SKS Microfinance Borrows a Leaf From Goldman's Book
It is now the turn of the bankers to throw off all pretences of concern about the lending practices of the Microfinance sector. They are reported to have asked RBI to bring the sector under its purview so that their lending to the sector can be rescued ("Banks ask RBI to Control MFIs", The Economic Times, 23 December 2010, p.1.). The bankers fear that if the sector is not under the purview of the central bank, then it is likely that each State will pass its own laws, which would be a disaster for the microfinance sector. One banker is reported to have told the RBI (and the press): "Let the government, banks, MFIs and RBI sit together to decide the course. The Andhra Ordinance is no solution. Even the state government doesnot have the administrative machinery to follow the recovery process laid down by the new law". The RBI on the other hand is reported to have placed the onus on the banks to see to it that the MFIs do not charge more than 24 percent to borrowers.
SKS Microfinance on the other hand has decided to borrow a leaf from Goldman Sach's Strategy book. During the course of the Financial Crisis inquiry commission in the USA, Goldman was criticised for either not responding to requests for information or would send truckloads of information, so that the Commission would be overwhelmed. Goldman is reported to have submitted the equivalent of about 2.5 billion pages after calls for information. Goldman's strategy was quite simple: it would be humanly impossible to go through all that information (and other information) thereby enabling the Commission to come to a conclusion. about its culpability. SKS with its abhorrent practices has followed a Indianised version of the same strategy. It claims that it has submitted nearly 1.3 million loan application requests to the government for approval.
It is clear that SKS would like to cause maximum administrative inconvenience in the hope that the government would be completely overwhelmed with an over-kill of information so that the Government of Andhra Pradesh would be forced to dilute their opposition. The fact that they can submit digital records of the information may provide vicarious solace to SKS since their business model and market value have all but collapsed. Any dilution in the AP government's stance, especially its submission to Y.H.Malegam Committee that the interest rates be capped at 8% spread would provide the sector, especially the large 10 companies, which account for nearly 90 percent of the business volumes. Moreover, if they are able to force a climbdown by the AP Government, which has great experience and administrative resources, the subtle calculation of the Microfinance sector is that the smaller states would not even think about introducing such regulations or placing any hurdles in the business model of the MFIs. On the other hand SKS seems to be blissfully unmoved about the nature of changes that may have to face in the near future. It is reported to be running pilot projects that will lend money against collateral like Gold and Houses in Karnataka and Gujarat, ironically, activities run by full-fledged Non-banking Finance Companies.
This comes at a time when the weekly collections in Andhra Pradesh are about Rs.28 crores. It has been hit to the tune of Rs.350-300 crores since the crisis started ("SKS Micro to limit portfolio in each State to 10%", Businessline, 24 December 2010, p.6). Invariably SKS has always been economic with the truth, about the cost of their funds. In 2008, they claimed that their cost of funds was 26%, and their margin 1-2 percent, and in AP they were lending at 24% (See the Image of the Interview of Vikram Akula). This is ironic since only recently they have announced that they reduced interest rates and their cost of funds have remained unchanged despite the IPO and their access to private equity.
These strategies should be a cause for greater concern since it is clear that the MFIs do not seem to be interested in evolving a new business model that would enable them to reinvent itself. It is probably the only business in India where there is no chance for arbitration in case of disputes. MFIs have to realise that any business (even the private moneylenders or even the criminal panchayats run by extortionists) offer this practice. A more important reason why microfinance sector needs to reinvent itself is that the Central Government seems to have made it clear that they would prefer banks to directly take up the task of financial inclusion, especially by growing the Business Correspondents model. State Bank of India wants to have 50,000 consumer points spread over one lakh villages by March 2012. It has hired Financial Information Networks & Operations, for providing technology and selecting Banking Correspondents ("Providing Connectivity to picking BCs, Tech Firms do it all for Banks", Business Standard, Section II, 22 December 2010, p.4).
Financial inclusion is set to become an increasingly fashionable part of government policy with the President of India, calling for expanding the scope of inclusion. Ironically, all of them seem to believe that financially inclusion can be extended if they can improve the credit delivery mechanism so that credit can be pushed to the poor. Very of them seem to be concentrating on creating products that would mitigate and transfer risk from the poor. Little wonder that the MFIs find so much support despite their blatant violations of various laws. Pathetically, the state of financial sector has deteriorated to such an extent that when a government does take up a genuinely beneficial law the criticism seems to be quite vicious. However, when the government bailed indebted industrial groups, it was considered to be 'investor friendly measures' - an euphemism for the transfer of public wealth to private hands.
An important broader trend that has often been missed is that the very fundamental justification as it was given in 1991 for liberalisation seems to have been conveniently forgotten. In 1991, it was claimed that all forms of subsidies are bad and the Government should avoid all forms of subsidies and free markets should be allowed to flourish. But the experiences in the aftermath of the Credit Crisis of 2008 seems to make it clear that the heavy hand of the government is always needed, especially in the realm of the financial sector . The State seems to be especially necessary to bailout or subsidise the speculators who now decide that it is more profitable to speculate on the speculation of others. Welcome to the era of the creation of State sponsored oligopolies.
An important broader trend that has often been missed is that the very fundamental justification as it was given in 1991 for liberalisation seems to have been conveniently forgotten. In 1991, it was claimed that all forms of subsidies are bad and the Government should avoid all forms of subsidies and free markets should be allowed to flourish. But the experiences in the aftermath of the Credit Crisis of 2008 seems to make it clear that the heavy hand of the government is always needed, especially in the realm of the financial sector . The State seems to be especially necessary to bailout or subsidise the speculators who now decide that it is more profitable to speculate on the speculation of others. Welcome to the era of the creation of State sponsored oligopolies.
Vikram Akula Interview in 2008 (From The Financial Express)
(Click to Enlarge Image)
No comments:
Post a Comment