Poor conditions for borrowing in India

A number of debtors in the Indian state of Andhra Pradesh have ended their lives, putting further highlight on the controversial industry of microfinancing.

The microfinance companies where poor people like Shobha Vakade, right, go to for loans are now being viewed with suspicion.
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Of the 26.7 million active borrowers from private microfinance institutions (MFIs) in India, some 54 have ended their lives in recent months.
Whether that should be considered a large number or not depends on what it is being compared with: the national average for suicides is 10.8 deaths per 100,000 people, and by that measure the crisis is not alarming.
But each death viewed as a statistic is a tragedy for the immediate family. The state of Andhra Pradesh, which accounts for 35 per cent of outstanding microfinance loans nationwide, has passed immediate measures to restrict private MFIs.
There is no evidence to suggest the suicides occurred because borrowers were unable to pay back their loans, or that the loan recovery methods were coercive or aggressive. But the industry that was supposed to help lift the poor out of poverty is now being viewed with suspicion.
The measures Andhra Pradesh announced include preventing private MFIs from granting loans to borrowers who had already borrowed from state-supported self-help groups, unless they have obtained a no-objection certificate, and stopping MFIs from organising weekly loan recovery meetings in which officers meet borrowing groups and recover loan instalments.
Andhra Pradesh officials have couched their intervention in humanitarian terms. They point out private MFIs charging "usurious" interest rates (between 24 and 30 per cent).
That SKS Microfinance, one of the leading private MFIs, recently launched an initial public offering and raised US$350 million (Dh1.28 billion) in capital has also not gone unnoticed.
The reasoning goes: something is wrong when for-profit MFIs prosper from lending money to some of the poorest people in the world. The law, the state argues, is meant to protect borrowers from harsh lenders driven by profit and bottom line.
If only it were that simple. The law has been challenged and may not survive in its current form. But as Vineet Rai of Intellecap, a social sector advisory that recently published a report on the crisis points out, the real issue is who owns the poor: the state or the private sector?
The poor are a market to be served, over which the state has enjoyed monopoly. The loans state financial institutions have made to them have often not reached them because of endemic corruption. There are significant leaks in the system, because of which repayment and recovery are sluggish.
One consequence is the absence of a culture of credit, which means the rural poor are seen not as borrowers, but as recipients of grants.
Their unpaid loans tend to be waived in the run-up to elections, and when their support is needed, political parties force state-run institutions to increase lending to them.
Those bursts are sporadic and the rural poor need money regularly. The absence of a reliable flow of credit forces many of them to borrow money from traditional money lenders. The interest rates they charge are significantly higher than the 30 per cent that private MFIs charge. Their loan recovery methods can also turn violent.
When Muhammad Yunus launched the idea of microfinance in neighbouring Bangladesh through the Grameen Bank decades ago, his aim was to liberate the poor from the clutches of such money lenders in his country.
But the difference between the Yunus model and the private MFI model is that Grameen raised funds from donors, whereas private MFIs raise capital from stock markets.
Investors in private MFIs want profits and good returns; their interest in investing is not necessarily social development.
Could the pressure investors apply on the employees of private MFIs to earn ever-higher rates of return force the MFIs to deploy unethical means? That is an interesting question in theory, but as yet nobody has accused private MFIs of using force on their borrowers.
Indeed, SKS Microfinance says that while 17 of its borrowers ended their lives, none of them was in arrears, suggesting it is simplistic to argue that the borrowers committed suicide because they could not afford to service their loans.
In any case, the growth of private MFIs is inevitable. Indian banks are required to lend about 40 per cent of their portfolio to the so-called priority sector, which includes lending to the poor.
Many Indian private banks are urban-based and lack the infrastructure, capacity and expertise to service a large number of labour-intensive transactions, with poor borrowers spread out over a vast territory.
Private MFIs become effective intermediaries in this area, and they bear the transaction costs of being in regular contact with the borrowers, collecting money periodically.
Bankers have long observed that the surest and most effective way to ensure loan recovery lies in disciplined contact with borrowers, and private MFIs do just that.
But this becomes a novel experience for some borrowers, who are used to lending by the more lackadaisical state-linked financial institutions, or SHGs, in which their employees have little incentive to perform, and where political exigencies can prevail.
Rolling over loan portfolios becomes politically convenient. By disrupting that equilibrium, private MFIs are changing the rules of the game, which politicians resent.
Private MFIs have access to capital (from banks which must lend to the priority sector), and their recovery model is disciplined (some MFIs talk of a 98 per cent recovery rate), which makes them attractive investment bets in stock markets.
They can raise far more capital than non-profit non-government organisations. But it is that success, and the riches it has brought to stock-owning employees of newly-listed companies such as SKS, which has raised questions about the industry.
In this, MFIs are also partly to blame: they have created the hype that microfinance and microcredit are the panacea for all ills, and that their borrowers can unleash an entrepreneurial revolution in rural India. The fact remains that a large proportion of the borrowing goes to pay for transactional costs, or to pay back older loans; only a small amount of the money borrowed is for starting businesses.
There are other sociological consequences which the industry will not talk about. Microfinance rests on the principle of lending money to women, because research shows that women borrow money to pay for their children's education or health, or to set up small businesses.
However, empowering women in this manner changes the equation within families, and social activists have reported cases where far from emancipating women, they have been endangered, with many of them subject to violence from husbands or male relatives who want access to the money they have borrowed.
And a recent report in The Wall Street Journal suggests that many women who would like to continue repaying loans are being forced to stop doing so by their male relatives, who argue that if they don't pay back the loans, the state will bail them out.
As many of the officials in Andhra Pradesh who took the decision to get tough with MFIs are also men, sociologists are concerned that this is yet another way the traditional male patriarchy is preventing the economic independence of women.
Clearly, microfinance is not the only solution to the intractable nature of rural poverty. But restricting private microfinance is suicidal: it will force the poor to choose between sometimes corrupt and often inefficient state-run institutions, or usually more expensive and sometimes violent money lenders. Instead of liberating the poor, this intervention will enslave them. Trust them, offer them choice, and they will make the decision that is in their best interests.