India’s Microfinance Industry Fuels Suicides
Most of us remember Muhammad Yunus’s 2006 Nobel peace prize for microfinance, small loans to start businesses, with extremely low default rates. Now it looks like this industry has done what many American financiers have done, lent more than people can ever pay back, in order to make greater profits. In India and other parts of Asia, however, cultural factors mean that over indebtedness causes more than just sadness and bankruptcy. This lending without regard to ability to repay has causes suicide on the part of borrowers. This is particularly insidious, given that- unlike home loans or payday loans in the U.S. - the whole point of microfinance is to help the poor start businesses.
Moreover, the industry itself faces imminent collapse as almost all borrowers in one of India’s largest states have stopped repaying their loans, egged on by politicians who accuse the industry of earning outsize profits on the backs of the poor. Indian banks, which put up about 80 percent of the money that the companies lent to poor consumers, are increasingly worried that they could now face serious losses. Indian banks have about $4 billion tied up in the industry. Initially the work of nonprofit groups, the tiny loans to the poor known as microcredit once seemed a promising path out of poverty for millions. In recent years, foundations, venture capitalists and the World Bank have used India as a petri dish for similar for-profit “social enterprises” that seek to make money while filling a social need. Like-minded industries have sprung up in Africa, Latin America and other parts of Asia. Some companies have more than doubled their revenues annually. Recently, one of India’s largest for-profit micro lenders, SKS Microfinance, went through an initial public offering, fueling anger. The company is backed by famous investors like George Soros and Vinod Khosla, a co-founder of Sun Microsystems.SKS and its shareholders raised more than $350 million on the stock market in August.
And it’s not just money at stake of course. People are committing suicide over the shame of not being able to pay the debts back. A 30-year-old mother of two boys poured 2 liters of kerosene on herself and lit a match, after she and her husband argued bitterly the day before over how they would repay multiple loans. Shobha Srivinas, was being pressured to pay interest on her 12,000 rupee ($265) loan. Lenders also were demanding that she cover for the other women who had borrowed, since borrowers essentially guarantee each other’s loans in order to use social pressures to ensure repayment. She had her husband are both dead after he was unable to put out the flames and got caught in them himself. More than 70 people committed suicide in this particular Indian state from March 1 to Nov. 19 to escape payments or end the agonies their debt had triggered. According to Malcom Harper, Microcredit has become “Walmartized” by unrestrained selling of cheap products to the poor. “Selling debt is like selling drugs,” says Harper, 75, the author of more than 20 books on microfinance and other topics.“Selling debt to illiterate women in Andhra Pradesh, you’ve got to be a lot more responsible.”
This is obviously not the way Yunus designed the loans. Yunus, 70, had his own ideas about which profits were proper when setting up microloans, which he set at the cost of funds plus 10 percent, he says. Indian micro lenders themselves borrow from banks at 13 percent or more on average and extend credit to the poor. They charge interest rates that can rise to 36 percent. “Microfinance has been abused and distorted,” Yunus said. “I feel so sad because that’s not the microcredit I have created.” He also reports being embarrassed, and is now less happy to be a founder of microfinance.
What’s in Your Wallet Part II: Let’s Shop for Credit Cards
I have been enjoying talking to my UNM colleagues about Katie’s post on what’s in our wallets. There are different credit cards for every demographic imaginable. For example, there are cards with rights to all airport clubs and even the right to a personal shopper, for the truly rich and famous. There is plenty of free pizza to be had with the cards touted to college students.
While I fancy the Costco Amex, my colleague Peter Winograd suggests the US Bank VISA Travel Card (20,000 points qualifies for a $400 ticket on any airline, plus a 10,000-point bonus for first use plus double points for certain categories of purchases); the Compass Bank VISA (5% return on purchases at drugstores, supermarkets, gas stations, plus 1% on everything else); the CitiDividend MasterCard (5% on certain categories of purchases, with the categories changing every three months; 1% on everything else)…
I’d love to hear more about some of the other gems out there so, like Bob (I mean George Clooney), I’d relish some reader participation, particularly thoughts on which cards they love. You can also shop here if you currently have no favorite.
And, I have a question. When should a person actually pay an annual fee on a credit card? I usually (call that always) opt against annual fees, but I am sure there are times when it pays to pay them. Let’s hear it.
