Tuesday, 4 October 2011

Indian Microfinance Crisis

Suppose you were shot on your hand. The doctor gives you two choices: he can either remove the bullet and heal your hand with proper care, or he could amputate and remove the source of the problem. The Andhra Pradesh (a State in India) government would advise you to take the latter option.

The absurdity of the advice in the above case is evident, but when placed in the context of Microfinance the principle gets muddled. After the revolutionary 'group-lending' mechanism was introduced by the Grameen Bank, Bangladesh, Microfinance Institutions were no longer considered a loss making, unsustainable model and different versions of it were adopted across the world. India was not to be left behind. Vikram Akula, the founder of SKS Microfinance in India, dreamt of making a microfinance firm that would not be based on donations or government grants, but on private investments. By developing a model that allowed them to not only help the poor, but also provide the investors with reliable returns, SKS was able to take the next step and form a completely self-reliant model. The insurgence of private investment allowed SKS to reach a lot more people and become the largest Indian Microfinance firm in a little over a decade. By 2010 SKS was serving more than 7 million people across the country and had been joined by numerous other companies.

Then the government stepped in. Citing several cases of suicides and complaints of 'coercive means of recovery' the Andhra Pradesh government passed the MFI Ordinance Bill on the 15th October, 2010. The bill was implicitly designed to shut down the MFI industry in Andhra Pradesh. The MFIs were not permitted to recover their loans and a series of regulations were passed that rendered the business unsustainable. With no recovery of loans in the foreseeable future, banks stopped lending to MFIs, crushing their operations and hope of survival. MFIs portfolio in Andhra Pradesh amounts to 6000 crores rupees (1.2 billion USD) all of which will be lost with no one held accountable.

So did the MFIs have it coming? For many countries, 50 people committing suicide due to economic pressure is a cause of massive concern and an immediate sign of something being amiss. But in India these rates are part of everyday life. The crude honesty is that life in India is cheap. The National Crime Records Bureau stated that there were 16,196 farmers who committed suicide in 2008 alone. Not including student suicides, domestic suicides etc. This begs to question whether that the 50 or so suicides that the Government of Andhra Pradesh cited were due to the new pressure of the MFIs or the already existing circumstances?

This does not mean that the MFIs are completely clean. The complaints of coercive recovery means cannot be baseless. MFIs always have to tread in the grey area when it comes to recovering loans and there is a good chance that they stepped too far. They should discipline their employees on the first sign of complaint. The fact is that this industry is extremely sensitive and quick to be judged and the MFIs have to look after their reputation. That said, the ordinance was still too aggressive. The government, just like the doctor of our gunshot victim, should have nurtured the industry and placed some carefully designed regulations to stop the mal-practices. Instead, the Andhra Pradesh government amputated its limb which will not allow
it to function to its full capacity.

The MFIs have been researched and debated enough to leave no doubt as to their potential benefits and yet the government has chosen this course of action. Is it just their irrationality, or a lack of understanding of India's often uneducated leaders? Or maybe it’s a political ploy. I think it is a little of everything.

It is often said that to enter Indian politics the basic prerequisites is a criminal record. In fact close to 30% of the current MPs have criminal records. It should thus come as no surprise that most of them are quiet uneducated. Most will not even try to understand the economics behind MFIs and how they function. Thus lack of understanding definitely plays a part. However with the massive literature in the support of MFIs, one can safely assume that this does not hold too much weight.

The more likely reason is the irrationality of the government in their distrust of the profit making MFIs. Conventional wisdom tells us that making money from the poor is wrong and unethical. This is why the SKS model is not universally accepted. This line of thinking however is flawed as SKS's model has allowed credit to reach many more people than the conventional model, of government grants and the benevolence of the rich, would permit. The need for credit is massive and cannot be sufficed by the latter model. Private investment was required and the only way to woo them was by offering returns. The counter argument, however, goes that the need for better returns pushes the MFIs employees to the coercive means of collecting repayments, as mentioned earlier. This does make sense, however once again one must ask whether to regulate the industry, or amputate it?

