Farm loan waivers to raise state deficits by ₹1.08 tn: India Ratings report


The farm debt waivers announced by the five large States together will widen the combined fiscal deficit of the States by 1,07,700 crore or 0.65 per cent of GDP this financial year, warns a report.

The combined fiscal deficit of the States for FY18 has been budgeted at 2.7 per cent of GDP or 4.48 trillion.

Uttar Pradesh, Punjab, Maharashtra, Rajasthan and Karnataka have announced farm loan waivers this year after a string of farmer suicides in these States.

Nine States have budgeted an increase in their fiscal deficits/gross state domestic product (GSDP) ratios this year compared to 19 states in FY17.

“With several States announcing farm loan waivers, there is a fear that the combined fiscal deficits of the States could be much worse than the budgeted figure,” India Ratings said in a report on Monday.

The report estimates that the combined fiscal deficit of the States in FY18 at 3 per cent of GDP or  4.99 trillion. This is higher than the budgeted figure but considerably lower than FY17.

The report is based on the analysis of 29 State budgets, the impact of the farm debt waivers announced outside the budgets and implementation of GST from July 2017.

While the farm debt waivers announced by UP and Punjab are part of their respective FY18 budgets, the waivers announced by Maharashtra, Rajasthan and Karnataka are outside their budgets.

“These States will have to either generate additional resources to fund farm debt waivers or cut their budgeted expenditure,” the report said.

If such announcements are funded through expenditure compression, the axe usually falls first on the budgeted capital expenditure, followed by social expenditure.

“Both cuts do not augur well from the point of view of the medium to long-term growth prospects of these States,” the report said.

Andhra Pradesh and Telangana, which announced a farm debt waivers of 43,000 crore and 17,000 crore, respectively, in 2014, however have adopted a staggered payment mechanism.

The report, however, said despite fiscal pressures, the encouraging feature of FY18 state budgets is near stability in the combined revenue deficit and some improvements in the combined primary deficit of the states compared to FY17.

The other encouraging feature of the state budgets this year has been the continuation of capex by the states.

Boosted by Uday bond issuances, combined capex of the states grew 40 per cent year-on-year and 26.2 per cent in FY16 and FY17, espectively.

How will farm loan waivers impact the Indian economy?

Farm loan waivers will strain the finances of states, and harm both farmers and banks over the long run

The debt waiver packages, even if limited to a few states, will likely prove to be counter-productive and offer little gains to farmers over the long run. Photo: Mint

The debt waiver packages, even if limited to a few states, will likely prove to be counter-productive and offer little gains to farmers over the long run. Photo: Mint

In its policy statement released last week, the monetary policy committee (MPC) of the Reserve Bank of India (RBI) pointed out that the implementation of farm loan waivers across states could hurt the finances of states and make them throw good money after bad, and stoke inflation.

How much of an impact will the waivers have on the Indian economy?

Mint analysis suggests that the cumulative impact of farm loan waivers is likely to be lower than that of the power-restructuring package, Ujwal Discom Assurance Yojana (UDAY), unless they are extended to all Indian states. However, the debt waiver packages, even if limited to a few states, will likely prove to be counter-productive and offer little gains to farmers over the long run.

So far, three major states—Uttar Pradesh (UP), Punjab and Maharashtra—have announced large-scale farm debt waivers. The debt waiver packages of UP and Punjab were aimed to fulfil poll promises made by the Bharatiya Janata Party (BJP) and the Congress party, respectively, in these two states. The cumulative debt relief announced by the three states amounts to around Rs77,000 crore or 0.5% of India’s 2016-17 GDP.

UP’s debt waiver of Rs36,400 crore is equivalent to one-fourth of the total estimated farm debt in the state. Punjab’s debt waiver worth Rs10000 crore is  equivalent to less than one-seventh of the total estimated farm debt in the state. Maharashtra’s farm debt waiver appears slightly more generous as it appears to cover almost one-third of the state’s farm loans.

If poll-bound states—including Gujarat, Karnataka, Rajasthan and Madhya Pradesh— too announce farm debt waivers and extend it to one-third of farm loans in their respective states, then the aggregate amount of farm debt waivers before the 2019 elections would balloon to Rs2 trillion, or 1.3% of India’s GDP.

The Rs2 trillion hit to state finances is not a small amount but it is lower than the fiscal burden of the UDAY scheme, which originally envisaged states to take over Rs3 trillion of discom (distribution companies) debt. As of now, the UDAY website shows that 15 states have pledged to issue bonds worth Rs2.7 trillion, or 1.8% of India’s GDP.

This means that the current cost of debt waivers, though large, is not yet alarming. But what if all states, and not just the poll-bound ones, decide to waive farm loans, and extend it to half of all farm debt rather than just one-third? In such a case, the total waiver amount will substantially increase to Rs6.3 trillion or around 4% of the GDP.

