Yarvaguda Dispatch

In my last post I wrote that microcredit bubbles are unusual among credit bubbles in not being linked to salable assets such as houses. I was wrong. In the late 1970s and early 1980s western and Japanese banks got very enthusiastic about lending to foreign governments, which, like poor people without collateral, are hard to foreclose on. Funny, this symmetry between the mightiest and weakest borrowers. I have long appreciated this passage from Anthony Sampson's The Money Lenders: Bankers in a World of Turmoil, which describes bankers trying to make deals with finance ministers as they gather for the Fall 1980 meeting of the World Bank and IMF:

Through the main entrance more bankers are swarming in, whose roving eyes suggest a very practical purpose….Across there a pack of Japanese bankers…is converging on a finance minister. Along the corridor a grave-looking French banker…looks as if he is in full pursuit of new African prey….Many of them begin to look not so much like bankers as financial middle-men, contact men, or---could it really be?---salesmen….For these men who look as if they might have been trained to say No from their childhood are actually trying to sell loans. “I’ve got good news for you,” I heard one eager contact man telling a group of American bankers: “I think they’ll be able to take your money.”

The banks thought their big bets were safe because countries, as Citicorp chairman Walter Wriston famously explained, “don’t go out of business.” But then a high government official, acting with hardly any legislative mandate, brought the party to rude, crashing end. Paul Volcker jacked up U.S. interest rates, to which the loans' rates were directly or indirectly tied. In August 1982, the Mexican Minister of Finance, in the words of a U.S. Treasury official, “showed up at our doorstep and turned his pockets inside out” (p. 84 of this). The third world debt crisis was on. In the last few days, I have dwelt on the complexities of the Andhra Pradesh crisis---the intra- and inter-party intrigues, the clashing political dynasties, the role of the media, the conceptual nuances of bubbles and overindebtedness, the rivalry between government-backed self-help groups (SHGs) and government-avoiding microfinance institutions (MFIs), the various motives for growth…but on Friday, I met villagers and all that melted away, at least for a while. Their story was pretty simple. They took the MFIs’ money. In the village of Yarvaguda, Rangareddy district, west of Hyderabad. (A few photos starting here.) I met seven women. As a good social scientist, you have immediately asked, what was the selection process that brought these subjects before me, and how would that tilt the sample? The networking that led me to this village involved organizations that have worked with self-help groups (SHGs), so perhaps not by coincidence SHGs are strong in Yarvaguda. Among some 160 households, there are 17, with perhaps 12--14 women each. All the women I met were members. Maybe because of this strength, the new breed of fast-growth MFIs came lately to the village, just within the last year. So this village borrowed less from MFIs than many villages in the area. On the other hand, the women were picked because they had borrowed more than most of their neighbors. A final point is that SHG members, like MFI borrowers, tend not to be the poorest, who cannot easily handle loans. We gathered in a functional one-room concrete building that is used for SHG meetings. My guide and I sat cross-legged on a woven mat, the only furnishing, with our backs against a wall. The women formed an arc around us. On my guide’s advice, I left my camera in the car. But the women were just so beautiful in a Christopher Alexander "Timeless way of building" manner, comfortable in their skins, their bold saris, and their bangles. Fortunately, I brought my Droid and, at the end, asked if I could take pictures. First they said no, so I covered the phone, which was resting on the floor, with my hands. Then they changed their minds. Here the women are, from left to right as I saw them: Rukkama Santosha, Ellamma, Vijaya Lakshmi, Khajabhi, Bhavani We spoke for about an hour. I would ask a question, my guide would translate, much discussion would ensue, and he would occasionally toss an answer my way. Obviously, I missed the richness of the conversation. I suppose that’s why my tabulation of what I learned looks pretty thin for an hour of discussion. Since I am interested in the extent of multiple borrowing---borrowing from several MFIs at once---as a marker for potential overborrowing and overlending, I focused on inventorying their “semi-formal loans,” meaning those from SHGs and MFIs as opposed to friends, family, and moneylenders. I asked for names of lenders and initial and current amounts outstanding (shown as vertical pairs of numbers): It emerged that before the last year BASIX was the only MFI lending in village. BASIX has been lumped in with other MFIs in the crisis but has always been a category apart. It is at once the forbear of the other, pure-credit MFIs, founded on the belief that services must be commercialized to reach India’s millions, yet also an exemplar within India of doing more than pure credit. BASIX was started by the respected Vijay Mahajan. As I reported, he has been criticizing the industry he represents, partly to distinguish BASIX. Like BRAC in Bangladesh, BASIX seeks to understand and address the many challenges poor people face in improving their livelihoods---not the generic challenges of health, education, sanitation, etc., but the concrete obstacles to, say, raising a water buffalo for milk. If you want to invest in a buffalo, BASIX