Hot Pursuit of Customers: The Real Reason More People are Turning to Payday Loans
As one who studies the advertising and marketing plans of payday and title loan companies, I was interested in two Wall Street Journal articles published this week on the topic of payday loans, one claiming that Dodd-Frank has pushed many consumers into the hands of payday lenders, and another describing how hard payday lenders are working to steal customers from banks. Since many payday loan customers do not fully understand the terms of the loans, it isn’t that hard to steal customers from banks. Payday loans, often at least ten times more expensive than credit cards, are easier to get. The lenders are far friendlier to customers and have more locations and business hours. Plus, have you seen the advertising? It makes it sound easy and even fun to take out a 500% loan. Payday loan industry experts now claim that their toughest business challenge going forward is not collecting on bad loans but finding enough new customers to keep the hundreds of thousands of stores afloat. Payday loan volume dropped $38.5 billion in 2009, or 24% since 2007, in part because of state regulation. Industry has successfully dodged regulation in some state, mostly by claiming that customers desperately need these loans for emergencies. The truth of this statement seems critical to the survival of this industry, but let’s look at the industry’s advertising and the real uses of these loans.
Payday lenders are getting quite desperate for customers, and thus now offer loyalty programs to get people to refer their family and friends, whether these friends and family members have an emergency or not. They offer similar loyalty programs to get people to keep the loans out longer, whether they have a continuing emergency or not. They offer more loans as soon as one loan is paid off, whether the customer has an emergency or not. The advertising suggests that people use the loans to get through the holiday gift-giving season, even to go out to eat! It is time to really study how these loans are being advertised, and also to look at how they are actually being used. My own data show that less than 10% of the loans are actually used for emergencies.
As for this idea that Dodd-Frank is the driving force in pushing people into the hands of payday lender, this is not the case. Customers were borrowing from payday lenders when they could use banks well before Dodd Frank or the Credit Card Act. The real cause of this shift is the payday loan industry’s own search for customers, as well as their advertising, which claims loudly and repeatedly that payday loans are good for anyone or everyone, any time, and are not just for emergencies.
Debt Causes Bankruptcy (But Sometimes in Counter-Intuitive Ways)
I like NPR’s Marketplace, but stories like this drive me nuts: “Why bankruptcy claims aren’t as high as one would think.” The story repeats a premise I often hear in media calls that I receive. The conversation usually starts something like this: “Foreclosures are up, unemployment is high, the economy is a wreck: why have bankruptcies stopped climbing?”
Wrong question. But fair enough. I get called because I am supposed to know something about bankruptcy filing rates, and my caller often has just picked up the assignment for the day. If that is the wrong question, what should we be taking away from trends in bankruptcy filing rates?
Bankruptcy is a legal act with legal consequences. Bankruptcy filings are not a bellwether indicator of the economy’s health. Foreclosures, unemployment, and general economic conditions certainly play a role in determining the bankruptcy filing rate, but other factors are more important. At best, the bankruptcy filing rate is a weak and trailing economic indicator.
In trying to understand the bankruptcy filing rate, it is better to focus on the legal consequences and legal incentives for people who file bankruptcy. Specific legal rules mentioned in the NPR story–procedural requirements and rules on home mortgages–are also undoubtedly playing a part, but these rules are too specific to be playing a major role. The explanations are all trees and no forest.
People file bankruptcy to discharge debt (at least in the United States). No debt, no bankruptcy. In the long run, the overall bankruptcy filing rate will rise and fall with the amount of consumer debt. As people accumulate more debt, bankruptcy demand will grow. That is why we see countries often adopting American-style consumer bankruptcy laws featuring debt forgiveness as consumer debt in that country increases. Without lots of consumer debt, talking about bankruptcy filings rates is like talking about snow accumulations in Honolulu.
The long-term growth in U.S. consumer bankruptcies closely tracks the long-term growth in U.S. consumer debt. When the financial crisis hit, consumer credit dried up, and outstanding consumer debt experienced unprecedented declines. There are fewer reasons to file bankruptcy today because there was less borrowing two to three years ago.
Consumer debt also has a profound but perhaps counter-intuitive short-term effect on consumer bankruptcy rates. In the short-run, a decline in consumer credit will lead to a bump in consumer bankruptcy filings. As people run out of options–as they become less able to put this month’s grocery or utility bills on a credit card–bankruptcy becomes a more attractive option. People can and will continue to borrow to stave off the day of reckoning. If a lender is willing to extend credit, further borrowing is a rational decision. After all, the consumer can become “none more broke” by borrowing further but might see things turn around tomorrow if they can get by just one more day on a credit card. Students of option pricing should quickly grasp the point.
The numbers bear out these effects. The graph to the right shows a close relationship between total consumer debt and bankruptcy filings. As consumer debt goes down in a particular month, bankruptcy filings tend to rise. Clicking on the graph should bring up a larger image in a pop-up box, and at the bottom of the post is some information about how the graph was constructed. The correlation is not perfect, but my claim is not that the correlation is perfect. A clear, negative relationship does exist. The takeaway message is that focusing on current foreclosure rates and unemployment to explain bankruptcy filing rates misses more important features of the story.
