Banks may write off Rs 7200 crore debt to microfinance institutions

http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/banks-may-write-off-rs-7200-crore-debt-to-microfinance-institutions/articleshow/21872024.cms

MUMBAI: Banks that restructured Rs 7,200 crore of debt to microfinance institutions are staring at a possible write off as several of these institutions are finding it difficult to recover loans in Andhra Pradesh.

Lenders had bailed out microfinance institutions (MFIs) such as Spandana Sphoorty Financial, Asmitha Microfin, Share Microfin, Trident Microfin, Future Financial Services and Basix in 2011 after the Andhra Pradesh government passed a law to regulate MFIs.

“MFIs have not been able to recover any loan. The restructuring has failed. They have not been able to recover any money from Andhra Pradesh,” said a senior banker close to the development.

MFIs had sought the Reserve Bank of India’s nod for a second round of restructuring, but the regulator rejected the request. “If banks were to restructure loans of troubled microfinance institutions for the second time, they will not get any benefit in terms of provisioning,” RBI Deputy Governor Anand Sinha had said at a recent banking conference. “We do not stop second restructuring. But what we say is that asset classification benefit will not be available to banks. The RBI does not stand in the way of second time debt restructuring.”

RBI prescribes that if a borrower, who is already into corporate debt restructuring, has to avail of loan recast again, then its banks will have to provide 15% of the recast loan amount as provision. This has increased the trouble for banks and MFIs.

Banks may write off Rs 7200 crore debt to microfinance institutions

“Banks are staring at a possible write off unless the state government changes its stance and conveys the message that it is the duty of every borrower to repay debt. There are about 92 lakh defaulters in Andhra Pradesh, which has affected their credit history,” said Vijay Mahajan, founder and chairman of Basix, a livelihood financial services group.

“The average ticket size of the loan is around Rs 7,000. We had also offered to waive off the interest charged on loan after October 2010. This would mean an interest loss of three years. Borrowers would have to repay only the principle. It is for the government to decide,” he said.

Mahajan said the legislation passed by Andhra Pradesh has several provisions that make it difficult for MFIs to recover their dues.

“It requires MFIs to take government permission for every fresh loan granted. This is cumbersome. We are also not permitted to visit the borrower’s house or work place for collection of loan. We have to meet the borrower at a public place or panchayat office,” Mahajan said, adding that there have been no recoveries in the past two years.

Andhra Pradesh-based MFIs have been facing repayment pressures after the state government in October 2010 passed the Microfinance Act to check alleged coercive recovery practices of these institutions. The Act, apart from other provisions, also mandates MFIs to collect loan payments on a monthly basis as against the earlier practice of weekly collections, which has further hit their collections.

The real cost of credit constraints: Evidence from micro-finance

In December 2010, the Indian state of Andhra Pradesh passed a law that severely restricted the operations of micro-finance institutions and brought the micro-finance industry to an abrupt halt. We measure the impact of micro-credit withdrawal in this unique natural experiment and find that average household expenditure dropped by 19 percent relative to a control group after the ban. The largest decrease was observed in expenditure on food. There is some evidence of higher volatility in consumption after the ban. All households were affected and not just the borrower households, which may suggest general equilibrium effects.

http://www.igidr.ac.in/pdf/publication/WP-2013-013.pdf

 

Small loans add up to lethal debts

ERIKA KINETZ

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.

Investigations

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.

Complaints

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

Micro finance giant SKS Under Spotlight in Suicides: Wall street Journal

http://online.wsj.com/article/SB10001424052970203918304577242602296683134.html
Associated Press

MUMBAI, India — First they were stripped of their utensils,
furniture, mobile phones, televisions, ration cards and heirloom gold
jewelry. Then, some of them drank pesticide. One woman threw herself
in 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
government of the south Indian state. The state blamed microfinance
companies–which give small loans intended to lift up the very
poor–for fueling a frenzy of overindebtedness and then pressuring
borrowers so relentlessly that some took their own lives.

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

However, internal documents obtained by The Associated Press, as well
as interviews with more than a dozen current and former employees,
independent researchers and videotaped testimony from the families of
the dead, show top SKS officials had information implicating company
employees in some of the suicides.

An independent investigation commissioned by the company 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, the 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 150,000 rupees
($3,000) in loans but only made 600 rupees ($12) 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
diarrhea, 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 150 rupees
($3)–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 was either 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 industrywide 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 findings, said the company stands by its September 2011
affidavit before India’s 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 hypergrowth leading up to the
company’s hugely successful August 2010 initial public offering.

