Making profits from poverty

By Devinder Sharma
25 Nov 2009

Micro-finance is a highly profitable business. No wonder Micro-finance institutions are competing with each other to extract their pound of flesh while 'helping the poor women'.

Poverty has literally become a big and organised business. If you are educated, and looking for a profitable business enterprise, and more so if you are a non-resident Indian and want to translocate to India and still make millions, micro-finance offers you the right avenue.

There can be no better business opportunity than starting a micro-finance institution with assured returns and 100 per cent loan recovery. You can even think of trading on the stock exchange after a couple of years. And still more importantly, you can hold your head high and claim that you are helping the poor to come out of the poverty trap. You don't have to feel ashamed and morally guilty. The elite in the society have knowingly (or unknowingly) given you a license to loot.

The unprecedented growth in micro-finance tells us that modern-day Shylocks are everywhere, looking at every possible opportunity to make profits from poverty. Rich countries become rich at the cost of the poor countries. Rich people in any society (of course there are exceptions) also follow the same path. Micro-finance is a classic example.

I am sure if Shakespeare were alive today, he would have easily penned down a sequel to his great classic Merchant of Venice.

We agree that micro-finance institutions are the game changers. They have shifted the game from the hands of the villains of the story, the sahukars or moneylenders, to a sophisticatedly organised class of neo-moneylenders. These are not the usual banias but a highly educated class of people who use all sophisticated skills to rob the poor. And they have done it remarkably well.

It is all in the name of empowering the poor. I have often asked academicians how you justify the exorbitant rate of interest the micro-finance institutions extract from the poorest of the poor. The answer I get is that at least it empowers the poor. At 24 per cent rate of interest if the micro-finance can empower the poorest of the poor I wonder why do we have to keep the rate of interest for the urbanites, whether it is for housing, for car, or for any other business activity, as low as 6 to 8 per cent.

If the poor can be empowered with a 24 per cent rate of interest, how come the resourceful people in the cities/towns need a much lower interest rate to get empowered? If the poor in the villages can make a business enterprise even after paying a 20-24 per cent rate of interest, why do people in the cities find it difficult to do so? Or is it that we need a different yardstick (and in this case it happens to be the interest rate on your borrowing) to empower the poor and the not-so-poor? In other words, since the poor have no voice, some of us (and that includes banks) have joined hands to exploit the poor in the name of development.

I think these are difficult questions that we in the cities simply try to ignore or brush aside for the simple reason that we are in a way or so the real beneficiary of this criminal exploitation.

Isn't it shocking that a poorest of the poor woman in a village, who may be only surviving on the NREGA promise of 100 days assured employment (not getting more than Rs 60 a day), has to pay a 24 per cent rate of interest if she borrows money to buy a goat, and the rich in the cities can get interest-free loans or loans with a minimal rate of interest for buying a BMW car?

I am sure if that poorest of the poor woman were to get a loan for buying a goat at a minimal rate of interest (say 4 per cent or even 7 per cent that we give to farmers) she would also be driving a car, at least a Tata Nano, at the end of the year. Also, I don't understand the logic of providing micro-finance to the poorest of the poor women with a high rate of interest of 20 to 24 per cent (on an average) whereas her husband (if he happens to be a farmer) gets crop loan at 7 per cent.

If the farmers cannot survive (and there are 600 million farmers in India, including their families) with a higher rate of interest, I wonder how do we expect his wife (who is part of the self-help groups) to pay out at the rate of 24 per cent?

Nevertheless, the micro-finance business has grown manifold. India Microfinance Report 2009 tells us that the portfolio of the micro-finance institutions has grown by 97 per cent, and number of beneficiaries has also gone up by 60 per cent. More than 150 million are already borrowing from Micro-finance institutions. What the report however does not tell us, but is quite apparent, is that this organised group of money-lenders is now beginning to take over the unorganised villains of the game -- the sahukars or the traditional money lenders.

Another news report tells us that SKS Micro-finance is charging approximately 24 per cent rate of interest in Orissa, Karnataka and Andhra Pradesh; in southern India, Equitas Micro-finance is seeking 21-28 per cent interest rate and Basix Microfinance is providing small loans at 18-24 per cent interest rate. There are numerous other players, and they all rake in money. Sewa in Gujarat and the Grameen Bank in Bangladesh too thrive on a similarly high rate of interest.

It is time we put all of them under a scanner. The society cannot turn a blind eye to this organised loot of poor and helpless.

We often hear success stories of women who borrowed and the transformation it has brought to their lives. I don't deny this. But perhaps what we don't want to know is that even when the private money lenders (the class we hate) were lending at 24 to 36 per cent or more, there were also success stories. The business of money lending wouldn't have succeeded all these decades and centuries if it was not helping those who borrowed.

People went on borrowing from the money lenders or sahukars because they needed the money (even if it came with a very high interest rate), and it must have and still is making a difference to them otherwise the entire business of moneylending would have collapsed and become unsustainable. All that micro-finance institutions are doing now is to replace that class of moneylenders. Micro-finance institutions are also extracting their pound of flesh. The sahukars were using their own capital for lending and therefore charging a very high interest of 36 per cent or above. The micro-finance institutions use the bank finances (or donors money) and therefore charge a little less at 20-24 per cent.

The sahukars or money lenders were lending individually and therefore charged a higher rate of interest to cover up the risk. The micro-finance institutions go in for group lending, and that too to women, the most vulnerable section of the society, and therefore have their risk covered, and still charge 24 per rate of interest. In the process the banks (no wonder, they find it the most lucrative business) and the micro-finance institutions literally make a killing from robbing the poorest of the poor.

If the sahukars are guilty of a crime, so are the micro-finance institutions.