Then comes the politics. This is the most likely reason. The cliché story of campaigns where the
candidate hands out blankets to the homeless is quite popular in India. This is just another form of that. The ordinance, which effectively gives away the money to the people, can be viewed as just another round of blankets. The politicians probably hope to generate good will for themselves for the next set of elections. There is always the temptation of banking the short term benefits. India has a history to forming policies based on individual cases. Instead of remedying that particular episode, we just make a law which bans anything to do with it. As explained above, it could be for a variety of reasons, but that does not justify it. The Microfinance sector in Andhra Pradesh is struggling. Once the current loans die out and no future loans are provided, the people will feel the pain as well. 1.2 billion USD is going to disappear. The MFI industry will be set back by years even if the government now revokes its ordinance. The damage is massive. But the biggest concern is that the government shows no signs of changing its mind.

Thursday, 15 September 2011

IAC Counter Attack

Lack of solution orientation is a disease that haunts several teams. This disease now torments India. IAC decided on a course of action and executed it accordingly. But the so called 'intellectuals' of our society (which primarily consist of the upper class for whom corruption is not really a hindrance) have sought to critize it every step of the way, while making elaborate speeches about the 'right' way forward which the IAC should take up. Does one not see the the futility of the situation? While these intellectuals don't do anything themselves, they deem themselves worthy of dictating what other's should do. They all make it a point to state that they are not 'arm-chair' critics, but that is exactly what they are.

Such individuals can broadly be categorised into four categories. However, as the first two steal points from the third (made clear later) it is sometimes hard to distinguish between them. The four categories are:
  • Elitist, who just want to look down upon what the masses are doing
  • Ignorant, who just don't understand the issue at hand
  • Idealistic, who don't understand the practicality of the world
  • Divergents, who insist that other steps should be taken first
The 'elitist' category consist of the upper middle class who are not effected by corruption on an everyday bases. To be fair, their lack of interest in the movement is understandable as their need for an anti-corruption bill is far lesser than the lower classes. But norms of society expect them, the educated ones, to lead such a movement which makes many uncomfortable. While some openly admit to this (crude honesty that one learns to appreciate), there are plenty of others who try to shift the blame on the movement instead. They rationalise to others (and sometimes even to themselves) that the movement is 'incorrect' or has the 'wrong spirit' or some other flaw they can conjure that justifies their lack of support. Such chain of thought is meant for the weak.

A very popular argument among this herd is that if you were to question random individuals standing in protest about aspects of the bill, they have no response. They question the right of such unaware people to protest. Leaving aside the fact that most of these elitist don't know much about the bill themselves, I beg to question – so what? They protest because they believe in the leadership of this movement. They believe in Anna Hazare, Arvind Kejriwal, Kiran Bedi and so on. But what is so bad about that? Individuals specialise in their chosen field, and there are tons with almost no acumen in the political sciences. Does that mean they should avoid voting too? People have known to invest considerable money simply because they trust the new CEO of a company. People will open accounts in reputed banks even if others provide better returns. Reputation does count in this world and that is something Anna Hazare has earnt. So maybe there are some people who are 'investing' (supporting) in a 'company' (IAC movement) just based on it's leadership. It seems fair enough to me. A soldier finds himself kept in the dark on numerous occasions during a war, does he stop fighting? Or does he trust his commander to make the right calls?

The ignorant ones: One of the issues with India today is that in the years after our independence street protests have gained a negative connotation. Many people now automatically assume that street protests simply consist of mindless, jobless masses, rambling about things they don't understand and making unreasonable demands. This allows them to make quick and ignorant judgements. One the most prominent ones, that comes to mind are the exorbitant claims that the Lokpal will become a supreme head of our country, with too much power. This is what the politicians try to publicize and many people who believed themselves to be the 'voice of reason' in an increasingly 'agitated India' blindly repeated the propaganda. Not so smart now, eh? Even the government, which at one point had the audacity to blame the US for this movement, does not shelter under this argument anymore.

