PRESS RELEASE: Intellecap Chairman and Aavishkaar Founder Vineet Rai Responds to The Wall Street Journal

Original article not available online.

Dear Editor,

I would like to take the opportunity to thank you for publishing that little article on microfinance’s impact on India’s poor a few weeks ago. The fact that you gave it prominence clearly underlines the importance the Wall Street Journal places on issues that concern our broader society, perhaps inspired by the realization that Wall Street not only impacts the lives of rich but also affects the world at large. See “global financial crisis” for reference.

I took three core messages from your article:
a) Microfinance has an oversupply of money that may cause a bubble akin to sub-prime
b) Microfinance is leading to multiple borrowings and hence over-indebtedness
c) Microfinance has drifted from its core goal or mission of being not for profit

Of course, these are my inferences and hence may not match with the findings of your journalist, Ms. Ketaki Gokhale. Yet, since I have been associated with microfinance for a few odd years, I thought it may be useful to exchange notes.

Bubble, Bubble Toil and Trouble
First, you are right that microcredit has been perfected as an art, has started scaling up, and has attracted equity and debt from global investors. However, the minor point that I wanted to make which your reporter missed is that Indian microfinance in 2009 (the article referred to 2008 figures) is close to US$3bn and almost 52% of this is in the two states of Andhra Pradesh and Karnataka (one of the states covered in your report), which represent 14% of India’s poor earning below US$3000. The fact that four northern states (UP, Bihar, MP and Rajasthan) in India have 50 million eligible microfinance borrowers of which only half a million have been reached is a minor fact that was missed while discussing the so-called oversupply.

Did I hear mention of a bubble coming from Luxembourg? Maybe you can advise that fund to study a bit about investing and learn that good investors sit near their investment, rather than flying in to airdrop cash. Perhaps they started to see the bubble in the ocean because they lathered their bath tub too much.

I was surprised by the comparison between microfinance and sub prime – some points that would help demystify this equation:

a) Sub prime loans were given to people with poor track records; Microfinance is lending done to a poor person whose track record has not been tracked
b) Sub prime loans were of longer tenure and backed by secured assets like a house; Microfinance is an extremely short term loan backed by no guarantee
c) Sub prime loans were given at variable terms including almost no interest in the first year with upward movement on interest in latter years; Microfinance is a one year loan product with weekly or fortnightly payments with little or no chance of default being hidden for years
d) Sub prime loans were pushed by agents who had the power to alter the terms of the loans. The level of scrutiny was nonexistent. While in Microfinance one can surely find issue of laxity, it is impossible to hide defaults or bad loans for years.

On accounts of multiple borrowing and over-indebtedness within microfinance, your reporter did find microfinance’s dirty underbelly. But she needed to do a bit more research to learn that multiple borrowing among the poor existed before microfinance ever happened and will continue to exist even if you stop all money flows to microfinance. The poor used to borrow from 3-4 money lenders, friends and family. In fact, microfinance began as the second option, as an alternative to money lenders. It soon became the first resort, and later, because of the norms to not lend beyond a certain size and to not lend to more then one member in the family, emerging microfinance institutions operating in the same area became a second and third source of borrowing. Do we see this as a problem? Of course we do. While this problem is more pronounced in the two states where the market penetration is around 50%, these issues are being tackled very aggressively. Initiatives such as setting up a self regulatory organization for profit-driven microfinance institutions, taking an equity position in a credit bureau, sharing of negative borrower lists, and building unique identification numbers would go a long way in addressing the issues raised. However, the reporter did not look at these developments, instead relying more on information that was easily available. I am sure that you would agree that these problems need to be solved. However, demonizing microfinance is akin to throwing the baby out with the bath water, and does not constitute a splendid example of mothering.

Granted, today there appears to be a drift from microfinance of yore where poor microfinance institutions with no money used to help poor people. One used to struggle to raise money and the other never had money. How romantic was that? Rest assured, I think that we can both agree that the solution is not to go back to the age when we did not have electricity, automobiles and Wall Street, so that we can save the world from the evil of world war, global warming, pollution and global financial meltdown.

A Confession
Before I close, I want to confide in you my own position. I, like you, am confused about my own pursuit of happiness and wealth. As an investor, it is my job to create wealth and I am trying to find out how to keep everyone happy despite making imperfect returns while taking perfect risks. In my quest I have stumbled across some findings that you may carry to far larger groups then I can and hence I am sharing these with you in confidence.

Please help people understand that we need to celebrate when choices that we take as a right reach those who never had the opportunity to make them. Freedom always has a cost and the poor have paid far higher costs already and are possibly far better off having those choices at any cost then not having them at all. As a collective we need to find ways of creating wealth that goes beyond individual hands and possibly working with the poor to promote creative or inclusive capitalism is the key to a more speedy response to poverty.

Microfinance is an imperfect tool to deal with poverty. But, it is better to have it then to banish it without understanding how the world was without it—something that your article seems to exhort people to consider.

I would like to end with a big ‘Thank You,’ as your article forced all of us to bring this debate out into the public. In light of this, I thought you might be interested in an upcoming public forum on the subject in India. I am moderating a debate titled “Microfinance & Sub Prime: Is the Comparison Real?” on December 8th in Mumbai at Srijan, a conference organized by Intellecap (www.intellecap.com). I would be delighted if you or your intrepid reporter could join us to share your point of view at the conference.

Warm regards,

Vineet Rai

Chairman, Intellecap
Founder, Aavishkaar

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