An Interview by Nicole Majestic, Daniel Nolan, and Morgann Ross
The Review: Thank you for joining us today. We understand that the mission of the Swami Vivekananda Youth Movement (SVYM) is to “build a new civil society in India through its grassroots to policy-level action in Health, Education and Community Development sectors.” Does your organization use microfinance to accomplish this mission?
Dr. Balasubramaniam: People use the term “microfinance” in a very loose way. I think that word, “microfinance,” has come into vogue the last seven to eight years, and it has become more of an industry dominated word. Technically, people who have been in the sector a long time prefer to use the word “microcredit.” I personally started not having known what microcredit was because twenty-five years ago when I started this work I used to call it “self-help.” So our groups were known as “self-help groups.” We saw these small groups as bodies where the poor actually help the other poor, so they didn’t need any outside intervention.
Basically the poor understand the needs of the poor better. They understand their own difficulties so they get together and help each other out. There was very little outside influence or intervention. And the poor actually got together and they would save their money, and with their saved money they would extend credit to the poorest of the poor. So the interest they determined was very correlated to the paying capacity of the individuals themselves. It was a wonderful mechanism where the poor understood their needs, but the poor also understood their capacities. The model was directly proportional to their ability to pay and it was understood by the rest of the group.
I think over time when the “microfinance” model came in it became an outsider driven model. It was not self-help because it was driven by business interests; it was driven by an opportunity to make money. That is how I look at it. When these “big” people from the U.S. and other people came into India and said, “Well I’m going to put a million dollars into microfinance,” many of them were driven by venture capitalism. Obviously venture capitalists have a reason to put their money into it, because they’re looking at returns. People actually, in my opinion, made a business out of poverty. That’s the difference I hold, and that is something that I am passionate about. That’s the disagreement I have with the word “microfinance.” Because “microfinance” is not “microfinance owned by people.” It’s not community driven; it’s driven by outside business.
The Review: Dr. Balu, do you believe microfinance/microcredit is more beneficial to the poor than foreign aid?
Dr. Balasubramaniam: “Microfinance” as community owned and community driven, and community centered… I find it much better because they [the poor] are driven by their own aspirations; they are driven by their own abilities. Foreign aid is not driven by the micro-context. It is not driven by the local conditions. Foreign aid is a political tool distributed all over the world. It’s not a tool for development; it’s a political tool. Lets look at the USAID. USAID’s net budget is what? Twenty billion? Twenty-two billion? [That money is] spread out across the whole world, and they decide on development based on the political agendas of the State Department of the US. So it could be India today, Pakistan tomorrow, or Africa the third day. They are driven by Congress and are completely limited by the vision and negotiation capability of Congress. The entire US legislative process is lobbyist driven. So nobody lobbies for India’s development on a sustained basis or for a particular program. Therefore, every two years when Congress re-appropriates funds, USAID’s agenda changes. Development doesn’t happen in that cycle. Development’s cycle is not limited to the funding cycle. It’s got its own agenda and it’s got its own pace of growth. My argument would be: I would vote for “microfinance” because it is that much more local.
The Review: Again, “microfinance” as how you define it: community based, community driven; the money is from within the community.
Dr. Balasubramaniam: They can still get money from outside but let the ownership be with the communities. That’s the important part. What it means is I [a poor person] control the rate of interest, I make profits for my own sake, and I reapply profits in a way where I decide what they should be used for. I’m not led by an outside investor or agency driving me to take positions on their behalf.
The Review: To follow up, when you talk about “community driven microfinance”, do you find any of those models in India? Or do you find the “external” microfinance model to be more prevalent?
Dr. Balasubramaniam: When we all began this work twenty years ago/twenty-five years ago, they were reasonably community driven and community centric. Organized and large-scale microfinance institutions damaged the concept of self-help. The people in the small self-help groups put in small sums of their own money and made it available for credit to the others in the group. These loan amounts were determined by the absorption capability of the group members that we worked with. They were not determined by the amount of money the group had. That’s a big difference. When the government came in, they just offered a homogenous sort of a benchmark. Every group would get 10,000 rupee, for example. So there was no evolutionary process; there was no training; there was no understanding of what credit was; there was no understanding of what savings could do or not do.