The extreme case of 50% farm debt waiver should raise concerns as it will worsen states’ debt-to-GDP ratio by 4 percentage points on average. This will jeopardize India’s stated aim to reduce its total public debt, Centre and states combined, to 60% of the GDP.

State-wise outstanding farm debt has been estimated by using available break-up (for previous years) of agricultural loans extended by scheduled commercial banks and regional rural banks. The estimates thus obtained have been scaled up to the total value of institutional farm loans at Rs12.6 trillion. This figure was cited by Union minister of state for agriculture Parshottam Rupala in November last year in response to a question on farm debt.

While the effect of increased public debt will play out over the long run, the increased interest burden due to higher debt will hit state finances immediately. Even if we assume a benign scenario, where debt waiver amounts to only one-fourth of all farm debt, as in the case of Uttar Pradesh, the aggregate interest payment burden of states will rise by 8% (over their 2016-17 levels). Interest payments of states are already quite high, and often eclipse their spending on important infrastructure areas such as roads and irrigation.

The impact on state finances could have been justified had the waivers provided meaningful relief to India’s distressed rural economy. But that is unlikely to happen since the poorest farmers in India typically rely on non-institutional sources of credit, as a previous Plain Facts column pointed out. Instead, as the experience of 2008 shows, farm loan waivers can discourage subsequent lending by banks in districts with greater exposure to the debt waiver, harming farmers over the long run.

Given that farm loans will be transferred from the assets side of banks’ balance sheets to the liabilities side of government’s books as part of the waivers, will distressed banks gain from such moves? Not much, according to a review into the non-performing asset (NPA) portfolio of banks.

Banks might gain in the short run as their loan book gets lighter and they get rid of some non-performing assets. But such waivers and their anticipation in future would damage credit culture. It is not surprising that after the farm debt waiver in 2008, the drop in banks’ agricultural bad loans or NPAs lasted for barely a year before rising sharply once again.

But to put things in perspective, the share of agricultural loans in the total basket of NPAs today is low. In fact, banks with more NPAs tend to have a smaller share of agricultural loans in total NPAs, as the chart below shows. This means that even temporary relief for stressed banks will be quite modest.

Given that the promise of farm waivers have seemed to help both the Congress and the BJP win in Punjab and Uttar Pradesh, respectively, it is likely that India’s political class will increasingly adopt this option in the run-up to the 2019 Lok Sabha elections.

But the above analysis suggests that such waivers are unlikely to help the cause of either distressed farmers or troubled banks over the long run. And they may well impair the quality of public spending by states, as the central bank fears.

The debt story less told

The Hindu, February 12, 2015, by K P Prabhakaran Nair

Small and marginal farmers in rainfed regions are trapped in a losing battle with agriculture — and with life

The lot of the poor Indian farmer keeps deteriorating with the passage of time. According to the National Sample Survey Office (NSSO) data released on December 19, 2014, during the last decade, the bloated debt of Indian agricultural households increased almost 400 per cent Even the number of heavily indebted households has steeply increased during this period.

The report is titled Situation Assessment Survey of Agricultural Households in India, and is based on a national survey covering 35,000 households during 2012-13. Though the definition of an agricultural household has changed during the last decade, the basic features remain the same. The survey states that, on an all-India basis, more than 60 per cent of the total rural households covered in 11 States are in deep debt, though wide variations exist, ranging from 92.9 per cent households indebted in Andhra to 17.5 per cent in Assam. Loan patterns show it is 60 per cent institutional loans and 40 per cent non institutional loans. Moneylenders make up most of the non-institutional lenders.

Green revolution myth

Average debt per household is ₹47,000, while average income is ₹36,973 per annum. In 2002-03, India had 148 million rural households which increased to 156 million by 2012-13, a 5.4 per cent increase in a decade.

The data point to another disturbing trend. While average income from 2002-03 to 2012-03 increased by 318 per cent, most worryingly, total debt per household increased by 273.5 per cent during the same period, proving that while income from sale of agricultural products increased due to a price advantage during the last one decade, it has not translated into a reduction in rural indebtedness. Has the so-called green revolution really helped the poor and marginal farmer of India?

Benefits by way of better seeds or fertiliser input have been cornered by rich and affluent farmers in Punjab, Haryana, western Uttar Pradesh, Andhra, Tamil Nadu and Karnataka. The poor and marginal farmers of Bihar, Odisha and eastern Uttar Pradesh are in a miserable state. There are reasons to believe that indebtedness of rural agricultural households cannot be just 60 per cent, as shown by the NSSO survey, but perhaps as much as 70-80 per cent.


