INDIA:Stories of sky-high interest rates is forcing India to more closely scrutinise microlenders, writes RAMA LAKSHMI
THE MICROCREDIT revolution that freed up credit lines in areas of India where banks simply were not prepared to lend has been celebrated for helping poor women in developing countries to start small businesses. The women were able to help lift their families out of poverty using borrowed money to buy such items as sewing machines or buffalo.
Critics of the microcredit model, however, say it has been perverted by commercial greed in India, with reports of abusive collection methods and sky-high interest rates.
“What began as a simple, innovative model of providing credit for the poor women who were excluded from mainstream banks underwent a paradigm shift in India,” said R Subramaniam, principal secretary for rural development in the southern state of Andhra Pradesh. “Many of these microfinance lenders morphed into for-profit companies six years ago.”
In Andhra Pradesh, which has the highest number of microlending businesses in India, at least 25 defaulters have committed suicide in the past two months, according to the government. At least 31 other suicides are under investigation.
Founded in rural Bangladesh, the Nobel Prize-winning microcredit revolution called Grameen Bank became a global phenomenon as it introduced a system of handing out very small loans to poor people.
The industry has boomed in India, growing at 70 per cent annually in the past five years.
Critics say the rapid growth has resulted in abuses. “Each loan agent had a target to fulfill and was knocking on people’s door with easy credit without due diligence. That is how the rot set in. Its not unlike the subprime crisis in America,” Subramaniam said.
Vijaya Kasipati, who lives in the village of Lachapet in Andhra Pradesh, said she had defaulted on five loans totalling about €1,500 from different microcredit institutions. Loan recovery agents entered her home last week, she said, with dozens of men shouting insults.
Two hours after the men left, she said, her husband, Jangam Kasipati, a temple priest, suffered a massive heart attack and died.
“The shock was too much for him. The agents were rude and very insulting. The whole village heard them,” Kasipati said. “I just could not repay; I tried hard. The agents harassed me every week.”
The government is introducing a national law to scrutinise the institutions.
Earlier this month, the Andhra Pradesh government introduced an interim law calling for more disclosure, a ban on coercive loan recovery measures and better controls on multiple loans to one person. The law also mandates displaying interest rates prominently on signboards and setting up district-level courts to hear complaints.
The microfinance industry has challenged the curbs in the state high court. Advocates say that about 80 per cent of the sector is already regulated by the central Reserve Bank of India and blame informal fly-by-night operators for the abuses.
“The way the rural economy is structured, moneylenders are an integral part of it,” said Alok Prasad, the chief executive of the Microfinance Institutions Network, the industry association. “They feel threatened by the inroads made by the formal sector microfinance institutions.”
Some of the advocates say the restrictions could trigger a meltdown of the industry, with loans worth €5 billion and more than 30 million borrowers. “Everybody loses – the banks, the microfinance institutions and the clients. Where will people go for their credit needs if the tap is suddenly turned off? Stop pushing them back into the arms of the village moneylenders who have been exploiting people for centuries,” Prasad said.
But complaints about aggressive tactics abound. Officials say that harassment by agents included the beating up of defaulters, humiliating them by making them stand in the sun all day and using abusive language outside their doors.
“You need to be very careful when you are working with villagers,” Subramaniam said.
“If you show up at their doors with easy loans, they accept. They think, ‘Money has come to my doorstep, why send it away?’
“So the same person is given more than one loan by several agents without checking their credit history and capacity to repay.
The loan size ranges from about €200 to €400. The borrowers have to pay the interest weekly, a dramatic change from the earlier Grameen Bank model of monthly payments. Prasad said the interest rate ranges from 24 to 36 per cent. But an official said that some charge 50 to 60 per cent.
Critics said some of the small loans are being used to pay for weddings, pilgrimages and items such as mobile phones.