Originally developed as a nonprofit 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 that 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?”

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 Mr. 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 percent.

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

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

In August 2010, SKS Microfinance–then India’s largest
microlender–went public. Exuberant investors oversubscribed the $350
million offering nearly 14 times. The stock surged more than 10
percent its first day. The company handed out 21,000 watches to
employees in celebration.

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

In October 2010, a mob of 150 people surrounded SKS’s Hyderabad
headquarters, protesting the suicide of a borrower’s husband. They
threatened to drag the corpse inside and demanded $20,000.

It was one of dozens of deaths the government of Andhra Pradesh blamed
on aggressive tactics by microfinance companies. Police jailed
microfinance employees, including dozens from SKS. Among the charges
was abetment to suicide, essentially driving people to kill
themselves, a crime under Indian law. 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.

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 India’s 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.

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 suicides 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. Venkateswarlu
verified that it was the material he presented to Mr. Akula and Mr.
Rao.

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

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

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 Jan. 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 emails 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 authorized 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, neighbors 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.

Ms. Rajyam was unable to pay off $2,400 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, Ms. Rajyam drank pesticide on
Sept. 16, 2010, and died, the family

says.

“We have 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. Emails obtained by AP indicate that summary reports
were emailed 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.”

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” program 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 televisions, 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,” Ramulu Sirgapur, who spent a decade
at SKS before he left in December, told AP. “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 $3.2 billion 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.

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 that 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
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’s 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.

In spring 2011, Mr. Akula began circulating a plan to spend $10
million to train financial counselors who would make sure clients
weren’t getting into too much debt and used their loans productively,
according to Mr. Sarin, Mr. Vautrey and others with firsthand
knowledge of the proposal.

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 told India’s
Business 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 Akula’s presentation at a July 26,
2011, meeting, said a former employee who helped prepare the material
and spoke anonymously for fear of retribution.

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 Sept. 26 email to Mr.
Akula, who had complained of the omission.

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.

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 summarized his concerns about the company’s direction
in emails, obtained by the AP, to seven board members, including
Sequoia’s Sumir Chadha, Sandstone’s Paresh Patel and three independent
directors: 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.

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 email.

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

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

Mr. Vautrey said he was targeted, and SKS began termination
proceedings against him on Feb. 6. Three members of his staff have
been fired and have filed wrongful termination complaints with the
state.

On Feb. 6, SKS also sold 2.43 billion rupees ($49 million) in
securitized loans. The stock price surged 10 percent. Top executives
have been on the road, hoping to raise 5 billion rupees ($100 million)
from international investors.

Mr. Sai, the company spokesman, said SKS has hired an ombudsman, is
spending $3 million to improve its customer grievance program 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 reorganize incentives to maintain rapid growth
while ensuring loan quality. Those changes have yet to be implemented,
he said.

Microfinance institutions push tribals into debt trap

Ravi Reddy

HYDERABAD: A number of Micro Finance Institutions (MFIs) have penetrated into the Scheduled Areas of the State by exploiting the innocence of the tribals and luring them into taking loans at hefty interest rates.

Throwing all rules and regulations to winds, these institutions are having a free run in the tribal areas and targeting illiterate women. In violation of the AP Scheduled Area Money Lenders Regulation 1960, the MFIs are carrying out their business and pushing tribals into debt trap.

According to the Regulation, no person or institution can carry on business of money lending in Scheduled Area unless they obtain a licence. That money-lending was assuming alarming proportions in several tribal areas of the State was evident when the then Khammam Collector V. Usharani wrote a letter to the government in February 2010 explaining the murky financial transactions of these MFIs.

In her five-page letter, (a copy of which is available with The Hindu), she named Share Microfin Limited, Swayam Krushi Sangham (SKS), Spandana and Undamma Bottu Pedatha as carrying out money lending business. She mentioned that these MFIs had obtained certificate of registration from the Reserve Bank of India to carry on the business of microcredit advances, lending money for agriculture, industries and market linkage developments.

They were working in Scheduled Areas by lending money and completely defeating the concept of Indira Kranthi Patham (IKP). “Their method of extending loans to the groups with small interests looks apparently simple, but is accumulating to compound interest as the term of repayment is weekly basis and coercive methods applied to recovery on the tribals amounted to harassment,” the Collector said.

“The innocent tribal families are taken easily in to the lap of these agencies and ultimately become bankrupt unable to repay the loans. Due to the coercive recovery methods, certain borrowers have committed suicide,” she noted. She said a huge amount of bank loans are pending forcing the bankers to refuse loans to the IKP groups.

