Where Angels Prey

by Ramesh S Arunachalam

  A round of polite applause alerts Bob to the arrival of the guests of honour. Kamineni is flanked by the director of CIRIG and other senior officials. A CIRIG official called Che makes introductory remarks on the stated mission of the institution: CIRIG partners with multi-lateral and bi-lateral agencies, private foundations, and national governments that share a common vision of improving the lives of poor people with better access to finance and related services.

  Bob alternates between doodling idly and making quick notes on important observations. He hopes to corral Kamineni for a one-on-one later.

  Some of the statistics that Che’s presentation throws up underline the appalling state of affairs where an estimated 3.1 billion working-age adults—more than half of the world’s total adult population—have no access to any kind of formal financial services that the privileged consider a basic necessity. No banks with which to deposit savings or access loans, no credit cards to swipe without a second thought, for necessary purchases or an impulse buy. Their livestock and pieces of jewellery are their means to save and pawn brokers their only source of credit, no matter how high the risk or how low the returns. Welfare measures and philanthropic initiatives have thus formed the mainstay of efforts to service the financial needs of the poor to a degree.

  Che touts the emergence of microfinance as that miracle solution that has successfully dispelled the notion that the poor are a risky investment, by ensuring their access to financial services and more importantly, attracting commercial capital as investment into the sector.

  There is polite applause all around as Che goes on to cite the stupendous success of the SAMMAAN IPO. A beaming Kamineni is thereafter invited to offer his insights on the evolution of the Indian microfinance sector from a subsidy dependent, pro-poor initiative to a commercially viable enterprise that is still sensitive to the needs of its target clientele.

  Kamineni turns out to be a witty speaker and quite adept at keeping an audience engaged. Bob cannot help but be impressed by the combination of sincerity and confidence in his demeanour.

  “The degree of financial exclusion faced by the poor in India, where almost 80 percent of its 1.2 billion population live on less than US$2 per day, is simply phenomenal. This scenario makes it, by many estimates, the largest potential microfinance market in the world.

  While in all fairness, right from the nineteenth century onwards, India has initiated several progressive financial inclusion efforts ranging from the postal savings banks to cooperative financial institutions, regional rural banks etc., none of these have been successful.”

  He pauses and looks enquiringly at his audience.

  “Anyone know why?”

  There is silence in the room.

  “These initiatives were regularly written off as bad debts. I am sure all of you recall the Rs 95,000-crore loan waiver for farmers before the general elections of 2009. Loans have essentially been doled out through melas2 and are typically based on contacts, influence and bribery. As a result, more often than not, the recovery rate is extremely low.”

  As Kamineni pauses to take a sip of water, Bob marvels at his well-timed and strategic pause. The silence will serve to underline the next point he intends to make. Kamineni’s words confirm this.

  “The success achieved by microfinance institutions like SAMMAAN becomes even more phenomenal in the light of all this. This shift from being a charitable trust to a non-banking finance company has enabled SAMMAN to raise more capital and grow much faster. Today, NBFC microfinance institutions account for more than four-fifths of all MFI loans, dominated by the five largest MFIs, including SAMMAAN. That international investment firms and financial institutions are eager to partner with us is proof of the degree of success the sector has achieved in terms of sheer numbers, be it outreach or profits.”

  He pauses yet again before reeling off names of some of the key investors in the Indian microfinance sector. Bob is amazed to hear mention of “Greek billionaire Alexander Zaimis and the Indian IT moghul, Raghava Shetty”.

  “We had a phenomenally successful IPO where $680 million was raised as fresh capital. In fact, post the IPO, SAMMAN’s valuation stood at $4.8 billion with an almost 84% rise in the share price after nearly four weeks of trading. SAMMAAN has been among the fastest growing microfinance institutions globally, with a compound annual growth rate of 262% since 2004. More importantly, the SAMMAAN IPO has demonstrated that microfinance institutions can successfully harness the vast resources of capital markets. And that’s a potentially game-changing development. Thank you ladies and gentlemen.”

  During the resounding applause that follows, Bob cannot help but wonder at the almost fairy tale-like quality of the SAMMAAN success story. The figures that Kamineni has bandied about are all fine and dandy, but the ultimate proof lies in the degree of success achieved with regard to the larger goal of inclusion and the difference it has made to the lives of the clientele. Something that Bob plans to verify once he gets to the field.

  Bob’s scepticism seems to find resonance in the observations made by a few other panelists. David Harding, a fellow at the Institute of Afro-Asian Development Studies at Reading, UK, and Prof Raman, a senior Indian academician engaged in development research, both express huge reservations about the actual benefits for the poor as well as the not-so-ethical tactics adopted by the institutions in the process of their evolution to for-profit forms.

