MFIs are making profits at the expense of the poorest people

An estranged wife may not be the most objective witness, so perhaps we shouldn’t take everything Malini Byanna says about ex-husband Vikram Akula as gospel truth.

Writing an Open Letter, her main contention is that many of the ideas adopted by SKS Microfinance were originally hers; she also says the seed money for the whole enterprise came from her family. She also accuses him of ruthlessness and getting rid of people who disagreed with him or were no longer useful to him.

Akula is not the first CEO, and he won’t be the last, who is accused of the ‘sins’ listed above. In fact in the corporate world, especially in the US, a CEO’s single-minded focus on profits accompanied by a willingness to ‘push people off the cliff’ will often be rewarded with a million dollar bonus.

Akula does have a history of sacking people, the latest being the SKS CEO Suresh Gurunani, whose hiring had grabbed business paper headlines.

But we shouldn’t shed too many tears for Gurunani: after all, he was given a joining bonus of Rs1 crore by SKS. More than that his severance terms would give him his salary for a year (Rs1.5 crore) plus 1.25 lakh stock options (valued at Rs300 crore at current prices!!) Not bad for few months work.

It’s not Vikram Akula’s management style nor his inter-personal relationships which should bother us. What should are some of the numbers in the previous paragraph and some of the numbers that follow. The number of zeroes bankers and finance men can command, while making zero real contribution to society is no longer news.

The shamelessness with which Americans bankers have paid themselves million dollar bonuses while pauperising their middle-class clients is too well documented to require repetition.

But a micro finance institution? Somehow that was meant to be different. Ever since Mohammed Yunus was given a Nobel for his work with Grameen Bank, the world was under the illusion that micro-finance was a benevolent exercise, and people like Akula wore a halo that shone in any light. Now we know that the halo dazzled us so much that we failed to see how fat their wallets had become.

It wasn’t just the media that was taken in: one of the large investors in SKS Micro finance was Narayan Murthy, and if even he could be taken in…

Someone — a banker —  said to me, “What’s wrong in making profits?” There isn’t, of course, but there’s a line beyond which profit becomes profiteering. In the case of micro-financing, that line is clear and leaves no room for ambiguity because of the nature of the enterprise.

Micro finance companies give small loans to farmers and the rural poor, a role hitherto played by moneylenders, the kind who gave rise to Naxalism.

These money lenders charged 48% interest or sometimes even more, thus ensuring that their client is forever in debt. Banks, even nationalised banks, wouldn’t step in because the sums involved were too small and the customers were too far dispersed. In stepped microfinance companies, willing to work with small margins, and spreading around the countryside to the remotest corners to help the poor of our country.

Or so we thought till Vikram Akula went in for an IPO. The size of the IPO and the eagerness of people to lap up its shares made everyone sit up and take notice: obviously there was lots of money to be made in microfinance. The public who subscribed to the IPO saw that before the media did.

The microfinance bottom line works because of the traditional money lender. If he charges 50% interest, anyone charging half of that seems like an angel.

Which is how SKS worked: get money from institutions at 9.5% (by Akula’s recent admission) and lend at 26%. That margin takes care of the high cost of disbursing and collecting over a large geographical area, and still leaves a very healthy margin for making profit.

You and I pay less than half of that for our home loans. But the poor and marginal farmer, making a subsistence living, borrowing money for absolute essentials like seeds and fertilisers, has to pay 26% or more. (Since the story broke, SKS has announced a reduction of 2% in the interest charged. Big deal)

This is profit-taking at its most callous, because the MFIs are making massive profits at the expense of the poorest people in India. As a result, farmer suicides continue unabated.

In Andhra Pradesh, for example, 25 people took their own lives recently. Of them 17 were SKS Microfinance borrowers.

Perhaps that’s just a coincidence. But the fact remains that the poor of this country are being exploited by people who profess to be do-gooders, but actually are in it only to make money.

The fate of Vikram Akula and SKS Microfinance should not bother us; what should is the fate of the millions who make companies like SKS fat and profitable, and who themselves have nothing — not even a semblance of a future — to show for it.