Ordinances and fatwas can’t shoo away the microfinance spectre

The sacked CEO of SKS Microfinance, Suresh Gurumani,  received a fatty consolidated annual salary of Rs1.5 crore and gross remuneration of Rs2.45 crore in 2009-10, besides other benefits, much bigger than this, to which we will come to a little later, while some of its borrowers committed suicide unable to meet their repayment obligation  with their meager earnings.

Compare this with the pay package of the chairman of State Bank of India (SBI), the largest bank of India, O P Bhat of Rs26.5 lakh.
And RBI governor Duvvuri Subbarao received a still lower a salary — Rs15 lakhs, while deputy governors got about Rs13 lakhs a year.

This is not to say that their salary structure is very poor. It is enough if this much level is maintained duly neutralising the inflationary effect year after year; lavish salaries to the top executives, ministers, legislatures and other functionaries of the government in this country where majority of the population languish in poverty, are loathsome.

It is, of course, simply nonsensical to compare SBI with SKS.
But SBI and the like and SKS and its ilk have their due role in the microfinance-related woes of the poor though both these sets of
organisation are not at all comparable in their size and stature.

SKS had a loan portfolio of Rs4,321 crore as of March 2010. It’s profit after tax for the year was Rs173.95 crore. It is acclaimed to be the number one microfinancier in India.

As for SBI, it has garnered deposits of Rs804,116 crore and lent Rs631,914 crore (outstanding figures as of March 31, 2010). That means SKS’ portfolio is equal to 0.68% of SBI’s and 0.30% in total portfolio.

If whole of SBI group’s business of `19,85,965 crore is taken into account, the SKS portfolio will be a further minuscule 0.21%.
SBI’s net profit itself for a single year of `9,166 crore — though with a 0.88% average assets ratio — is more than the double the SKS portfolio.

Yet the SKS CEO’s salary package is more than nine times higher than his SBI counterpart.

Gurumani’s salary of Rs1.5 crore was for the last year; for 2010-11 it was raised to Rs2 crore.

Besides high salary, he was given performance bonus of Rs15 lakh a year, a one-time bonus of Rs1 crore in April 2009 and an insurance cover of Rs4 crore.

That was not all. He was given as part of severance package 1.25 lakh stock options valued at Rs300 crore.

Not only Gurumani, but some  60 other executives who got shares under employees share purchase scheme (ESPS) at Rs38 a share are reported to have sold their shares for Rs1,100 each soon after the SKS shares were listed on the stock exchange. If this is indeed true, then each of them got some Rs10 lakhs profit - or 29 times gain in three years.

Why, the other members, the founder and the chairman Vikram Akula was himself the biggest beneficiary of the windfall of the microfinance business.

Last year he was allotted 9.45 lakh shares at Rs49.77 per share, which he sold to Tree Line Asia Master Fund of Singapore for a price of $13.67 per share, that is roughly Rs564 higher than the purchase price and made about Rs53 crore profit in just two months.

How is this, hundreds of crores of profit to the microfinance institutions and to their employees directly and indirectly becoming possible when the business is giving small loans to the poor people?

To put it without hypocrisy, it is becoming possible through impoverishing the poor further, taking advantage of their needs and compulsions.

Microfinance institutions are charging high interest rates peaking to above 60%. And making the poor borrowers to pay the principal, interest and other charges through nose. That is the secret of the high success and viability of the microfinance institutions in terms of profit making. After all, the money doesn’t grow on trees!

Banks’ complicity
The public sector and other commercial banks seek to absolve themselves of the sin of killing (to call the suicides killings may not be wrong because death is forced on the poor through coercive methods of recovering the high cost loans from them) the MFI
borrowers.

But the banks and other institutions are responsible because they have directly and indirectly responsible for the lending activities of the MFI.

It is on account of failure of the banks in meeting the credit needs of the poor that the MFI have come on to the scene. The banks have a wide network to reach-out the people across the country.

There are about 72,000 branches of all the scheduled commercial banks including 14,500 odd branches of the Regional Rural Banks. There are more than a lakh primary agricultural credit societies (PACs) besides 12,000 branches of district cooperative banks.

There are also ideas to rope in the post offices to involve in SHG savings and finance. What more institutional structure is needed if there is will to provide credit and other the financial services to the poor ?

The argument that the banks alone cannot meet the credit needs of poor and therefore created space for other players is just escapist. It is the banks that have provided funds on cheap interest —below 10% — to the microfinanciers who lent on usurious interest to the poor people.

As per Nabard’s compilation (in its report: Status of Microfinance in India 2009-10) Banks in public and private sector have lent Rs10,095.31 crore (outstanding as on end March, 2010) to as many as 1,407 microfinance institutions in India. In addition, SIDBI has lent Rs3,808.20 crore to 146 of them.

More distressing, the regional rural banks (RRBs) who have been established with the sole motive to finance to the weaker sections have lent Rs52.22 crore to as many as 103 institutions instead of
directly lending to the individuals and self-help groupos on low interest.

The aggregate number of micrifinanciers, it may be noted here, may look to be bigger than the actual number — estimated to be around 800 — in the country. This is possibly because the same institution may have borrowed from multiple sources.

A new priority
The motive for the banks, even to the private banks which have lent about Rs4,900 crore, is that their lending to the institutions has been treated by the Reserve Bank of India as loans to the priority sector. So, the banks found microfinanciers a good conduit to meet their priority sector obligation.

Banks, which pay a small interest, say of 3.5% on savings deposits, channel the funds to microfinanciers at about 10%. The institutions, in turn, lend at high rates ranging from 24 to 60% to the poor and make a huge profit — through fat salaries and
potentially high dividends to the executives.

And all this is facilitated by the banks. At one level they do not give loans adequately to the poor and then siphon the funds to the microfinanciers giving a free hand to them to make high profits — doing  business with the poor.

In addition to banks, microfinance sector gets support from the apex agencies such as Rashtriya Mahila Kosh and Nabard in different other ways.