I also club the people who claim 'that lokpal will not solve all our problems' among the ignorant. This excuse for not supporting the Lokpal is pitiful. Not on one occasion did anyone, Team Anna, IAC or any other individual claim that this would be the case. But does that mean we don't support a movement which can at least bring about some changes? Maybe it will only help improve the situation by 30%, maybe even less. But is that not worth it? Such arguments are made by cynics, and cynics are simply a burden on society.

Now for the idealists. I bumped into a college student on the train home from a protest. As I was trying to persuade him to join the cause, in a very reasonable tone he replied that he supported the Jan Lokpal bill but despised the tactics employed by Anna, i.e. fasting. He believed it to be a form of blackmail and completely undemocratic. With my stop approaching soon, I wasted no time in countering his allegations and simply questioned him whether he saw the bill passing without immense public pressure? No he said, but still insisted that fasting was wrong. So I suggested to him not to go to the protest to support Anna, but simply to show support for Jan Lokpal. It was clear that he did not believe in the means, but did so in the end. So the question really was that is protesting against Anna's methods a higher priority than protesting against corruption? There were some who disagreed with IAC's approach, but where is the balance? Even if we were to admit it was 'wrong' (which I don't), which is the greater of the two evils? What will benefit you as individuals more? This is a classic mistake in prioritizing, where we divert our attention from the greater problem by focusing on some technicality.

There are other idealists who make suggestions that IAC should have entered politics and brought about the change from the inside. Such people don't do so themselves, but find that they are at liberty to tell others how to do it. But leaving the frustration of this hypocrisy aside, there is an issue of practicality in such a route. If IAC were to be large enough a party to bring about this bill, it would take them years of campaigning. Lets not forget the added burden of the existing players continuously trying to quell the rise of an honest party. Entering politics can be a dirty game and requires patience and a lot of sacrifice if you are to be honest and even then chances of success are low. What right do these idealists have to demand such sacrifice of others?

History has demonstrated that major battles, while keeping casualties to a minimum, are almost always won by changing the rules of the game. Ghenghis Khan trained the best archers in the world and won his empire using them. Chankya manipulated kingdoms to get Chandragupta Maurya his empire. Babur used the unconventional cannons to destroy the armies of the Rajput. This is a war against corruption and the rules had to be changed to win it. A frontal assault, by fighting elections, would have destroyed the IAC's armies, just like Chankya's army would have been on attacking Maghda. By changing the rules we achieved a better chance of success.

Another point of discomfort for the idealists is the concept that by assembling a few lakh people in Delhi anyone can influence the country's policies. To assume that the crowd in Ramlila was the only reason that the government was pressurized is just naive. In such a vast country, a few lakhs will not change anything in terms of election out-comes. The government was pressurized because they rightly realised that besides the people on the streets of Delhi, this movement was supported by lakhs of others who just didn't have the time to demonstrate their support.

Finally the divergents. Such 'intellectuals', in the midst of a movement start making suggestions that instead of fighting corruption we should be protesting for economic reforms, or other such policy. Their motto being – First do this, then do that. Not getting into the debate of in which order we should be bringing the reforms, I would just point out the absurdity of such a comment. When the momentum has already been built, what sense does it make to change the goal and kill the movement?

During the days of Anna's fast, I read an elitist's comment that protesting on the roads had become a fashion statement. The comment was in obvious disdain and I was irritated by it. But now when I look back I feel like an idiot for being frustrated. What the elitist said was true! It was fashionable to come to the roads, just like it was fashionable to burn the British clothes during satyagrah. I remember the glee on the people's faces as they climbed on to the police trucks to get arrested. Even now I see the pride with which people recount the stories. Yes, it was fashionable. But this fashion helped improve our country, unlike the Gucci bags of our elitist counterparts.

