Microfinance, the practice of giving small loans to networks of poor women that was pioneered by Mohammed Yunus, has been lauded by foundations and many liberals as a great example of “social entrepreneurship” – using markets to do good by attending to a triple bottom line. The idea has had a lot of success. But as an AP investigation has documented, it has alsolead to terrible tragedy – crushing debt burdens that, in a cruel distortion of the original idea, have led to the suicide of over 200 people.
In 1997, [Mohammed 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.
But in 2008, under the influence of a private equity firm, it started moving in a very different direction.
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. 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. 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 Akula.
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 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.
And once that part of the Microfinance model was shredded, the rest of it fell apart, turning into a vicious circle.
As the relationships between heavily indebted borrowers and loan agents broke down, it became harder to collect.
And so long agents started acting like loan sharks.
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.
The moral of the story: the market isn’t a Disney fairytale. Companies that get subjected to the full brutal pressure of market forces can easily turn into a horrible perversion of the original social aims. Some lefties might argue that this is the inevitable fate of any attempt to create more humane finance so long as we are living in a capitalist system. I take this as one more example that We Are Not As Smart As We Think We Are and that no matter what kind of economic system we have, our best ideals can be turned into nightmares if we aren’t vigilant – and if we don’t have movements with the power to stomp the crap out of the sociopaths who try to drive us there.