http://www.business-standard.com/article/companies/sks-microfinance-completes-rs-163-crore-securitisation-114022800366_1.html
I found this article interesting because it demonstrates the inclusion of the worlds poor into the formal global financial sector. The author describes briefly how SKS Microfinance - a large microfinance organization that serves thousands of women in India - secured funding for its operations in the short term by bundling and selling a bunch of the loans it has made. This is a fairly common practice in the industry for other types of loans like mortgages which in part lead to the financial crises in 2008. However those mortgage loans were of poor quality even though they were rated highly by rating agencies (sub-prime mortgages) making them poor investments. It is very interesting that in the article it states that these securities created from microfinance loans were rated very highly (A+) by rating agencies. This is in line with what you would expect given the low rates of default typical of microfinance loans - "the poor always pay back". Apparently SKS has performed this maneuver 8 times before on smaller scales which might indicate the beginning of a trend where microfinance is slowly being incorporated into the financial sector. Also significant is that the fact that SKS is a for-profit institution and it sold the loans to another private sector bank with furthers impression of the inclusion of microfinance into the for-profit financial sector.
While all this might seem promising there are still concerns with the basic premise that MFIs should be for-profit in order to be most effective. Even though the loans have been rated as very secure by ratings agencies this is at interest rates around 30% - exorbitant by most standards. In fact after digging a little bit more into what SKS has been doing I found they were implicated in causing suicides because of high interest rates and collection practices. This was part of the Andhra microfinance crisis in which the government started enforcing heavy regulation of the sector because of perceived predatory lending. Whether or not these allegations are true it casts doubt on whether inclusion of microfinance in the financial sector will lead to predatory lending and destroy its effectiveness as poverty alleviation technique. This is very relevant for my PE because I will be working in a microfinance organization in Mumbai that may or may not be for-profit (my PE is not yet finalized). If it is for-profit I will be able to see first hand whether this model is effective and the effect of interest levels on effectiveness. It also means that regardless of whether it is for-profit or non-profit I will need to pay special attention of my MFIs interaction with the formal financial sector and government regulation resulting from the Andhra crisis.
It's also worth noting the region's political landscape during the time of the Andhra Pradesh crisis. While microfinance banks were overleveraging (rather recklessly) with the ultimate target of reaping profits and reaching the scale and numbers that shareholders love to see, the failure of many MFIs was further perpetuated by the encouragement from political parties seeking votes from this bottom-of-the-pyramid population to just not repay loans. This was in response to the already media-sensationalized suicide epidemics as a result of customers being pushed further into indebtedness, but ultimately, it was a political ploy at the expense of the microfinance industry, which leads me to question: is India, given its political situation, simply not ready for microfinance, or is the practice of SKS (and banks like it) simply unethical and destructive?
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