torchbearer than Vikram Akula for an industry as quintessentially Indian as microfinance, the business of providing the poor with loans, as small as R5,000, secured not with physical assets but trust.
In 2004, Akula — modifying the idea of a grassroots non-profit, microcredit revolution started by Bangladeshi Nobel Laureate Mohammad Yunus — had just submitted to the University of Chicago his doctoral thesis on the impact of microfinance. Two years later, he was hailed as one of the world’s radical thinkers. Today, his personal wealth is about $60 million. His company, SKS Microfinance, is now one of the world’s largest in the sector. It is backed by, among others, financier and philanthropist George Soros and Indian tech icon NR Narayana Murthy. The sector Akula spurred into action has more than 300 companies, attracted international capital and handed out $7 billion in loans to some 40 million poor Indians.
Today’s poor, as emerging India knows, are tomorrow’s middle class. Today’s middle class is tomorrow’s rich, who are at the top of life’s pyramid, a good place to start our story.
There’s a nice view of India from up here, all those happy, shiny people, trading in their Honda Citys for Porsche SUVs. This is first-world India, where the view of the world and its horizons stretches forever. For the most part, it’s seceded from the grimy republic beyond. Its people live in penthouses, vacation in Paris or Antarctica, and mostly fly first class. What’s that? Oh, I’m sorry. Many actually don’t fly first — they take their Gulfstream.
Aspiration is a wonderful thing.
Let’s go now to the bottom of the pyramid. It’s hard to see the world from down here. This is third-world India, mired in the old country and the struggles of today. The people here may not be shiny, but they work for a brighter tomorrow. They trade their cycles for Hero Honda motorcycles, their postcards for cell-phones.
Aspiration is indeed a wonderful thing.
How many Indians live at the bottom? In his seminal 2004 book The Fortune at the Bottom of the Pyramid, management guru CK Prahlad said anyone living on less than $2 a day (less than R100) qualifies. By this count, there are 900 million Indians down there. Prahlad’s main point is contentious, that the poor must be seen as consumers and entrepreneurs. But no one disputes that they must not be regarded as victims.
Akula and his industry tapped into Prahlad’s thesis to create a sector that proves you can do business with the poor. In doing so, the sector threatened an ancient rural power centre, the moneylender, and his modern-day benefactor, the politician. Unlike infotech, the microfinance sector, which provides livelihood to many more people, works directly in the politician’s main arena, rural India. Micro-financiers like SKS are now criticised for interest rates that range from 24% to 40% . They say it’s expensive to monitor and collect so many loans in remote areas. It’s also the rate most credit cards charge you, and it doesn’t compare with the usurious 100% that moneylenders force on the poor.
Akula’s personal profits queered the pitch for an enterprise that Yunus once said could be a “social-consciousness-driven private sector to take over government functions”. This year, Akula made some $10 million from selling some of his shares when SKS sold stock valued at $350 million last month. Akula holds an additional $50 million in SKS stock. Shortly after, Akula sacked his CEO Suresh Gurumani.
While la affaire Akula unfolded, Andhra Pradesh (AP) — where nearly one in four Indian micro loans is handed out — reported a string of suicides, at least 30, among micro-borrowers. Some 17 of these were SKS customers; Akula says none of them were in default.
Last month, the AP government arrested some lending agents for coercing defaulters. AP politicians then urged borrowers not to repay loans. The result: major lenders are watching their 2% default rate soaring. The state does not know if landlords or traditional moneylenders were also involved, a distinct possibility. Many families tend to take multiple loans: The industry’s own 2009 report reveals 823% of all poor AP households took micro-loans, sparking fears of a credit bubble.
Clearly, microfinance needs scrutiny. So, AP’s effort to create a database of all borrowers and stop multiple loans is good. What isn’t is the creation of a regulator in the rural development ministry, which is also a competitor: through state-lending agencies it hands out highly subsidised loans to women’s self-help groups, which also offer micro-loans at rates as low as 3% but still see borrowers flocking to quick, efficient private companies. This is like State-owned telecom giant BSNL regulating competitor Airtel, licence-raj style. Scared Indian banks, which provide micro-lenders with 80% of their funds, have frozen lending, fearing a crash might cause a larger system collapse, as the US sub-prime crisis nearly did by freely giving housing loans to low-income families. In Delhi, the finance ministry is working on a national law that hopes to better supervise micro lenders — without stifling them.
There is no specific evidence that microcredit reduces poverty, and Akula is being foolish when he says that without micro-financiers rural India would be a “country of goat keepers”. But his sector does relieve the pressure of poverty: microcredit works because the government fails. Its bottom-up success could slow the top-down, inefficient splurge of public funds. India will spend more than $20 billion this year on inclusive growth — a third of this money will be wasted or stolen.
The business of ethically finding profits at the bottom of the pyramid is in its infancy. Some microfinance companies are trying to develop new business models, adding on micro-insurance, veterinary services, fertiliser advice and much more. The possibilities are immense. The government must help these emerge.