Tuesday, 26 July 2011

'It is your Destiny'


The line will be itched in any Star Wars fan. The execution of the line, and the importance given to it throughout the movie made certain we don't forget it. We would have used this word on several occasions ourselves, and heard it used even more. But what exactly do we mean by ‘Destiny’?

My search began while studying for an exam. As always my mind began to wander while sitting on my desk with the book with complex calculus in front of me. In one of its many expeditions my thoughts landed on this concept of ‘Destiny’ and the question: What is destiny?

I looked it up in the dictionary (anything to avoid the algebra). The first result I came across was, “The events that will necessarily happen to a particular person or thing in the future.” I detested this definition instantaneously! If we presume this to be the true meaning of destiny, then from tomorrow I would rather sit at home sucking on my thumb and wait for the riches to come to me! After all, if I was destined to be rich, I will be. If not, what can I do? Moreover, we won't be able to blame Hitler for what he did either. Maybe it was just destined for him to kill over six million Jews and start the 2nd World War. It wasn't his fault!

No, this definition was just not good enough and my curiosity dictated that I find another. So, as I always end up doing, I started figuring out variations of the existing definition which could avoid these problems. One such variation was; maybe we do have a fixed destiny, but not a fixed path. Maybe Hitler was destined to rule Germany, but we can still blame him for the path he took. Perhaps our final destination is sealed, but our route isn't. This solved my second issue of 'pinning the blame' but it failed to address 'sucking my thumb'.

Upon further reflection I started questioning myself as to why am I presuming that 'destiny' exists in the first place? Maybe, as most people put it, we do make our own destiny. That solved all my confusion for a bit, but one conversation with my father and my mind was in turmoil again. My father questioned me, if nothing like ‘destiny’ existed, then why do people with roughly similar 'characteristics' and level of efforts end up with such different lives? Why after working so hard for my IB Mathematics paper, and scoring a 7 consistently before the actual exam, did I fail to replicate the results when it actually mattered?

Luck. I'm sure most of you would have thought of the exact same response. But that is exactly what my father was waiting for. He directed me to think along the lines that maybe this 'Luck', that we all curse and praise, is ‘Destiny’. I had never come across such a view, and I struggled to find fault. But the logic was as sound as it was simple. Destiny was simply Luck.

While tentatively accepting this version of ‘Destiny’, I began to consider it’s repercussions. I tried to consider as many examples of ‘Luck’ as I could and then replaced ‘Luck’ with ‘Destiny’, and it started making sense. So I was ‘destined’ to miss a 7 in IB Mathematics and thus end up at UCL. My uncle was ‘destined’ to win that lottery and have a comfortable life there after. I was ‘destined’ to be born in a well-to-do family. Sachin Tendulkar was ‘destined’ to have an amazing set of skills at cricket. All of the above cases we normally attribute to ‘randomness’ or ‘luck’. Maybe this randomness was Destiny.

My initial two objections, which I started referring to as ‘sucking my thumb’ and ‘pinning the blame’, were also resolved. This version of Destiny was no longer in complete control of your actions or your final destination. It allowed you to choose where you plan to reach and the route you want to take. It was now just one of the many factors that influenced the result. The role of ‘Destiny’ only comes into play when it, along with your chosen ‘path’, decides whether you will succeed or not. Thus now I can blame Hitler for killing those 6 million Jews because that is the path he chose to take. Pinning the blame: Resolved.

‘Sucking my thumb’ is yet a little complex. This is only partially resolved, but I was satisfied with the result. Most will agree, that the ‘path’ one chooses to achieve a particular goal can influence the element of ‘luck’ required. For example, (keeping it very simple) to create a successful business, I could get very ‘lucky’ without working hard, or work very hard and thus require just a little ‘luck’. The same way the role of ‘Destiny’ can also be minimised by your actions. Thus I may be very lucky (with a bigger role of Destiny) and inherit a vast empire while sitting at home and ‘sucking my thumb’. However, I can minimise the need for luck/destiny by choosing a path better suited to achieve the goal I desire.

