opened up a pandora's box that is now threatening to expose..." />
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                            <font ><br /></font><div align="justify"><font >SKS Microfinance, India's largest microfinance player, arrived with a bang with its hugely successful IPO in August. However, the recent sacking of its MD and CEO Suresh Gurumani&nbsp; has opened up a pandora's box that is now threatening to expose the ugly underbelly of the sector which, many allege, is teeming with players who are no better than moneylenders but have so far been able to operate under the pious garb of poverty eradicators.</font><br /><br /><font >TOI spoke to a cross-section of people associated with the sector and found that most are of the opinion that far from pursuing their socalled vision of eradicating poverty and being poor-friendly , private MFIs are actually in it just for profiteering as they are lending to the poor at interest rates as steep as those charged by moneylenders, or 'Pathaani Vyaaj' , a sobriquet derived from the ruthless moneylenders of Afghan origin who operated during the early 20th century.</font><br /><br /><font >Those familiar with the functioning of MFIs point out that the lending model of for-profit MFIs is not exactly pro-poor . While offering a loan, they often quote a &quot;10% flat&quot; rate of interest, which, on the face of it, appears like a good deal. However, there is a catch. This 'flat' rate of interest means that it will not be calculated on reducing balance. It implies that even after the borrower has paid a few installments, the interest would still be calculated on the initial sum borrowed, and not on the balance loan amount. The result is a (hidden) final rate of interest of 24-30 %, or even higher for the poor who can barely afford a square meal a day. &quot;Microfinance, as practised by MFIs is unethical to the extent that it evades the truth in lending,&quot; said R Balakrishnan, a financial market veteran turned independent adviser . The high rate of interest is also leading to defaults and fraud. Recently , there has been a spurt in suicides in Andhra Pradesh and Orissa, allegedly due to harassment by MFI agents who started resorting to strong-arm tactics to recover loans as chances of default rise. M Subba Rao, of NGO Masses, who trained under Grameen Bank founder and Nobel prize winner Muhammad Yunus in Bangladesh, describes the cases of alleged harassment by MFIs as the result of 'irresponsible lending' . &quot;There is high pressure on the staff (of private MFIs) to lend. They have targets to meet and they dump money (on people),&quot; said Rao.</font><br /><br /><font >Consider this: The loan outstanding , according to the latest estimate by Microfinance Institutions Network (MFIN), the organization of 40 MFIs, is about Rs 30,000 crore with about 3 crore poor banking on MFIs for their financial needs. While the four southern states of AP, Tamil Nadu , Karnataka and Kerala account for a chunk of this borrowing, West Bengal and Orissa too have rural poor relying on MFIs. Besides, the sector is also on an uptick in UP and Haryana.</font><br /><br /><font >SKS Microfinance founder and chairman, Vikram Akula, is at great pains to ensure that everything is above board in the company. And more so due to the bad publicity the company got after its board sacked Gurumani. &quot;We believe there is a right way to do microfinance and we have been practising it over the past 13 years with not a single case of unethical practice against us.