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Resource centre on India's rural distress
 
 

In India, greed creeps into microlending, critics say by Rama Lakshmi

The microcredit revolution has been celebrated for helping poor women in developing countries start small businesses. By borrowing money for purchases such as a buffalo or sewing machine, the women were able to help lift their families out of poverty.

But critics say the microcredit model 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 Andhra Pradesh. "Many of these microfinance lenders morphed into for-profit companies six years ago."

In the southern state of 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 a system of very small loans to poor people . The industry has boomed in India, growing at 70 percent annually in the past five years.

Critics say that 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. It's 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 totaling about $2,000 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, 46, said by telephone. "I just could not repay; I tried hard. The agents harassed me every week."

India's government is introducing a national law to scrutinize the institutions.

Earlier this month, the Andhra Pradesh government introduced an interim law calling for more disclosures, 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 percent 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. The moneylenders do feel threatened by the inroads made by the formal sector microfinance institutions," said Alok Prasad, chief executive of the Microfinance Institutions Network, the industry association.

Some of the advocates say the restrictions could trigger a meltdown of the industry, with loans worth $6.6 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 beating up defaulters, humiliating them by making them stand in the sun all day and using abusive language outside their doors.

"You need to be very very careful when you are working with villagers. If you show up at their door 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," Subramaniam said.

The loan size ranges from about $250 to $500. The borrowers have to pay the interest weekly, a dramatic change from the earlier Grameen Bank model of monthly payments. Prasad said that the interest rate ranges from 24 to 36 percent. But an official said that some charge interest of 50 to 60 percent.

Critics said some of the small loans are being used to pay for weddings, pilgrimages and items such as cellphones.

"Where is the question of a small business? A woman has to immediately start weekly repayments," said Jamuna Paruchuri, project manager for gender at the government's Society for Elimination of Rural Poverty. "The woman is caught in a debt trap. She takes a second loan to repay the first."

In the village of Gangapur, B. Satyamma, 48, said she has struggled to repay a $250 loan she took out for a family medical emergency. She walks five miles a day to pick cotton because the wages are higher in distant fields.

"I have to do this to keep up with my weekly repayments of $6," she said.

Paruchuri said some loan agents create fraudulent accounts.

Savitri Edulu, 40, rolls beedis, or traditional cigarettes, to earn a living in Lachapet. A few months ago, an agent asked her to sign papers and offered her $25 as commission.

"It was quick money, and all I had to do was sign," she said. "Little did I know that the agent borrowed loans worth $2,500 from five different lenders in my name. Now, different men are banging on my door every week, and the agent has absconded."