The enthusiasts of highly extractive agriculture, euphemistically called the green revolution, based on “high input technology” — very liberal, often unbridled, quantities of chemical fertilisers, very expensive hybrid or Bt seeds, copious use of irrigation water — kept proclaiming the “success” of this revolution. But the poor and marginal farmers , primarily in the vast rainfed areas of the country, were simply left out.


Their farms remained parched, while their debts soared. The Vidarbha region of Maharashtra, where Bt cotton failed miserably in parched rainfed fields and farmers in thousands took their own lives, unable to repay the loan sharks, became a global shame. Only where rich farmers had access to assured irrigation water coupled with unbridled use of chemical fertilisers could Bt cotton perform well.


PDS leakages

Many farmers are unaware of the minimum support price. And, often, these farmers resort to distress sale of their produce to clear the loans from moneylenders, obtained at exorbitant interest rates. In collusion with unscrupulous local traders and commission agents, government agencies delay procurement of grains by, in some cases, as many as 50-60 days.

The poor end up spending more than 50 per cent of their meagre farm income buying food for mere subsistence, while the government procured grain in the FCI godowns finds its way into the hands of corrupt officials, middlemen and grain traders.

Though the contribution of India’s agriculture to the country’s GDP is 18 per cent and it provides employment to more than 60 per cent of the total workforce of the country, if one goes by the NSSO survey, the country is heading towards a crisis in agriculture. The Prime Minister would do well to rethink his ‘Make in India’ strategy. These poor and highly indebted farmers, most with no formal education, cannot be allowed to migrate to congested urban areas to eke out a miserable, daily wage-earner’s life.

Farmers indebtedness: Into the abyss?

Author(s): Jitendra @jitendrachoube1 

Jan 31, 2015 | From the print edition

The situation of India’s farmers has only become grimmer in the past decade, according to the latest National Sample Survey Office report

imageIllustration: Sorit

The lot of the embattled Indian farmer only keeps on getting worse with the passage of time. In the last 10 years, the voluminous debt of Indian agricultural households has increased almost four-fold whereas their undersized monthly income from cultivation has increased three-fold. Even the number of indebted agricultural households has increased in the last 10 years. At the same time, there has been a micro-increment in the number of agricultural households in India.

All this is according to the recent report of the National Sample Survey Office (NSSO), released on December 19, 2014. The report, titled ‘Situation Assessment Survey of Agricultural Households in India’, is based on a countrywide survey of 35,000 households by NSSO during 2012-2013.

It states that 52 per cent of the total agricultural households in the country are in debt. The average debt is Rs 47,000 per agricultural household in this country, where the yearly income from cultivation per household is Rs 36,972.

The report comes after a gap of 10 years. The last Situation Assessment Survey by the NSSO was for 2002-03. In that year, 48.6 per cent of agricultural households were in debt. The average debt was Rs 12,585. And the yearly income from cultivation per household was Rs 11,628. At the time, India had a little less than 89.35 million agricultural households.

In fact, some think that the report may not even be reflecting the entire truth. “The NSSO survey gives us an idea of the existing situation but not the clear picture. In my opinion, it is not just 52 per cent agricultural households that are in debt but 80 per cent,” says Devinder Sharma, a food analyst. “If you adjust for inflation, on an average 7 per cent every year, farmers’ incomes have remained frozen in the past 10 years,” says Sharma.

The other main takeaway from the NSSO report is that the debt is being incurred by the the richer, more prosperous farmers. NSSO data shows that richer agricultural states like Kerala, Andhra Pradesh and Punjab have the highest average outstanding loans per agricultural household, whereas poorer states like Assam, Jharkhand and Chhattisgarh have the lowest amount of average outstanding loans.

This is substantiated by the data which shows that among agricultural households which possess less than 0.01 ha the share was only 15 per cent of the total outstanding institutional loan, whereas for households which possess more than 10 ha the share was about 79 per cent.

Reasons behind the rise

The question then is: why have farmers’ debts increased? Ashok Gulati, former chairperson of Commission for Agricultural Costs and Prices (CACP), thinks outstanding loans to farmers are natural because of increasing intensification in agriculture. “As the intensification of agriculture increases, so does the loan.

The loan would be in the form of working capital, else the fixed capital will increase,” says Gulati.


Others believe that this report is like the one in 2002-2003 and brings out the same systemic problems. They add that India has not learnt anything in the past one decade. One such issue is investment in the sector. Even as agriculture has intensified, investment in it is very less. Even the yearly agriculture budget is not more than that of the flagship employment guarantee programme, Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).

“The current year’s budget of agriculture was nearly Rs 31,000 crore while the MGNREGA budget was nearly Rs 34,000 crore. If we see the seven-year budget, the ministry budget was never more than MGNREGA,” says Sharma.

