The Killing ways of micro-finance
By Devinder Sharma at Oct 12, 2010
The report stated: "In 2009, 43 farmers in Orissa committed suicide. It was a year that saw a massive farm loan waiver by the UPA government and also a record investment of over Rs 1400 crore in farm credit by the state government. But they were all small farmers who couldn't access institutional loan and had to borrow from microfinance NGOs at an exorbitant rate of interest. Many, even the state government, suspect it's this exploitative loan network that may have driven loan farmers to commit suicide.
A farmer in Sambalpur, didn't get water for his fields, subsidies, or insurance cover. What he got readily was a loan from a local microfinance NGO, at an incredibly high 24 per cent interest. The fear that he would never be able to pay back, drove him to suicide."
This was not an isolated event.
In a New Delhi-dateline report Law to rein in micro-finance bodies’ bullying (http://bit.ly/cxMIHp), The Hindustan Times (Oct 12, 2010) states: With the rise in suicides in Andhra Pradesh following harassment at the hands of micro-finance institutions (MFIs), the state is now planning a legislation to control the lending rates and curb the often abusive approach used by MFIs during recollection. In the last few days, on an average 2 to 3 suicides — most of them by women — have been reported, a result of harassment they face from MFIs.
Two to three suicides a day, I don't think can be taken as isolated events.
What kind of harassment are we talking about? In April 2010, The Hindu reported from Hyderabad in Andhra Pradesh: "Some Collectors sent reports about the harassment of borrowers, intimidation, manhandling, abusing and outraging the modesty of women and extreme punishment like making defaulters stand in the hot sun, tying them to trees and making them run in open grounds."
The news report further said: The 40 MFIs operating in the State with total finance portfolio of Rs. 3,000 crore are accused of forcibly enrolling poor women in the rural areas even though a majority of them are already part of the carefully nurtured Self Help Groups (SHGs) under the banner of Indira Kranti Patham.
This kind of barbaric acts of forcing enrollment and recovering money is not only confined to Andhra Pradesh. Across developing countries all over the world, such bullying tactics are being employed by the micro-finance institutions (MFIs). Because of the vested interest, and the general feeling that micro-finance is a pious initiative, the dark underbelly of the organised money-lending often goes unreported. What makes it still worse is the refusal of the international donors and aid agencies to acknowledge the crime that perpetuates in the name of tiny loans.
Sometimes back, the New York Times (April 14, 2010) had in a detailed analysis 'Banks Making Big Profits from Tiny Loans' reported:
-- Drawn by the prospect of hefty profits from even the smallest of loans, a raft of banks and financial institutions now dominate the field, with some charging interest rates of 100 percent or more.
-- Te Creemos, a Mexican lender has some of the highest interest rates and fees in the world of microfinance, analysts say, a whopping 125 percent average annual rate. The average in Mexico itself is around 70 percent, compared with a global average of about 37 percent in interest and fees, analysts say.
-- Compartamos, a Mexican firm that began life as a tiny nonprofit organization, generated $458 million through a public stock sale in 2007, that investors fully recognized the potential for a windfall, experts said. Compartamos charges an average of nearly 82 percent in interest and fees.
I had quoted these examples in an earlier blog post (Banks make big money from the poorest http://devinder-sharma.blogspot.com/2010/04/banks-make-big-money-from-poorest.html) but feel like sharing these once again knowing that public memory is too short. And I am sure like me you too must be wondering how can the poorest of the poor be made to cough out @ an interest rate of 125 per cent. Isn't this a crime?
Even the economic crime is ignored by the regulatory bodies. In the past few days, the capital market regulator in India -- Securities and Exchange Board of India (SEBI) -- has asked SKS Microfinance to cite the reasons that led to the sacking of its CEO. Newspapers are full of reports about the SKS imbroglio, but no one is questioning the role of MFIs in the bigger crime. Reserve Bank of India (RBI) and the Finance Ministry too are turning a blind eye to the barbaric games being played by the MFIs.
Local news channels in Andhra Pradesh have been showing for the past two days or so reports of small borrowers being harassed by the MFIs. A women from Karimnagar is on one of the shows is telling how an MFI was forcing her to sell her house for a paltry loan of Rs 4000 that she had taken.
Ever since I took up the issue to expose the darker side of the microfinance business, I have been flooded with support (of course I have also got my share of hate mails) and suggestions on how to improve the delivery of microfinance. You would have probably read about the zero-interest rate microfinance institute in Pakistan, which figured on this blog sometimes back, but in addition I have the following suggestions:
1. Borrowers of tiny loans should simply stop repayments.
Now before you get angry, let me explain. This is the only way to draw the attention of the policy makers and the decision-makers to the criminal ways of the MFIs.
2. All middlemen in microfinance who act as MFIs should be asked to close shop.
They are the root of the problem. They get credit from the banks/donors at about 12 per cent rate of interest, and further add 12 per cent as their margin thereby fleecing the small borrowers. At weekly repayment plans, the rate of interest effectively comes to 36 per cent.
3. Microfinance needs a model that is being followed by the Society for Elimination of Poverty (SERP) in Andhra Pradesh. The SERP has floated hundreds of SHGs, which get micro-finance @ 3 per cent interest. It draws loans collectively from the nationalised banks, and makes it available to the poorest of the poor at an annual 3 per cent rate of interest. The State government writes-off the remaining component of bank interest (or in other words subsidises the bank interest).
4. At a time when small borrowers are committing suicide or defaulting, SHGs operating under SERP in Andhra Pradesh have created a corpus of Rs 5,000 crores