&quot; The company, Akula said, clearly communicates to the borrowers that though the loan was at a flat rate of 12.5%, it effectively works out to over 26% because there is an &quot;extraordinarily high cost of doing microfinance&quot; . Since most of its lenders don't understand rate of interest, SKS' agents communicate to its borrower how much they have to pay in terms of rupees per week.</font><br /><br /><font >Akula, whose company is the largest MFI in the country with over 73 lakh customers, also denies the possibility of its staff using strongarm tactics or misleading borrowers . Instead, he blames the bad name that the sector is getting to new MFIs jumping into the fray sensing a lucrative business.</font><br /><br /><font >Of course, eradicating poverty through the MFI route, for some, is a lucrative business. The IPO document by SKS disclosed that Gurumani was drawing an annual salary of Rs 1.5 crore, an equal amount or more as performance bonus, and also a one-time bonus of Rs 1 crore. Akula is entitled to up to 1% of SKS's net profit, in addition to ESOPs.</font><br /><br /><font >Not surprisingly the 'success' of some of the MFIs and the mega-listing of SKS recently have stunned even seasoned bankers. When asked about the success of the MFI business in India, during a recent interview with TOI, SBI chairman O P Bhatt said even he was surprised by their numbers. He wanted to go deeper into their finances and business model to understand how MFIs, which borrow from banks including SBI, can make profits which these very banks can't make. After all, like mobile tariff plans, no financial product is protected by patents and IPRs and the uniqueness of any new and lucrative one cannot last for more than 24 hours.</font><br /><br /><font >The problem seems to be with the business model, and not the approach . In India, there are three kinds of MFIs: The government-supported self-help groups, non-profit NGOs and the private for-profit firms. While private MFIs say that the smaller entities have earned the sector a bad name, social workers and industry veterans at the grassroots say that bigger players with bigger targets have led to such incidents. In many instances, multiple MFIs lend to the same clients, resulting in repayment problems and eventually to defaults.</font><br /><br /><em><font >'MFIs have lost ethical values'</font><br /></em><br /><font >ANABARD-funded study says Vijay Mahajan's Basix Microfinance &mdash; with funding from Ford Foundation , Swiss Agency for Development and Cooperation and Sri Ratan Tata Trust &mdash; became the first MFI with a 'forprofit model' not only in AP but also India.</font><br /><br /><font >Industry observers point to a trend: Register a company under Section 25 of Companies Act, 1956 as a not-forprofit entity, use grants &mdash; local as well as foreign &mdash; and do social lending to build a book, buy an NBFC (preferably a dormant one), do a reverse merger and become a for-profit MFI. Says the head of a financial services company : &quot;The problem starts when shareholders of forprofit companies put pressure for return.&quot;</font><br /><br /></div>                                                           
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    <br><a href="http://timesofindia.indiatimes.com/business/india-business/The-ugly-underbelly-of-Microfinance/articleshow/6766589.cms" class="re" target="_blank">The Times of India, 18 October, 2010, http://timesofindia.indiatimes.com/business/india-business/The-ugly-underbelly-of-Microfinance/articleshow/6766589.cms</a><div class="clear"></div>
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The ugly underbelly of Microfinance by Roli Srivastava, Swati Bharadwaj-Chand & Partha Sinha