Right now, both the long-term and short-term effects of consumer credit are working in the same direction to tamp down the bankruptcy filing rate. There are lower levels of consumer debt because of decreased borrowing two or three years ago and hence less overall reasons for people to file bankruptcy. Also, with a reported easing of the consumer credit market, consumer who are at the brink have a slightly easier time borrowing to put off a bankruptcy filing. Given these dynamics, it is not surprising that bankruptcy filings are leveling off or declining and that a mathematical model predicts a decline in the bankruptcy filing rate for 2011.
The macrodata will fail to explain any individual case. A foreclosure, a job loss, a medical problem, and many other problems will be the primary impetus for many consumers will find themselves in bankruptcy court. These reasons explain why someone ends up filing bankruptcy, but they do not provide much help in explaining when they end up in bankruptcy court. Looking at trends in bankruptcy filing rates is all about the “when” question, and here macrodata are very helpful. The ups and downs of consumer debt levels tell us much–not everything, but much–about these trends.
Using data from Epiq Systems on bankruptcy filings and from the Fed for consumer debt, the graph compares monthly changes in the daily bankruptcy filing rate to monthly changes in the total amount of consumer debt outstanding. The graph begins in 2008 because of the anomalous effects the 2007 financial crisis had on outstanding consumer debt. Using 2007 data does not qualitatively change the results. The same phenomenon also can be observed historically, before the 2005 changes to the bankruptcy law. Bankruptcy filings are graphed against the left axis, and total consumer debt is graphed against the right axis. Both axes use different scales to make for easier comparisons. Also, the right axis for consumer credit has been inverted.
CARD Act Compliance Costs Outweigh Fee Benefits?
CARD Act Compliance Costs Outweigh Fee Benefits?
The American Banker has an interesting piece on the impact of the Credit CARD Act. It’s behind a paywall, but here’s the key insight:
Credit card issuers were expected to raise fees and cut rewards to compensate for lost revenue from new regulations. But some have done the opposite, eliminating fees they are still permitted to charge. Most banks have increased certain costs, such as purchase annual percentage rates, and added annual fees for some cardholders in response to the Credit Card Accountability, Responsibility, and Disclosure Act’s new restrictions on rate increases, penalty fees and other terms. The ones that have also eliminated fees — including Bank of America Corp. and Wells Fargo & Co. — claim they did so as part of an effort to be more transparent. Some experts offer another explanation: it may simply be cheaper for issuers to drop these fees rather than bring them into compliance.
At the very least, this indicates that the impact of the Credit CARD Act is more complex than its critics would have it.
Fifth Circuit Finds Bankruptcy Court has Jurisdiction to Certify Class of Debtor/Plaintiffs.
Matter of Wilborn, No. 09-20415 (5th Cir., June 18, 2010)
Holdings:
1) Bankruptcy court has jurisdiction pursuant to 28 U.S.C. sections 157(a) and 1334(b) to certify classes of debtors under Fed. R. Bankr. P. 7023.
2) Where class of chapter 13 debtor/plaintiffs did not satisfy the requirements of Rule 23(b)(2) and (3) in that their claims would require individual factual resolutions and determinations of damages, certification of class was improper.
Facts: The Bankruptcy Court for the Southern District of Texas certified a class of chapter 13 debtor/plaintiffs who filed Adversary Proceedings against Wells Fargo Bank, N.A., alleging that it charged and collected fees and costs during the pendency of the debtors’ bankruptcy proceedings which were both unreasonable and unapproved. The class of debtors alleged that Wells Fargo had violated section 506(b) of the Bankruptcy Code, which permits creditors to recover reasonable costs incurred in connection with the bankruptcy and which are allowed under the underlying contract, and Federal Rules of Bankruptcy Procedure, Rule 2016, which provides that a creditor must apply to the court to receive compensation from the estate. The Bankruptcy Court certified the question of class certification to the Fifth Circuit Court of Appeals.
Discussion: As an initial matter, the Fifth Circuit found that bankruptcy courts have jurisdiction to certify classes of debtors even though some members of the class may have cases before other bankruptcy judges in the same district. The court found jurisdiction was settled in the bankruptcy court for a particular district rather than in the individual judges within that district. “The placement of jurisdiction in the bankruptcy court here was proper, and based upon the general order of reference, the scope of the bankruptcy court’s jurisdiction was unrestricted.”
The court turned to the issue of whether the debtor class met the requirements for class certification set forth in Rule 23(a) and (b) of the Federal Rules of Civil Procedure. Although the court found that the four requirements of Rule 23(a)—numerosity, commonality, typicality, and adequacy of representation—were met, it held that the class in this case did not satisfy the requirement of Rule 23(b)(2) and (3). With respect to Rule 23(b)(2), the court found that individual monetary relief would not be incidental to a general order of injunctive or declaratory relief and that each debtor would have to have his or her damages determined on an individual basis. Additionally, under Rule 23(b)(3) the common issues did not predominate over individual issues because “The circumstances surrounding the charging of fees required an individual assessment of the claims.”