According to A note on Trends in Public Investment in India by S Mahendra Dev, Director, Indira Gandhi Institute of Development Research, Mumbai, the share of private investment in total investment in agriculture increased significantly over time from about 50 per cent in the early 1980s to 80 per cent in the decade of the 2000s. In other words, the share of public investment declined from 50 per cent to 20 per cent during the same period.

The public sector investment showed a negative growth in the 1980s and 1990s and a growth of 15 per cent in the 2000s. On the other hand, growth rate of private investment increased gradually from 2.5 per cent in the 1980s to 4.1 per cent in the 1990s and 52 per cent in the 2000s.

Another reason debt has increased is that market price of agricultural produce is not commensurate with rising input cost. Dev says that two-thirds of farmers do not get minimum support price (MSP) for their crops and are compelled to sell their crops at lower rates in the open market.

“Seventy-five per cent of farmers in India sell in the open market at lower than fixed MSP. Only the farmers of Punjab and Haryana get MSP. The situation of other states is deplorable,” says Dev. “For instance, in 2009, when I was the chairperson of CACP, in states like Bihar, farmers used to get Rs 700- Rs 800 for paddy when the MSP was fixed at Rs 1,000.”

The reason for farmers not being able to get MSP, according to the NSSO data, is that large numbers of them are not even aware of it. As per the data, only 32 per cent of paddy farmers are aware of MSP. But even then, less than half are able to sell their produce in government procurement centres.

“In collusion with local traders and commission agents, government agencies delay in starting procurement centres by 30 to 50 days. In between, farmers sell their produce to traders at lower than minimum price,” says Yudhveer Singh, a farmers’ leader.


Gopal Naik, who teaches agro-economy at IIM Bangalore, feels that total collapse of agriculture extension centres could also be the reason behind the outstanding loans and poor conditions of farmers. “The agriculture extension centres have collapsed. At one time, they were helping and guiding farmers in a number of situations like making the best use of pesticide, fertiliser consumption and modern tech, and making them aware of MSP and the nearest procurement centres,” he says. “Now farmers depend on dealers and sellers of pesticide for all that, which results in losses and non-profitability,” he adds.

Skewed debt

Naik believes the loan-waiving culture of the government also fuels continuation of outstanding loans. “Government policies are uncertain and increase the tendency of not repaying loans. It can also be a reason of increasing outstanding loans.encourage non-repayment of loans. The big land holders have high outstanding loans because they can easily access credit from institutions. They can access loan for other activities like setting poultry and other farms and wait till the government waives their loans,” says Naik.

The data shows that about 60 per cent of the outstanding loans were taken from institutional sources which included government (2.1 per cent), cooperative societies (14.8 per cent) and banks (42.9 per cent). But while the big farmers can afford to take loans, the small farmers still have no access to them.

“Credit from institutional sources is still a dream for small and marginal farmers,” says Jasveer Singh, a Bengaluru-based senior researcher who works on agricultural labourers’ issues. Anshuman Das, an activist who works with small farmers in Jharkhand, thinks that while they do not get institutional loans, they help in maintaining food security of the country.

“The small farmers practise farming which is different from that of big land holders. They try to keep investment low and innovate. For this, they do not access institutions for loans but are still dependent on non-institutional money lenders,” says Das.

The increasing debt and its skewed nature are surely driving many farmers away from agriculture. Agricultural house-holds are moving away to livestock, other agricultural activities, non-agricultural enterprises and wage employment. Data shows that 37 per cent of agricultural households no longer have agriculture as their principal source of income.

The contribution of agriculture in India’s GDP is nearly 18 per cent and it provides employment to nearly 56 per cent of the total workforce of the country. Despite this, as the NSSO report shows, the sector is no longer the first preference of rural households in India. It is heading towards a huge debt crisis and will need serious policy intervention instead of an ad-hoc approach.

Small loans add up to lethal debts


DEBT AND DEATH: Family members with a photograph of Hari Prasad, who took his own life in August 2010 by consuming pesticide in their home in Kadiri in Anantapur district of Andhra Pradesh. He had run up debts with a microfinance company. In the photograph taken last week are Sunita, the widow, 22, along with her daughter Shwetha, 5.

APDEBT AND DEATH: Family members with a photograph of Hari Prasad, who took his own life in August 2010 by consuming pesticide in their home in Kadiri in Anantapur district of Andhra Pradesh. He had run up debts with a microfinance company. In the photograph taken last week are Sunita, the widow, 22, along with her daughter Shwetha, 5.

The microfinance industry pursued a path of rapid business growth in recent years; two investigations now link it to debtor suicides

First they were stripped of their utensils, furniture, mobile phones, television sets, ration cards and heirloom gold jewellery. Then, some of them drank pesticide. One woman threw herself into a pond. Another jumped into a well with her children.