This is where I have reached so far in my search for ‘Destiny’. While I am content for the time being, the complex idea that this is, I await for the time when someone points a flaw in this version of Destiny and I am forced to restart my hunt.

Thursday, 21 July 2011

Cash for Votes: Diabolical?


For the uninitiated; this was a scandal that broke out in 2008. After Congress’ determined efforts to pass the nuclear deal with the US resulted in the left parties leaving the coalition. Lacking the majority, Congress needed to sway a few MPs to their side before the vote of no confidence. One of the means at their disposal, naturally, was bribing the opposition MPs. This came back to bite them with 3 BJP MPs bringing the exorbitant sum of money to the Parliament for all to see. Naturally an investigation was initiated, and quite naturally they didn’t make too much head way. Naturally the Supreme Court intervened and thus naturally all the parties are now trying to fling some dirt at Congress.

The details of the investigation and what actually took place is not relevant to my argument here so I shall skip them. What I really question is whether Congress was wrong in this particular instance. Don’t get me wrong, I do not for a second believe that the Congress didn’t bribe. I’m sure they did. But was the bribe ‘wrong’? For those who know me, and have listened to my idealistic lectures, this may come as a surprise. But as I have grown and learned about my friends and their family businesses, I have come to understand the practicality of everyday life.

Bribing is done at all levels of our society. From bribing the traffic police at the signal to bribing the netas for business tenders. In the book ‘A Fistful of Rice’, Vikram Akula describes his numerous struggles with our bureaucrats to set up a micro finance firm which would actually benefit the poor. In businesses people complain that even actions which will benefit our country are stalled till a bribe is handed over. We have all heard numerous examples of such situations and have now reluctantly accepted it as part of our ‘culture’. At the micro level, we Indians bribe, and then sleep peacefully in the night telling ourselves that ‘we had no choice’.

But then we come at the macro level. A whole new set of rules are applied. At the basic principle level, this is rightly so. They are the leaders of our country and should hold themselves to a higher standard than the masses. Their scandals have a wider and more prominent effect, than our micro level scandals. Additionally it is our money that they use for such selfish activities. Yes, they must be judged more harshly.

But now lets step back for a moment and examine this particular case. The problems we deal in a micro level is of the exact nature our leaders deal with at the macro level. Being at that level, its probably a lot worse. So let us suppose Manmohan Singh had  no ulterior motive for passing the nuclear bill (this being a very safe assumption). The bill, most would agree, was definitely benefiting us. BJP was hustling to gain some political points; we have seen the wikileaks letter where BJP promises Washington that if they come to power they would sign a similar deal. The left parties simply don’t like the US. Both reasons are stupid, and such stupidity may have killed this bill. After months of negotiation with the parties, Congress finally resisted giving into the blackmail and went ahead with what was right for our country. This cost them several MPs and the loss of majority, which in effect would kill the bill and would send our country in a period of confusion and uncertainty. So Congress did what they deemed required.

When our business deal is blocked due to some stupidity - we bribe. Congress had a business deal which was benefiting us all. When it was being blocked due to stupidity - they bribed.

This article may seem as though it is justifying bribing (and to be fair, so far it has done exactly that), but that is not the aim. Being an idealist, I loath bribes, but I have come to understand the people’s perspective, and when I applied it to our government, it didn’t feel much different. I would like to stress, that my argument only applies for this instance, because it is a rare occasion where the government bribed for the benefit of its people.

I have thrown a lot of ideas in here. There is however an easy way to sum up this debate. Just ask yourself: Does the end justify the means?

Monday, 4 July 2011

The Lokpal Bill

The Lokpal issue first began with humongous fanfare. The youth specially showed a great interest and support for the movement started by Anna Hazare. However as time has passed, and articles have been published, people aren’t as sure anymore. My belief is that people jumped to support a movement which was ‘anti-corruption’ without understanding the details. In the numerous debates and articles the main points have been jumbled up, a situation the government adores. It is clear to any half-wit that the numerous spokespersons on the TV debates just want to divert off the topic and hurl dirt at each other. My aim out here is to outline the points of arguments on some of the issues raised.