  “There have been challenges, owing to legal restrictions, in the transference of funds from a non-profit NGO to a private limited company. Spurred on by the need for growth, most MFIs have resorted to the creation of illegal mutual benefit trusts through which to channelize resources including external capital. Since incorporation as an NBFC requires a minimum capital requirement of Rs 2 crore, some of the MFIs have even stooped as low as to transfer the compulsory savings of their NGO clients to the MBTs and thereafter the NBFC. They’ve been further assisted by transformation loans offered by state-owned development banks to NGOs at phenomenally low rates of interest. There have also been instances of other institutions raising the conversion capital required through donor grants to the NGO, which have been subsequently routed to the MFIs. In all of these cases, the clients have been issued shares in the MBT, which in turn invested in the MFI’s shares.”

  Prof Raman speaks in a measured tone as he meticulously exposes strategies used by MFIs that are both legally and ethically unsound. Despite his dispassionate tone, his disillusionment and anger come through clearly in his words.

  “It was in the years following 2006 that foreign funds started flowing heavily into the MFIs, allowing further expansion of operations and the size of client portfolios. Consequent to the profit margins achieved by the MFIs, the value of their scrips skyrocketed in the market. However, the poor women clients, who had borne the risk of the business originally by way of investing their savings in the NGO, did not benefit in the least from this success story.

  The shares owned by the women had been transferred back to the original promoters or employees of the MFI within a few years of their issuance at a far lower price. Compare that to the killing that the promoters and MFI employees subsequently made by selling the shares to the venture capitalists, investment firms, etc. These are some of the negative aspects of commercialization, and I rest my case.”

  Bob is so busy making frantic notes that he doesn’t observe Kamineni’s reaction to Prof Raman’s observations. However, as the latter walks past Prasad Kamineni to resume his seat after the presentation, Bob notices Kamineni’s body language stiffen, even as he courteously nods at the professor.

  “At the risk of sounding a bit crass, Wall Street’s interest in the microfinance sector seems to me a bit like a butcher investing in animal shelters.”

  Wall Street observer Tom Moody has the audience tittering with his opening remark. Kamineni and other CIRIG officials are not amused.

  In an attempt at striking a conciliatory note, Moody clarifies that, given the huge numbers of poor
people in India, the sector offers a hugely viable and secure investment opportunity to the capital markets, particularly in the face of the global economic crisis.

  “The microfinance sector, particularly in India, can even be called the sunrise industry. The global economic crisis had investors scrambling to uncover new, emerging opportunities that offered high returns on investment, besides. Given its spectacular showing, the microfinance sector presented itself as that opportunity. The poor seemed to be the most bank-worthy and proved to be a somewhat safe and secure investment alternative. India scored primarily because globally, it had the largest captive market of the poor. The spectacular success achieved by the East African Microfinance Bank IPO in Kenya in the months just preceding the crisis may have also encouraged investors who believed that this was a route that the Indian microfinance sector could well take in the years to come.”

  Flashing a half apologetic smile at Kamineni, he adds,

  “While SAMMAAN’s hugely successful IPO seems to lend credence to Wall Street’s belief, a careful analysis appears to indicate that the numbers just don’t add up and are out of sync with market peers. Stated differently, while the earning prospects at SAMMAAN are indeed attractive, I am not sure that they justify such a high valuation.”

  Bob is watching Kamineni intently now, but the latter remains impassive right through Moody’s speech.

  When Vincent Bell, a senior analyst with Enterprise Global, which has invested heavily in Indian microfinance, describes the inflow of commercial capital into the sector as a heaven-sent opportunity, Bob has a sudden mental image of Wall Street knights, dressed in flowing capes and astride white steeds, riding hard to bail out a sector in distress.... Blame it on a reporter’s natural cynicism!

  James Henderson, a former central banker, remarks that policy makers all over the world are recognizing that financial exclusion is a risk to political stability.

  “The financial sector is similar to a three-legged stool, where, if the law is the seat, regulations are the legs. One leg is safety and soundness, another is profitability and innovation, and the third is consumer protection. Each leg is equally strong and essential to maintaining balance. It is through effective and balanced regulations and rules that the system has retained its integrity, its edge and its ability to deliver capital where it is needed. The general consensus is that regulations should allow this more risky activity to be profitable. In that context, even countries like Brazil, Kenya, the Philippines and several others are light years ahead of India”

  ‘REGULATORYFRAMEWORK?’

  Bob scribbles these words down before thickly underlining them. What about it? How much had it benefited Kamineni in achieving the numbers that he had? Bob mentally shakes himself as he realizes that he is already allowing himself to be influenced and forming opinions before even getting started.

  “He may not be a knight in shining armour but there is no reason to conclude that he is a bluebeard!” he tells himself.

  As the proceedings draw to a close, Bob walks up to Kamineni, who is already surrounded by a group of people who want more of his time and attention. Kamineni does not seem inclined to linger and excuses himself, saying he has a flight back home later in the evening. Unwilling to let go of the opportunity of an introduction, Bob presses his way forward and hands his business card to Kamineni. The name of the publication he represents does the trick, like always. Kamineni offers Bob an ingratiatingly charming smile as he pleads his inability to offer him time immediately.

  Bob nods in understanding.