The last seven to eight years, when this “organized microfinance” model came, two things happened. One, external companies came and set up microfinance companies in India and local Indian banks took up microfinance departments. The banking laws changed and with local banking it allowed them to set up micro models. So these people were driven, not just by social concerns. They might have started for social concerns, but once they started the process I think their engines were driven most by economic concerns of their own profitability. So recovery became more organized. They were not determined by the ability of people to pay but they were determined by how much I [the bank] need to get back. Whereas when we [SVYM] were running our models, we were looking at people getting out of poverty. We were looking at people using these funds as a safety net or a ladder to let them climb out of poverty.
So when [the external microfinance model] came about, we were confused because we had always worked from a social, passionate point of view, but these guys were trained to work from a business model point of view. They took over because they could give huge amounts of money [and] they could collect it back without wondering whether [the microfinance recipients] are actually doing well. They just gave you loans to get back interest. So they would claim 98 percent recovery. That’s the kind of spirit these guys had. Most of these agencies had rates of interest of 60-70 percent, which is huge. They would say 3 percent per month (that’s how it would begin), then it would go up to six percent per month, but if the poor would go to another lender it would be 10-12 percent interest per month. So it’s half of what the moneylender gives.
They determined that the poor had the capacity to pay, and that is how they planned their microfinance models. But I would demand that they should have planned not on the ability to repay but on the ability of poor to use the credit for generating more wealth to get out of [the] poverty trap, and so your rate of interest should be such that it does not become a burden. You don’t lend money to make interest from it. You lend money to get someone out of poverty. And that is the distinction. Today, they are all run by the other [profit driven] model.
People have tried to fight and have succumbed. I have not. The price we are paying is that our microfinance work is so small. We don’t have the capital to put all of the money into it. So we are small and all these funding models that you have, whether it is Bancos Compartmentos in Mexico or others, they put in millions of dollars into the process.
People are actually going to the public market to raise funds exactly like a private company raising funds, and when you raise public funds that way you have to pay your investors dividends. If you have to pay dividends, you have to charge interest, which covers overhead, keeps you profitable, and allows you to pay dividends. So where is the poor in all of this? The poor is not there.
The Review: From your previous experience, have you seen microfinance from external or internal parties to be vulnerable to corruption?
Dr. Balasubramaniam: Extremely. Microfinance is vulnerable to corruption at various levels. For example, earlier, when these models were micro or driven by small NGOs, there was more direct interaction between recipients of the loans and the people running the program. Because the women owned the process, they had their own checks and balances for people. The opportunity for corruption is small because I am the owner and if my neighbor borrows money, then I am going to watch over her. I have a stake in her not misusing the money. The second thing is that it was small enough for me to watch over 10 people in my group.
Let’s look at the other, larger model, where the money is not owned by us as a group but the money is pumped in by an external agency. So when my ownership of capital is not there and I know that someone is coming from [a] distance of 30 miles away to supervise my savings and credit, that creates more space to say no one is watching over me, the money is not owned by me, my neighbor is not watching me. So, I think: some employee is going to come once a week or once every two to three days, why don’t I just get away with not paying the money back and disappear? And in the rural context of India, I disappear for three months and you will lose complete track of me and you won’t get paid back.
The sector is unorganized. In India, we don’t have a tracking mechanism. It is a nonbanking sector. There is no way to actually catch this guy and tell him he owes the money. In the smaller group example, if someone goes to the group and says that they are going to take some money to buy something and they take the money but never come back, then that money is gone. It becomes a bad debt. If it happened in a small group, they would know better. People clearly distinguish consumption loans from production loans, and they would talk about it and people were exposed very easily.
