The Journey of Indian Micro-Finance : Book Review by Milford Bateman

By Milford Bateman

The recent events in the microfinance sector in the Indian state of Andhra Pradesh have shocked not just the global microfinance industry, but probably all individuals and institutions possessed of a genuine concern for poverty reduction and sustainable development. At such an important juncture, and especially in the wake of some crude PR attempts from within the microfinance industry to locate the blame anywhere but with the microfinance industry itself, there is a pressing need for honest, evidence-based and objective analysis to carefully expose just what went so seriously wrong and why. Thankfully, just such an analysis now exists. It comes in the form of the excellent new book by Ramesh S. Arunachalam, ‘The Journey of Indian Micro-finance: Lessons for the Future’.

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Be prepared, however: the book is a mass of fascinating detail, important statistics, telling anecdotes, personal reflections, and annexed material. It is also highly critical of the key individuals and microfinance institutions (MFIs) involved in the current debacle. But all who work in, offer their support to, or independently research the role and impact of the microfinance model in poverty reduction – and certainly not just inIndia – urgently need to get hold of this book. There is probably no better way to fully understand why and how the commercialised microfinance model – just like its Wall Street ‘big brother’ sub-prime mortgage market model in 2008 – ended up largely undermining and destroying the economic and social fabric of the very poorest communities in Andhra Pradesh that it was ostensibly designed to assist.

As I said, the book is a treasure trove of forensic detail and damning evidence. Arunachalam shows how the MFIs that emerged to work mainly in Andhra Pradesh (not one ofIndia’s poorest states by a long shot) were able to obtain public and international donor support. He then goes on to show how very few controls were placed on the operations of these new MFIs, and how so many individuals who should have known better believed in the initial flood of PR and hype pushing the message that microfinance and the big MFIs were ‘here to help the poor’. He carefully documents how the ‘Krishnacrisis’ that broke out in 2006 is the direct precursor to the much larger microfinance crisis that broke out in 2010. Importantly, Arunachalam also highlights the vast bonuses paid out to loan officers able to bring in new clients, as well as the significant financial rewards the senior managers felt they needed and deserved as they went about ‘resolving India’s poverty’. Arunachalam is also one of the first to point out the importance of the many independent agents contracted to the main MFIs, individuals who for a commission work across the community to round up new clients as well as encourage existing clients into ‘topping-up’ their existing microloans. Sadly, hardly anyone involved in this flurry of activity had poverty reduction in mind.

Although India’s commercial banks and equity funds are also taken to task by Arunachalam for underpinning so much of the unsustainable growth that took place, seeking large profits in providing funds to MFIs for on-lending, he boils down his argument and identifies the main guilty parties as the ‘top five’ MFIs and their senior managers. This conclusion will be very discomforting to very many supporters of India’s microfinance ‘pioneers’, including many based abroad, who were all led to believe that these individuals were selfless fighters against poverty. Not so, according to Arunachalam. For example, in the aftermath of the ‘Krishna crisis’ the top five MFIs were brought to account for ‘pushing’ so much largely unnecessary credit on to the rural poor, and all five MFIs promised to make many changes, including reducing their interest rates and moderating their unsustainable growth strategies. Arunachalam goes on to show that they kept not one of these important promises. Interest rates were not reduced and, perhaps most disastrous of all, the top five MFIs soon began to massively accelerate their efforts to flood Andhra Pradesh with more microcredit (though now the urban areas were targeted). Arunachalam’s narrative is thus not one that shows much sympathy for the main individuals that, he believes, destroyed the microfinance model from within.

Some of the most enlightening chapters in the book are those that carefully detail the amazingly unethical shenanigans of Dr Vikram Akula, perhaps the most high-profile individual associated withIndia’s microfinance revolution. A former management consultant, academic researcher and author, in the late 1990s Akula supposedly embarked on a personal ‘quest to end poverty’ in his nativeIndia. However, Arunachalam shows that this claim was largely a bluff. In fact, by eventually looting ‘from the inside’ the MFI he set up to ostensibly helpIndia’s poor – SKS – the reader cannot but conclude that Akula was mainly on a quest to turn himself into a multi-millionaire. The details are quite shocking and deserve very careful reading, not least because Akula is still revered in many parts of the global microfinance industry (though not inIndiait seems). Importantly, the extent of client manipulation in SKS first raised by the excellent M. S. Sriram in 2010 is not just confirmed here, but expanded upon by Aranachalam.

For example, Arunachalam comprehensively documents the extent to which loans from SKS were self-awarded to Akula to allow him buy into personal ownership of SKS. Arunachalam also excellently covers the issue of Akula’s manipulation of his poor client through the so-called Mutual Benefit Trusts, and the donations Akula used to activate them, and then how the main benefits eventually ended up – as presumably intended – with Akula himself. Indeed, Arunachalam’s documenting of the manipulations and scams in SKS is so extensive and so relentless that the reader can only wonder why it is that Akula retains his position at SKS and has not so far been charged with any civil transgression, if not worse. Perhaps this is to come, though Arunachalam makes no comment on this issue.

In spite of its inside knowledge, range and attention to detail, however, at the end of the day I did feel that perhaps Arunachalam dropped the ball in a couple of important respects. He openly claims at the start of the book that he wanted to ‘restore micro-finance back to the high pedestal that it once occupied’. I found this starting position puzzling. Surely, this is pre-judging the end point of the enquiry in such a way as to almost negate its important conclusions? After all, if it turns out that a policy intervention did not work, and actually brings forth great damage to the poor, as I believe Arunachalam has shown in quite excruciating detail is clearly the case in Andhra Pradesh, then why on earth would you want to restore it to its supposed ‘former glory’? Wouldn’t you be better off phasing out such a disastrous policy right away and turning to something that might be more effective?

In the same vein, it was disappointing not to find any reference in the book to the sheer paucity of genuine unbiased studies and surveys able to offer some – any – real proof that the massive microfinance industry created in Andhra Pradesh, albeit appallingly managed and abused as he shows, has actually benefitted the poor overall. This outcome issue needed a lot more analysis, to my mind, and perhaps it would have been better to have a little less detail focusing on the (mere) execution of the microfinance model. After all, if the microfinance concept itself is flawed, it matters little to the poor if the execution was perfect.

Putting these not unimportant caveats aside, however, the story Arunachalam recounts is a globally important one, and it is a story that is told very well indeed. By exposing the market-driven fallacies, the tall PR tales, the egregious manipulation, and the naked self-dealing and ethical transgressions of so many reputable figures and institutions that comprise the microfinance sector in Andhra Pradesh, Arunachalam has driven a tank through the transparently false upbeat narrative that India’s microfinance sector has built up to protect itself. One result may be thatIndia’s poor can now look forward to benefitting from more effective local financial models and systems, those that have been forced off the agenda in recent years thanks to the quite unjustified popularity and ubiquity of microfinance. Arunachalam has therefore made a genuine, as opposed to self-proclaimed, contribution in the quest for poverty reduction inIndia. For this, as well as for the enormous effort and personal bravery clearly involved in writing this book, he should be congratulated.

Dr Milford Bateman is a freelance consultant on local economic development and a Visiting Professor of Economics at Juraj Dobrila Pula University in Croatia. He is the author of ‘Why Doesn’t Microfinance Work ?‘ –The Destructive Rise of Local Neoliberalism’ published by Books for Change in 2010.

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