Sometimes, the debt collectors watched nearby.

More than 200 poor, debt-ridden residents of Andhra Pradesh killed themselves in late 2010, according to media reports compiled by the State government. The State blamed microfinance companies which give small loans intended to lift up the very poor for fuelling a frenzy of over-indebtedness, and then pressuring borrowers so relentlessly that some took their own lives.

The companies, including market leader SKS Microfinance, denied it.


An independent investigation commissioned by the company, however, linked SKS employees to at least seven of the deaths. A second investigation commissioned by an industry umbrella group that probed the role of many microfinance companies, did not draw conclusions but pointed to SKS’ involvement in two more cases that ended in suicide. Neither study has been made public.

Both reports said SKS employees had verbally harassed over-indebted borrowers, forced them to pawn valuable items, incited other borrowers to humiliate them and orchestrated sit-ins outside their homes to publicly shame them. In some cases, SKS staff physically harassed defaulters, according to the report commissioned by the company. Only in death would the debts be forgiven.

The videos and reports tell stark stories:

One woman drank pesticide and died a day after an SKS loan agent told her to prostitute her daughters to pay off her debt. She had been given Rs. 1.5 lakh in loans but only made Rs. 600 a week.

Another SKS debt collector told a delinquent borrower to drown herself in a pond if she wanted her loan waived. The next day, she did. She left behind four children.

One agent blocked a woman from bringing her young son, weak with diarrhoea, to the hospital, demanding payment first. Other borrowers, who could not get any new loans until she paid, told her that if she wanted to die, they would bring her pesticide. An SKS staff member was there when she drank the poison. She survived.

An 18-year-old girl, pressured until she handed over Rs. 150 meant for a school examination fee, also drank pesticide. She left a suicide note: “Work hard and earn money. Do not take loans.”

In all these cases, the report commissioned by SKS concluded that the company’s staff members were directly or indirectly responsible.

Caught in the despair of poverty, tens of thousands of impoverished Indians kill themselves every year, often because of insurmountable debt. The supportive structure of the microfinance companies was supposed to change that.

But Davuluri Venkateswarlu, director of Glocal Research in Hyderabad, which conducted the industry-wide investigation, said in an interview that he told SKS executives there was “clear involvement of SKS personnel” in some suicides.

SKS continues to deny all responsibility for the deaths, and says it never commissioned an independent inquiry. SKS spokesman J.S. Sai, who flew to Mumbai from the company’s Hyderabad headquarters to discuss the AP’s findings, said the company stands by its September 2011 affidavit before the Supreme Court. In that affidavit, chief executive M.R. Rao says SKS “is neither the cause of nor responsible for any suicides in the State of Andhra Pradesh.”

The deaths came after a period of hyper-growth leading up to the company’s hugely successful August 2010 initial public offering.

Originally developed as a non-profit effort to lift society’s most downtrodden, microfinance has increasingly become a for-profit enterprise that serves investors as well as the poor. As India’s market leader, SKS has pioneered a business model that many others hoped to emulate.

But the story of what went wrong at SKS has led current and former employees and even some major shareholders to question that strategy, and raises fundamental questions for the multibillion-dollar global microfinance industry.

Meanwhile, whistleblowers at SKS say they have been targeted for retaliation and that the company has failed to correct structural flaws that contributed to the suicides.

“At the end of it,” said Alok Prasad, chief executive of the Microfinance Institutions Network, the industry group that commissioned the Glocal report, “you come down to a handful of cases where some things went wrong. Is that indicative of the model being bad or very rapid expansion leading to a loss of control?”

Beginnings in Bangladesh

Microfinance was born in desperation. Amid the 1970s famine in Bangladesh, Muhammad Yunus began giving small loans to poor women with his own money. Despite the predictions of bankers, the women paid him back.

The core idea of Professor Yunus’ Grameen Bank was the borrower group. Five women from a village determine how large a loan each member gets and act as guarantors. If even one member is delinquent, no new loans are issued. Group members apply pressure and support that has kept repayment rates near 100 per cent.

Professor Yunus’ innovation won him the Nobel Peace Prize in 2006.

In 1997, Professor Yunus’ acolyte, Vikram Akula, founded his own microcredit organisation, Swayam Krishi Sangham, which stands for “self-help society.” In 2005, SKS started operating as a for-profit company and Mr. Akula began chasing private investment to achieve the massive scale required to dent global poverty.

Public issue

In August 2010, SKS Microfinance, then India’s largest microlender, went public. Exuberant investors oversubscribed the Rs. 1,715- crore offering by nearly 14 times. The stock surged more than 10 per cent on its first day. In celebration, the company handed out 21,000 watches to employees.

Then media reports began to surface that over-indebted borrowers were killing themselves.