  “Not a problem at all, Mr Kamineni. You’ll be pleased to know that I will be in India in a few days’ time. We are working on a story on the stupendous growth of the Indian microfinance sector and, in particular, the investments flowing in from the capital markets. Obviously, the success story of your IPO will figure prominently in the article. I would be most grateful if you can spare time for me in India. And maybe introduce me to your clientele, particularly those women who got a taste of corporate India when they accompanied you to the Bombay stock exchange!”

  “That is wonderful news. We would be delighted to have you over at SAMMAAN. Look forward to meeting you in India then.”

  He thrusts his own business card into Bob’s hands.

  “This card has my direct number. Call me as soon as you get to Hyderabad and we will be happy to offer you our hospitality.”

  Bob thanks him and the two men shake hands before Kamineni leaves, accompanied by CIRIG officials.

  As he looks around the room, Bob notices Tom Moody and Prof Raman deep in conversation with a small group of others. Dissonant voices always add colour and strength to a story. As Bob approaches the duo, he can’t help but feel pleased that his story seems to be taking shape even before he has left American shores.

  CHAPTER 6

  HYDERABAD, 23 SEPTEMBER 2010

  The man is so engrossed in the papers in his folder that he barely notices the commotion outside his car window. “We need to go to the Principal Secretary’s office!”

  It is his driver’s voice that alerts Rashid to his surroundings. A fairly senior bureaucrat, Rashid looks his part—with his bush shirt and corpulent presence. He is surprised. The government insignia on his car’s license plates usually guarantees smooth entry into any official premises.

  The policeman tries to peer past the driver to catch a glimpse of Rashid.

  “Saab is the CEO of TERP!”

  The policeman is clearly puzzled.

  “Arre… Trust for Eradication of Rural Poverty. Please don’t waste Saab’s time. He has to go to the CM’s house next!”

  The mention of the Chief Minister works like magic and the car is allowed to pass through.

  “What is happening, Gopal? Why is there such heightened security?”

  The driver is surprised. Has his boss not heard the news?

  “Sir, there is that procession today against the suicides, na! Also, they are threatening to bomb the Secretariat.”

  Of course, the papers had carried reports. Rashid had been so busy mulling over the upcoming meeting that he had forgotten all about it. The Principal Secretary was a very business like man and did not appreciate his time being wasted. And certainly not at a moment like this.

  The Andhra Pradesh Secretariat building is a rather fine piece of architecture, just a few years short of celebrating its centenary. It is the seat of power in the state, both legislative and bureaucratic. A high security zone even on normal days, today it resembles a fortress. There is a whole battalion of security personnel milling all over the place, doing a thorough check of anyone who attempts to enter the premises.

  Rashid jumps out of the car even as it slows down before Sampreethi, the Secretariat’s L block, and dashes into the building, hurriedly flashing his ID at the security personnel who try to stop him. On normal occasions, he would have flexed his bureaucratic muscles a bit. But there is hardly time for that today.

  Rashid glances at his watch repeatedly as he makes his way into the Principal Secretary’s office, where he is greeted by Subbalakshmi Srinivas, the efficient administrative assistant.

  “Does he have someone with him or can I go in?”

  She shakes her head.

  “He’s waiting for you. Please go right in.”

  He groans inwardly and hurries into the inner chamber.

  The Principal Secretary, Maruti Rao, better known as MR, stands by the window, gazing at the large expanse of sun-dappled water that represents the Hussain Sagar Lake. Rashid doubts if he is appreciating the scenic view, though, since a frown mars his forehead. The frown deepens when he sees Rashid enter.

  “Sorry, sir. But the traffic jam was terrible. And then all that security! Sir, I believe the traffic has been disrupted in several parts of the city thanks to the procession of anti-MFI protestors. Of course, the intelligence report that Maoists may be mingling with the crowds and trying to bomb the secretariat, sir....”

  Rashid comes to a halt as
he realizes he is babbling. Maruti Rao looks irritated.

  “We need to rush if we are to get to the CM’s house in time. No time for a chat. You can update me on our way there.”

  With that, MR quickly walks out of his room with Rashid almost running behind him to keep pace.

  They are soon seated in the car and heading towards the Chief Minister’s official bungalow.

  “So, what is the latest?”

  “There have been reports of four more in the last two days, sir!”

  MR frowns.

  “Why am I not surprised?”

  “Sir, the MFIs are fully to blame. But the Maoists are, of course, working at the grassroots to rouse popular sentiment against the government on this. There has to be some swift and hard action.”

  MR sighs before answering.

  “We need to have a watertight case that will stand in a court of law.”

  “Sir, the families of the victims would surely be willing to testify. In the guise of inclusion, they have allowed their greed to prevail and pushed more than fifty people to kill themselves so far!”

  “Be careful, Rashid. You head a rival programme and the MFI lobby will only accuse you of misrepresenting facts.”

  “Sir, the SHG model of microcredit has been in existence for over two decades. And we have no personal or vested interest in any case.”

  “That is not how they will see it. They will come up with their own line of argument in any case, including how the government is trying to crush free enterprise to further its own obsolete programmes.”

  The CM’s bungalow, a beautiful white building on Raj Bhavan Road, comes into sight and this puts an end to the discussion.

  The guards have already been intimated of their visit and they wave the car through.