The Wall Street Journal published an article “
A Global Surge in Tiny Loans Spurs Credit Bubble in a Slum”, which speaks about Microfinance in Ramanagaram, Karnataka, India. The article contains references to an Ujjivan customer and comments by Ujjivan CEO, Samit Ghosh.
It is disappointing that the article on microfinance at Ramnagara did not present a balanced view:
The microfinance institutions (MFIs) provide finance to the poor without any bias regarding religion, caste or creed. They are the only ones providing finance to poor women in Ramnagara.
The problems were engineered by moneylenders and businessmen who virtually employed the poor women as bonded labor. Over the last three years the women, by obtaining finance from the MFIs, were able to free themselves from moneylenders and undertake enterprises of their own.
MFIs borrow money from major banks & financial institutions at commercial rates ranging currently between 12.0% to 14.0 % per annum. They extend small loans at the customers’ doorsteps. The interest rates charged are one fifth to one tenth of those charged by moneylenders to these poor women. The breakdown of interest rates charged is as follows:
• The operating costs of MFIs, in India & internationally, for these small loans & to provide doorstep services range between 10 to 12% p.a.
• The cost credit provisioning or write-off is another 1% p.a.
• Profit margin for MFIs is 1% p.a.
• Based on the above, MFIs interest charges range from 24 to 28% p.a.
Multiple Borrowing: In the absence of a credit bureau it is difficult to asses the extent to which a customer may have borrowed from other MFIs. Ujjivan undertakes financial literacy education before a customer is inducted and specifically focuses on the perils of multiple borrowing and over extension of credit. The customer brochure on the financial literacy training was provided to the journalist. Our belief is that a large majority of customers understand their debt service capacity and limit their borrowings accordingly. However, there are a small number of customers like the few highlighted in the article who are intentional defaulters. The customer Lalitha has been an Ujjivan customer from 2007 and has taken a number of loans during this period and repaid them. Contrary to the article she has only one loan from Ujjivan of $185 outstanding, which she stopped servicing from June of this year taking advantage of the situation. The MFIs are now sharing information among themselves and also accelerating the process of sharing customer data through credit bureaus.
Assistance to customers who have over extended themselves: At Ramnagara, the Association of Microfinance Institutions of Karnataka has set up a customer service coordinator in Ujjivan’s office for customers to reschedule loans which have been borrowed from multiple MFIs.
MFIs are also re-assessing branching policies to avoid concentration & extension of credit in view of poor customer information to avoid multiple loans.
The problem is restricted to two districts in Karnataka. In most of the other districts the minority community customers continue to access microfinance and have disassociated themselves from those in these areas.
We are quite aware that prolonging this situation will bring undue hardship to our customers and especially those from the minority community. We are in discussion with the local community leaders, government administrators and our regulators to resolve the situation at the earliest.
Finally, I would like to conclude that the problem has nothing to do with private equity investors or the profit motive of MFIs. Without access to capital or the ability to deliver financial services viably, the financial inclusion of the 600 million un-served poor in rural & urban India will be impossible.
Samit Ghosh
Chief Executive Officer,
Ujjivan Financial Services.
August 14, 2009.