In October 2010, a mob of 150 people surrounded SKS’ Hyderabad headquarters, protesting the suicide of a borrower’s husband. They threatened to drag the corpse inside and demanded Rs. 9.8 lakh.

It was one of dozens of deaths the Government of Andhra Pradesh blamed on aggressive tactics by microfinance companies. The police jailed microfinance employees, including dozens from SKS. Among the charges was abetment to suicide, essentially driving people to kill themselves. Authorities investigated 76 cases in which employees from SKS and other microfinance companies were blamed for driving borrowers to take their own lives. The State passed a law designed to clamp down on abuses with new restrictions on loan disbursement and collection and onerous registration requirements on the companies. Microlending in India’s largest microcredit market was effectively shut down.

Charges denied

Microfinance officials fought the new law and denied the charges, accusing the State government of trying to gain traction with voters and punish companies for capturing valuable market share from state-run lending groups.

Established microlenders such as SKS said loan sharks operating under the guise of microfinance were behind the excesses. SKS and other companies asked a court to stop the arrest of their employees. The court issued a stay on new arrests. Today, no one is in jail.

In a November 2010 letter to the Union Finance Minister, Mr. Akula defended his company and included supportive articles from The Wall Street Journal and the Financial Times.

At the same time, the industry group Microfinance Institutions Network hired Glocal to investigate 44 deaths among debtors of microfinance companies, including SKS.

Mr. Venkateswarlu, the Glocal director, presented the findings to executives at three lenders. In January 2011, he delivered startling news to Mr. Akula and Mr. Rao — SKS employees had clear involvement in the suicide of four borrowers, meaning that their actions appeared strongly linked to the subsequent deaths, according to their investigation.

The AP obtained a four-page section of the Glocal report that deals with the SKS case studies. It related the financial history of borrowers, the loans obtained, the nature of pressure or harassment for repayment, and the microfinance company involved. Mr. Venkateswarlu verified that it was indeed the material he presented to Mr. Akula and Mr. Rao.

“They said they’d look into the issue and take some appropriate action,” Mr. Venkateswarlu said.

SKS sent internal audit teams to the field. Their reports exonerated the company.

Inquiry initiated

Unable to reconcile the two sets of findings, SKS hired Guardian’s Human & Civil Rights Forum and Third Eye, a private investigative agency, to do a more thorough, independent inquiry, according to Ramesh Vautrey, head of administration at SKS, who oversaw the investigation, and Rajender Khanna, the president of Guardian’s.

A January 17, 2011, letter from SKS, signed and stamped by Mr. Vautrey, asked Mr. Khanna to “carry out a fact-finding enquiry on the causes of suicide and complicity of our field staffs without any prejudice,” according to a copy of the letter obtained by AP. The AP was shown invoice numbers for SKS payments to Third Eye and e-mails indicating the findings were sent to top management.

P.H. Ravikumar, who became interim chairman of the SKS board last November, said neither management nor the board had authorised an independent inquiry into borrower-deaths.

“Our enquiries from 2009 to 2011 have revealed that neither SKS nor its employees have been the cause for any of the suicides in the state of Andhra Pradesh,” the company said in a statement. The company also said SKS employees have been acquitted in two borrower suicide cases in Andhra Pradesh and that only one criminal case remains outstanding.

Mr. Khanna sent teams to speak with families of the dead, village leaders, neighbours and loan agents, videotaping the interviews. Their report said SKS employees bore direct or indirect responsibility for at least seven suicides, including two that overlapped with the Glocal findings.

The interview videos were shown to the AP by Uma Maheshwari, who said she was present during one set of recordings and visited several of the families personally. She left SKS in July.

In one video, the daughter of borrower Dhake Lakshmi Rajyam cries, gasping as she talks to an investigator in Tadepalligudem, Andhra Pradesh.

Rajyam was unable to pay off Rs. 1.18 lakh owed to eight different companies. Employees of microfinance companies, including SKS, urged other borrowers to seize the family’s chairs, utensils and wardrobe and pawn them to make loan payments, her family told investigators. Unable to bear the insults and pressure of the crowd of borrowers who sat outside her home for hours to shame her, Rajyam drank pesticide on September 16, 2010, and died, the family says.

“We’ve lost my mother,” her daughter says. “Nobody will support us.”

The investigator’s conclusions lay the blame on SKS employees, saying they failed to comply with company policies “and even basic moral rights.”

Mr. Vautrey said he sent the case studies to three top managers, including Mr. Rao. E-mails obtained by AP indicate that summary reports were e-mailed to the managers.

Mr. Rao did not respond to multiple requests from AP seeking comment.

Mr. Vautrey went to Mr. Akula’s office one night and told him what they were doing was bad karma. “I don’t want to be part of a team abetting suicides,” Mr. Vautrey said in an interview. “It is systemic failure. We have no right to kill anybody for our own business. Let’s close down our business if we can’t do it right.”