will lend you the money, yes, and will also vaccinate and deworm the animal and check its health every two weeks for another $10/year. Most banks don't do that. The newcomer MFIs are, by all accounts, a different breed. They do just credit, had been growing unbelievably fast, and now stand widely accused of many crimes---misleading disclosure of interest rates, loan pushing, aggressive loan collection. Three came to Yarvaguda: SKS and Spandana (among the biggest) and one called L&T. I suppose the numbers in the table mostly show that whoever picked these women at my guide's request did what my guide thought I wanted: find women with many loans. Except for Santosha and Khajabhi, who were said to be too old for MFIs as a matter of policy or practice, all had 2--4 MFI loans in addition to their SHG ones. Average semi-formal debt for these five women is 51,000 rupees, or $1,130. In comparison, the Andhra Pradesh poverty line was placed last year at 433 rupees ($9.60)/capita/month for rural areas and 563 ($12.50) for urban areas (hat tip to Richard Palmer-Jones). If we use the higher figure for conservatism (proximity to Hyderabad may lift prices and wages in Yarvaguda), multiply by a typical 4 members per household, and double again since the women I met were probably not the poorest, we get a monthly household income of $100. So on average they had semi-formal debts worth about a year's income, 60% of which had been contracted recently from the new MFIs. Traditionally, group microcredit starts with small loans, perhaps $50--100, to help people develop the habit of thrift and gently test for reliability. Over a number of years, clients climb a "loan ladder," repaying and borrowing more at each step. But according to the data in this table, the new MFIs burst into Yarvaguda with big loans from the get-go: 12--20,000 rupees ($267--444). The notes on the right of the table add important texture. I regret not doing more to learn what the women did with the loans. My guide said that most were intended for investing in crops. Ellamma, though, used hers to pay off a moneylender loan that financed her daughter's wedding. This probably helped her in lowering the interest rate. But the women said that perhaps half the borrowings went to consumption needs---school and clinic fees, food. Most importantly, they explained that unusual rains had ruined their cotton crops. Apparently it normally stops raining in early October, but I witnessed a few rain squalls even in mid-November. The flooded fields turned the maturing cotton black and robbed it of commercial value. The crops they had counted on to pay their loans were lost. Sorry to say, this sounds like global weirding. I asked how they felt about their debt burdens and about the payment holiday the government effectively declared two weeks ago. Lakshmi, I think it was, said the stress of repayment gave her a fever. More credibly, Rukkama said she had trouble sleeping on nights before weekly meetings of the new MFIs. They were relieved about the holiday, but also worried: might the MFIs suddenly demand a month or two of debt service all at once? Somehow I doubt they've been adequately accumulating funds for that day. One purpose of credit is to discipline people into setting aside money they otherwise would not. Also noteworthy is that two of the women had recently defaulted on their self-help groups, but then recovered good standing. Why did they default on the SHGs instead of the MFIs? The MFIs send people to your house to harass and embarrass you if you don't pay. I read between the lines: MFIs pay people to disburse and collect loans. To keep costs down they must use the time of their employees efficiently. That drives them to keep repayments flowing smoothly. Since pursuing delinquents is expensive, any sign of default must be quashed before it spreads. In contrast, SHGs take a single loan from a bank, then split it among themselves according to rules that they can modify at least at the margin. The time consumed in doing business has no monetary cost, so there is not the same pressure for mechanical regularity. In sum, self-help groups seem inherently more flexible and humane; flexibility is an attribute that Portfolios of the Poor identifies as an important weakness in most microcredit. Both the deafulters on SHGs had at least 3 loans from MFIs. This pattern is consistent with what I had been told about how the latter threaten the former. SHG members ran up big debts to MFIs. Since the MFIs pursued repayment more aggressively, women in trouble defaulted on SHGs first. In the worst cases, SHGs' solidarity was fatally corroded and they in turn defaulted on the banks, which then slowed disbursements of new loans to other SHGs. It seemed pretty clear that several of these women had lapped up easy credit. Then they were hit by what economists call a shock---something that is all too common in the lives of the poor---in this case a crop failure. They are now struggling to cope. I left Yarvaguda with a strong intuition that the hypergrowing MFIs had spun out of control. I say "had": for then some high government officials, acting with hardly any legislative mandate, brought the party to rude, crashing end. I left also with a kind of happy sadness. Despite my inability to speak with them directly, I found the connection to be intense. As my guide and I walked away I could not resist looking back several times and waving. For all I know they experienced the encounter entirely differently. Perhaps they came only because a local with some power asked them to. Or perhaps they saw the meeting purely through the lens of their own need, hoping this Westerner would help them. But they did wave back.