What is the Lokpal bill?

The bill aims to setup a constitutional authority that deals with corruption cases. It will not have the authority to pass judgement or hand out punishments. It will undertake investigations and prosecutions and put forth its case to the courts who will adjudicate on the same. Rest assure that they will not be an all-powerful committee who might over-throw democracy!

Is the bill too undemocratic?

In India, the constitution carefully balances power between the Executives, Legislature and the Judiciary. Many express concerns that the establishment of the Lokpal will topple this balance. This makes no sense. The Lokpal Committee should only have investigating and prosecuting authority and not to adjudicate. If this is adhered to, the status quo shall remain.

The Lokpal committee is just another anti-corruption investigative authority. Why not just correct the CBI instead of creating a whole new department?

This is probably the most fundamental question. Is there a need for the Lokpal bill at all? The CBI is governed by the very politicians they are expected to investigate. There is a clear conflict of interest and obviously they cannot function effectively. Furthermore, correcting the faults in the CBI is easier said than done. We have been aware of their deficiencies for decades now but have been unable to change them. There comes a time when it is more burdensome to correct the faults in an existing project as compared to starting a whole new one.

Other arguments include the fact that Lokpal authority will not have to seek permission to investigate the top politicians, which is currently mandatory and they can take up issues on suo moto, thus addressing incidents that no one is brave enough to complain about.

Should the ‘civil society’ be allowed to draft bills?

This has recently been heavily debated with claims that this is ‘undemocratic’ and that only the elected representatives have the right to draft and pass bills. While the latter is correct, the former isn’t. Being a democratic country, everyone has the right to state what exactly they would like from the bill. If the civil society is giving their version of it, I see no reason to stop them. There are many other ‘non-elected’ committees and departments that help our government design bills, then why simply stop this one?

Threatening to ‘fast till death’ if things aren’t done their way is too undemocratic.

Rubbish. This civil society is basically a bunch of lobbyists who are trying to bring change. The only difference is that instead of representing a particular industry or religious denomination, they represent the general people. All lobbyist put pressure on the government. An industrial lobbyist will threaten to not sponsor the next election or shut down factories; a religious lobbyist may even threaten with violence. But no politician will call them undemocratic (God forbid  something happens to their vote bank!), only the relatively peaceful form of protest is picked upon. Do I even need to say why?

The other point the government throws in is that this is a relative minority making a lot of noise. Swami Nigamananda died after fasting for more than 100 days. Until his death, did anyone even know he was protesting? Did the government do anything to address his concerns? It’s really quite simple: If Anna Hazare was fasting for something only a minority wanted, the government would not even address the issue. It would make no difference to their votes. And if their vote banks are unaffected, so are they.

How will the Lokpal Committee be selected?

The government naturally wants to hold onto the ability of putting their favourites in the position of power. However this has to be avoided. If the committee is governed by the very people they must investigate, they will never be able to do the task any justice.

Should the PM office and Top Judiciary also be covered in the Lokpal bill?

The argument goes that if the people in the top have to explain each and every decision of theirs, how will they function. I don’t see why this must be the case, however the argument still holds weight. The PM’s office has to discharge lots of sensitive issues. Questioning some of their decisions may not be in our countries best interest.

Should the CBI be taken under the Lokpal?

This has some good reasoning behind it. If the CBI and the Lokpal both fight corruption cases, then the 2 government agencies may have jurisdictional conflicts. By placing CBI under the Lokpal this can be avoided and the Lokpal will then be a concrete anti-corruption investigative agency. It will have a strong goal and clearly defined authority.

Anna Hazare and his team have already accomplished a lot and should be  congratulated for their success so far. I stand by the Lokpal bill and hope you see its potential after reading this article. Politicians have digressed onto smaller issues of ‘undemocratic means’ for bringing about the change, but we must not forget the bigger picture: the change itself.