Profound shift

A profound shift in values and incentives at SKS began in 2008.

In October, Boston-based Sandstone Capital, now SKS’ largest investor, made a major investment. It joined U.S. private equity firm Sequoia Capital, which funded Google and Apple and is SKS’ largest shareholder, on the board of directors.

Mr. Akula, who had been chief executive in the company’s early days, stepped down in December 2008 but stayed on as chairman. The company brought in new top executives from the worlds of finance and insurance.

SKS also began transferring more loans off its books, selling highly rated pools of loans to banks, which then assumed most of the associated risk of borrower default. That freed SKS to push out more and bigger loans.

In December 2009, SKS launched a massive sales drive. The “Incentives Galore” programme ran through February 2010, just one month before the company filed its IPO prospectus.

Agents won prizes worth up to 10 times their average monthly salary for signing huge numbers of new borrowers. Mr. Vautrey said he coordinated the shipment of 8,800 television sets, refrigerators, gold coins, mixers, washing machines and DVDs as rewards for more than 3,000 districts nationwide.

One loan officer signed up 273 groups in a month. Under training protocols, the ideal number of groups formed per month is 12, the maximum is 36, according to field agents and reports written by Mr. Akula.

“The focus is only on targets,” said Ramulu Sirgapur, who spent a decade at SKS before he left in December. “Even if we’ve given feedback, there might be recovery or repayment issues. That’s OK. Just concentrate on growth.”

The result: Management had a great set of numbers to show investors as it shopped the IPO. In a month, SKS could add 400,000 borrowers and 100 branches, and train more than 1,000 new loan officers. SKS had 6.8 million borrowers and had disbursed Rs. 15,680 crore in loans. India was pimpled with SKS branches, which bloomed in nearly 100,000 villages. SKS said it was the fastest growing microfinance company in the world.

What was overlooked

But basic principles of lending were overlooked, according to interviews with current and former employees, as well as correspondence and internal PowerPoint presentations by Mr. Akula.

Six current and former SKS staffers with experience in the field told the AP they no longer had time to check a borrower’s assets or follow up and make sure a loan was put to productive use. They said they were pressured to push more debt onto people than they could handle, and that the number of days devoted to borrower training was cut in half.

“You have a [borrower group], and a loan officer goes out and trains them, educates them, then they give the loan. That’s the SKS I’d seen in 1999. That was the whole model on which microfinance is supposed to work. In the quest for growth, a lot of these things got neglected,” said Ankur Sarin, director of the SKS trusts, which are the fourth largest shareholder in the company and tasked with looking out for borrower interests.

As the relationships between heavily indebted borrowers and loan agents broke down, it became harder to collect. Frustrated agents began working together and going door to door to collect, rather than taking payments only in public, a company rule that had been designed to limit coercion. They began using other borrowers to pressure defaulters into repaying.

“The growth was very rapid. That growth led to some suboptimal outcomes,” said Ashish Lakhanpal, managing director of Kismet Capital, one of SKS’ largest shareholders, who was on the SKS board until October 2010. “Were there lapses? Absolutely.”

While the board was concerned about fast credit growth, the company never believed it was harming borrowers, Mr. Lakhanpal said. “Mistakes were made, but I find it difficult to believe there was anything people did at a managerial level to encourage field officers to do that,” he said.

Plan that never made it

In the spring of 2011, Mr. Akula began circulating a plan to spend Rs. 49 crore to train financial counsellors, who would make sure clients were not getting into too much debt and used their loans productively, according to Mr. Sarin, Mr. Vautrey and others with firsthand knowledge of the proposal.

But the plan was never adopted. Publicly, Mr. Akula continued to deny that SKS bore any responsibility for suicides. “Whatever happened was due to external factors and was not reflective of any fundamental flaw in our model,” he toldBusiness Today.

Privately, Mr. Akula prepared a 55-page presentation for the board that detailed the seven suicides that SKS’ outside investigation had blamed on the company. The presentation showed how the pre-IPO push for growth led to a systemic breakdown, and again urged core reforms to restore training and lending discipline.

Board members received copies of Mr. Akula’s presentation at a July 26, 2011, meeting, said a former employee who helped prepare the material.

The minutes of the meeting, however, make no mention of the report.

“As per my notes, this was not part of the board proceedings,” company secretary Sudershan Pallap wrote in a September 26 e-mail to Mr. Akula, who had complained of the omission.

Mr. Ravikumar, who would become interim chairman when Mr. Akula resigned, said the board was never informed that SKS employees were implicated in any suicides, and denied Mr. Akula presented any such findings to the board. “There was no presentation from Vikram Akula at that board meeting. This will be reflected in the minutes, as signed by Vikram Akula,” he said.