Published on Oct 18, 2010   Modified on Oct 18, 2010

SKS Microfinance, India's largest microfinance player, arrived with a bang with its hugely successful IPO in August. However, the recent sacking of its MD and CEO Suresh Gurumani  has opened up a pandora's box that is now threatening to expose the ugly underbelly of the sector which, many allege, is teeming with players who are no better than moneylenders but have so far been able to operate under the pious garb of poverty eradicators. TOI spoke to a cross-section of people associated with the sector and found that most are of the opinion that far from pursuing their socalled vision of eradicating poverty and being poor-friendly , private MFIs are actually in it just for profiteering as they are lending to the poor at interest rates as steep as those charged by moneylenders, or 'Pathaani Vyaaj' , a sobriquet derived from the ruthless moneylenders of Afghan origin who operated during the early 20th century. Those familiar with the functioning of MFIs point out that the lending model of for-profit MFIs is not exactly pro-poor . While offering a loan, they often quote a "10% flat" rate of interest, which, on the face of it, appears like a good deal. However, there is a catch. This 'flat' rate of interest means that it will not be calculated on reducing balance. It implies that even after the borrower has paid a few installments, the interest would still be calculated on the initial sum borrowed, and not on the balance loan amount. The result is a (hidden) final rate of interest of 24-30 %, or even higher for the poor who can barely afford a square meal a day. "Microfinance, as practised by MFIs is unethical to the extent that it evades the truth in lending," said R Balakrishnan, a financial market veteran turned independent adviser . The high rate of interest is also leading to defaults and fraud. Recently , there has been a spurt in suicides in Andhra Pradesh and Orissa, allegedly due to harassment by MFI agents who started resorting to strong-arm tactics to recover loans as chances of default rise. M Subba Rao, of NGO Masses, who trained under Grameen Bank founder and Nobel prize winner Muhammad Yunus in Bangladesh, describes the cases of alleged harassment by MFIs as the result of 'irresponsible lending' . "There is high pressure on the staff (of private MFIs) to lend. They have targets to meet and they dump money (on people)," said Rao. Consider this: The loan outstanding , according to the latest estimate by Microfinance Institutions Network (MFIN), the organization of 40 MFIs, is about Rs 30,000 crore with about 3 crore poor banking on MFIs for their financial needs. While the four southern states of AP, Tamil Nadu , Karnataka and Kerala account for a chunk of this borrowing, West Bengal and Orissa too have rural poor relying on MFIs. Besides, the sector is also on an uptick in UP and Haryana. SKS Microfinance founder and chairman, Vikram Akula, is at great pains to ensure that everything is above board in the company. And more so due to the bad publicity the company got after its board sacked Gurumani. "We believe there is a right way to do microfinance and we have been practising it over the past 13 years with not a single case of unethical practice against us." The company, Akula said, clearly communicates to the borrowers that though the loan was at a flat rate of 12.5%, it effectively works out to over 26% because there is an "extraordinarily high cost of doing microfinance" . Since most of its lenders don't understand rate of interest, SKS' agents communicate to its borrower how much they have to pay in terms of rupees per week. Akula, whose company is the largest MFI in the country with over 73 lakh customers, also denies the possibility of its staff using strongarm tactics or misleading borrowers . Instead, he blames the bad name that the sector is getting to new MFIs jumping into the fray sensing a lucrative business. Of course, eradicating poverty through the MFI route, for some, is a lucrative business. The IPO document by SKS disclosed that Gurumani was drawing an annual salary of Rs 1.5 crore, an equal amount or more as performance bonus, and also a one-time bonus of Rs 1 crore. Akula is entitled to up to 1% of SKS's net profit, in addition to ESOPs. Not surprisingly the 'success' of some of the MFIs and the mega-listing of SKS recently have stunned even seasoned bankers. When asked about the success of the MFI business in India, during a recent interview with TOI, SBI chairman O P Bhatt said even he was surprised by their numbers. He wanted to go deeper into their finances and business model to understand how MFIs, which borrow from banks including SBI, can make profits which these very banks can't make. After all, like mobile tariff plans, no financial product is protected by patents and IPRs and the uniqueness of any new and lucrative one cannot last for more than 24 hours. The problem seems to be with the business model, and not the approach . In India, there are three kinds of MFIs: The government-supported self-help groups, non-profit NGOs and the private for-profit firms. While private MFIs say that the smaller entities have earned the sector a bad name, social workers and industry veterans at the grassroots say that bigger players with bigger targets have led to such incidents. In many instances, multiple MFIs lend to the same clients, resulting in repayment problems and eventually to defaults. 'MFIs have lost ethical values' ANABARD-funded study says Vijay Mahajan's Basix Microfinance — with funding from Ford Foundation , Swiss Agency for Development and Cooperation and Sri Ratan Tata Trust — became the first MFI with a 'forprofit model' not only in AP but also India. Industry observers point to a trend: Register a company under Section 25 of Companies Act, 1956 as a not-forprofit entity, use grants — local as well as foreign — and do social lending to build a book, buy an NBFC (preferably a dormant one), do a reverse merger and become a for-profit MFI. Says the head of a financial services company : "The problem starts when shareholders of forprofit companies put pressure for return."

The Times of India, 18 October, 2010, http://timesofindia.indiatimes.com/business/india-business/The-ugly-underbelly-of-Microfinance/articleshow/6766589.cms

Tagged with: Microfinance

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