The second level is monitoring. The person who serves as monitor is an employee. Let’s say a big bank through their agency gives money to the poor. Then he has to collect this money, and I have heard but not seen that there have been examples when the monitor would collect money and not apply it to the appropriate accounts. So people are repaying loans thinking they are going to the bank, but they would have outstanding debts. The guy disappeared with the money. So there are multiple layers, different types of corruption. Though these still might be isolated instances.
The third instance, something that happened recently in India…I’m not sure where he came from, maybe New York. Dr. Vikram Akula set up a huge company called SKS; [a] huge microfinance opportunity, rates of 72 percent and higher. He had [a] huge presence in India, was a listed company, made huge profits; he was the poster boy for microfinance in TIME and Newsweek. And then suddenly, six months ago, it collapsed. This occurred because people were constantly borrowing from someone to repay someone else. It became an industry driven on his recovery rates instead of the opportunity of poor to get out of poverty. I think that is another type of corruption because you are corrupting yourself from the goal of microfinance, which is alleviating poverty to making profits. To me it’s a corruption of the ideology. Corruption doesn’t have to be money and the process; it is different kinds. All three happened. Each time the government had to step in and regulate. It’s a completely unregulated sector but after what happened in the state of Andhra Pradesh in India, the government had to step in and regulate, which I think is good.
The Review: People say that microfinance is a tool for empowering women. How do you feel about this sentiment?
Dr. Balasubramaniam: I feel very strongly. Again, I am using microfinance from the aspect of self help. In our groups, it’s one-to-one .We sit there, we talk about issues, [and] we offer solutions. Not just financial problems, but we offer solutions for local issues they are facing every day. If it’s an external agent doing microfinance, they say, “Let me give you your money,” and then they disappear. They spend 6 minutes, whereas I spend an hour per week in my self-help group meetings. There is a time for engagement and a time to talk about things other than money. I think the way microfinance is designed is limited to only look at economic empowerment and its spinoffs, whereas microfinance is just one portion of self-help. The empowerment process is much more complex, much more multidimensional, and an ecosystem approach. So the whole ecosystem is empowered, and this is something very important that they are losing out on.
My field workers will actually be there sitting with them talking with them. They don’t just talk about money, they are talking about a lot of stuff, which has an impact on the economy also.
The Review: Some argue that in addition to microfinance, the best way to help underdeveloped countries is to open for-profit businesses to help bolster the economy. What are your thoughts on this?
Dr. Balasubramaniam: I believe in an economy model that allows wealth to be created in a rural scenario. I support a for-profit company that could be set up in a village environment where wealth is actually generated. When wealth gets generated, people will have a tool not to just cope with poverty but to get out of poverty. That is a big distinction. People have to get out of poverty. I believe [in] an inclusive economy where people have access to credit to set up for-profit companies, but the owners of this for-profit has to be the community themselves; the people themselves. I can’t go as an outsider company, set [up] a large for-profit company and make money off the people there. I think of the poor not only as consumers but also as the owners of the industry that drives the consumption. With this model the for-profit company makes sense. I am a capitalist but it should aim to be humane in that the owners of this capital model should not be me or the outsiders or a bank, but it should be the people themselves.
The Review: What about microfinance must change to make it more effective?
Dr. Balasubramaniam: Take an ecosystem approach; don’t be uni-dimensional and look just at money. Look at power of communities, community engagement, community ownership and community driven/centric models. Look at people determining their own rates of interest, people determining the loans for consumption or production, people determining the amount of wealth they can observe or need. I would also say empower people with the training and tools. Don’t bring in technology for microfinance that has to exclude the poor. Bring in technology that women can handle, and if they can’t handle it, train them. I am not saying don’t bring the technology but bring appropriate technology, and the appropriateness will be determined by the absorption of training these women have. Make them the drivers, make them the owners, make them the process drivers. That is the change I would see. This is asking too much because people do not see it as a community driven process, people see it as an agency driven process. And that is the distinction. The microfinance industry is just the body, I would like for them to buy a soul.