Mr. Ravikumar said the board reviewed reports from the Microfinance Institutions Network, but none of them implicated SKS employees.


Mr. Akula continued to complain to the board that his presentation had been ignored. He summarised his concerns about the company’s direction in e-mails, obtained by the AP, to seven board members, including Sequoia’s Sumir Chadha, Sandstone’s Paresh Patel and three independent directors — Mr. Ravikumar, Harvard’s Tarun Khanna, and Pramod Bhasin, the former chief executive of Genpact.

Mr. Chadha, Mr. Patel and Mr. Khanna did not respond to multiple requests for comment.

Mr. Ravikumar declined to comment on what he said was personal correspondence.

Mr. Bhasin said reports claiming SKS bore responsibility for borrower suicides were “unsubstantiated.” “Any issues raised to the Board at various times were fully investigated by external parties and found to be unsubstantiated or without evidence or actions were taken on them where appropriate,” he wrote in an e-mail.

Rancour within the company was intensifying. Board members felt Mr. Akula was suffering from a bad case of “founder’s syndrome,” that he could not stand to share power at a company that had become too big for him to run.

Finally, on November 23, 2011, Mr. Akula resigned.

Mr. Vautrey said he was targeted, and SKS began termination proceedings against him on February 6.

Three members of his staff have been fired and have filed wrongful termination complaints.

On February 6, SKS also sold Rs. 243 crore in securitised loans. The stock price surged 10 per cent. Top executives have been on the road, hoping to raise Rs. 500 crore from international investors.

Mr. Sai, the company spokesman, said SKS has hired an ombudsman, is spending Rs. 14.7 crore to improve its customer grievance programme and has revamped training to ensure that employees comply with current regulations and do not lend to over-indebted borrowers. He said the company would like to reorganise incentives to maintain rapid growth while ensuring loan quality. Those changes have yet to be implemented, he said. — AP

They live on borrowed time

KALPETTA: Amidst the arecanut and coconut garden sprawling over 1.37 acres of land in Thrikkeppatta lies the house of farmer P S Varghese who had committed suicide.

 At first sight one would wonder why a man who owned this much land and a beautifully-built house would end his life for having a financial debt of just over

Rs 3 lakh; perhaps, an amount of debt every Kerala family might have. An inquiry into this question would expose the other aspect of farmer suicides in Wayanad: the psychological, social and cultural factors and efforts to sustain the changing lifestyle.

The house of Varghese had roofing with asbestos sheets but he had managed to make it appear like a terrace building from a distance, even from the courtyard. “Be it in farming or in other matters, he had maintained certain standards. He had always talked about giving quality education to children and conducting their marriages properly. Perhaps, all these concerns coupled with consecutive loss in farming might have… Anyway, we could have avoided that even by selling a portion of our property,’’ said Jessy, Varghese’s wife, who has been working as a medical representative for the last 11 years and has three daughters – Renju, Sinju and Basily.

The story of deceased farmer C P Sasidharan in Mothakkara is somewhat different as he had never told anybody about his borrowings from private sources, not even to his wife Yasoda.

‘’He did not like being enquired about those things. When someone comes,

he used to talk to them outside the house. We came to know about such debts amounting to Rs 3 lakh from the suicide note only,’’ said Yasoda.

Sasidharan had been an active CPM worker and had a cordial relationship with the locals. “A week before his death, Sasidharan mobilised a sum of Rs 5000 to help one Vellan of the tribal hamlet who was admitted to hospital. Such a man could not keep that enthusiasm about his own life,’’ said Sasi, the brother-in-law of Sasidharan.

Clinically, these suicides are related to adjustment disorders with emotional disturbances. These are egoistic suicides due to mental stress, family problems and alcoholism besides agrarian crisis, says psychiatrist and former director of Institute of Mental and Neuro Sciences (IMHANS), Kozhikode, Dr Suresh Kumar, who has done extensive research in suicide in Wayanad. Dr Suresh adds, “Majority of farmers is under stress as they could not cope with the changed lifestyle. During the 1970s and 80s, they earned well and had a good living. Now, due to repeated crop failure, they fail to maintain their lifestyle and in turn resort to pseudo finance planning like using bank loans and money borrowed for high interest to sustain high quality lifestyle instead of investing in agriculture. The ego gets shattered when there is financial crisis. They cannot accept even a slight insult to ego. They suffer a mental breakdown and commit suicides.’’

According to relatives, two among the three deceased farmers had been victims of alcoholism as well. ‘’Often, these are not well-thought attempts but impulsive. The thinking will be tubular and the majority will consume alcohol during the time, which gives a pseudo energy to remove all inhibitions leading to suicide,’’ he said.

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