In her report, Ms. Usha Rani observed that these MFIs were registered as Public Limited Company. They came very much under the purview of the definition of AP Scheduled Area Money Lenders Regulation 1960 but were carrying on money lending in scheduled areas. She pointed out that loans were given to tribals in the scheduled areas against security of movable and immovable property where the Land Transfer Regulation 1959 is in force. She accused the MFIs of working against the Agency laws.

Report sought

When contacted, B. Rajasekhar, Chief Executive Officer, Society for Elimination of Rural Poverty (SERP) said it was a fact that a number of agency mandals in Khammam were affected by the activities of the MFIs. He said a detailed report was being sought from the districts for necessary action.

Over 90 farmers committed suicide in Adilabad district: NGO

D.V.L Padma Priya
Failure of kharif crop and mounting debts stated to be reasons

 The interest rate on private loans ranges between 24 and 36 per cent
The district witnessed 15 deaths in 3 days during November

HYDERABAD: Sixty-nine farmers from Adilabad district committed suicide during the kharif season that lasted from August to November 2009 and the number grew to 93 by December 15, if reports from the non-governmental organisations and farmers’ associations in Andhra Pradesh are any indication. Failure of kharif crop and mounting debts are stated to be the reasons for the spate of suicides across the district.
A recent committee constituted by Deccan Development Society, Centre for Sustainable Agriculture (CSA), PEACE, AP Rythu Sangam and other organisations recently came up with a study report that revealed the staggering number of farmer suicides.
The committee visited around eight families in various mandals, informed G.V. Ramanjaneyulu, Director of the Centre for Sustainable Agriculture.
“In the first week of November alone, over 16 suicides were reported in vernacular newspapers and that’s when we put together this committee. The committee with the help of local media and farmers estimated that over 69 suicides had taken place during the kharif season,” he said. Confirming the report by the committee, S. Malla Reddy, vice-president, A.P. Rythu Sangham, says over 93 suicide deaths were recorded by the Sangham by December 15, 2009.
Majority of the farmers who took the extreme step had taken large amounts of private loans and micro-finance operators at high interest rate in order to cultivate cotton, revealed the report.
G. Bhojanna of Lokeshwara village in Lokeshwaram mandal of the district is one such farmer of five-acres who ended his life last November due to mounting debts incurred on his failed cotton crop.
His accrued loans of two years amounted to Rs.3.5 lakh, and every month, he had to suffer the ignominy of the moneylenders’ visits to his home, his son G. Gangaprasad, an 18-year-old college student who now spends more time as a daily-wage worker said.
Bhojanna’s widow Indramma is helping run the house now with her meagre income as a beedi worker.
Burden
The interest rate on private loans ranges between 24 and 36 per cent, informed Rajasekhara Reddy, one of the committee members.
“The microfinance companies would collect the interest amount every month. For a farmer this is a burden as farming doesn’t guarantee regular income,” he explains.
“We had brought this to the notice of the district Collector too and submitted a memorandum. However, the Collector had approved ex-gratia for only 18 deaths he considered genuine. After we submitted our list, ex-gratia was cleared for 50 farmer families,” S. Malla Reddy, vice president, Andhra Pradesh Rythu Sangham.
BT cotton hybrids
The report further states that though on an average 1.65 lakh hectares of land is under cotton cultivation in the district, this had increased by 20 per cent in 2009. Thus a total of 1.90 lakh hectares of land was reported to be under cotton cultivation, with almost 80 per cent of it under BT cotton hybrids, it says. The drought forced the farmers to re-seed thrice for gap filling and with each bag of cotton seed costing around Rs.750, this meant an increase in cost of cultivation, explains Mr. Rajsekhara Reddy. “The minimum cost of cultivation per acre is around Rs.12,000 so a farmer would require a harvest of six quintals per acre merely to break-even,” he points out.
MSP
Despite the minimum support price for cotton in kharif 2009 standing at Rs. 3,000, the low yield – almost half of the previous year – pushed farmers deeper into debts, the report points out.
Kodanda Reddy, member, Andhra Pradesh Kisan Cell, said the district had witnessed 15 deaths in three days in November and this too was brought to the notice of Collector.
“I visited the families personally to ascertain the facts. Majority of the farmers didn’t receive crop insurance amount and there was little intervention to stop the private lenders,” he says adding the loans were also given in kind in the form of seeds and fertilizers.