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LATEST NEWS UPDATES | New loan sharks by S Nagesh Kumar

New loan sharks by S Nagesh Kumar

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published Published on Nov 19, 2010   modified Modified on Nov 19, 2010

The rural poor in Andhra Pradesh, a State showcased as a model for SHG-bank linkage, are caught in the vortex of microfinance.

WITHIN a decade of their coming into operation, microfinance institutions (MFIs) have dealt a serious blow to the economy and the well-being of thousands of families in rural Andhra Pradesh. Harassment by their collection agents has allegedly driven at least 60 borrowers to death, and the number is increasing. It is like a scene-by-scene re-enactment of the crisis that gripped rural areas in 2006 when about 200 borrowers ended their lives.

MFIs hold the borrowers by their throat. Microcredit draws the women members of self-help groups (SHGs) into a deadly cycle of entrapment. MFIS first allow loan repayment in weekly instalments and then harass the defaulters, driving many of them to suicide.

The ubiquitous village moneylender, often viewed as a Shylock ready to go any length to recover his loan, is gradually disappearing as the widening of the bank network and the lowering of interest rates have made access to bank credit easier.

Where the moneylender has stepped back, the whizz-kids of MFIs have stepped in, armed with management degrees and ready to extract their pound of flesh. They have fancy names that make them seem like non-governmental organisations committed to the well-being of the poor in remote and rural corners and meeting “a large unmet demand of the poor left untouched by government agencies and banks”. In reality though, MFIs are outright commercial entities falling in the category of non-banking finance companies (NBFCs).

What is disturbing in the unfolding scenario is the reluctance of the political establishment to take on MFIs whose scale of operations nearly matches those of regular banks. According to sources in the government, MFIs have disbursed loans to the tune of Rs.27,399 crore from 2004-05 to date; they had lent Rs.1,899 crore up to 2003-04. After a public outcry against MFIs, which were seen as minting money at the expense of the rural poor, the Congress government promulgated the Andhra Pradesh Microfinance Institutions (regulation of money lending) Ordinance, 2010, in an attempt to rein them in. The ordinance, however, fell far short of expectations as it failed to tackle the crux of the problem – usurious interest rates charged by MFIs.

It laid down guidelines for mandatory registration to start the moneylending business, prohibited MFIs from seeking security from a borrower by way of pawn or pledge, and sought to prevent the use of force to recover loans. If an MFI was not registered within the stipulated time, its directors would be liable for punishment with imprisonment up to six months or a fine up to Rs.10,000, or both.

The ordinance laid down that MFIs shall not recover interest in excess of the principal amount. On its part, the Reserve Bank of India (RBI) has not intervened to check the interest rates, which are as high as 56 per cent per annum, although it has constituted a subcommittee to study the issue.

The Centre, too, has shown no inclination to intervene, perhaps because it fears that the intervention may be construed as an impediment to economic liberalisation. R. Gopalan, Secretary, Department of Financial Services of the Union Finance Ministry, said as much when he ruled out “interest rate subvention… in a deregulated regime”.

Vikram Akula's SKS Microfinance is one of the biggest players in the field. He was a management consultant with McKinsey before he started the Hyderabad-based microfinance venture. SKS charges 26.7 per cent interest (lowered to 24 per cent after the public furore). The break-up of the 26.7 per cent is quite revealing: cost of funds from commercial banks (8.5 per cent), salaries (5.4), administrative cost (3.4), loan loss provisioning (1.5), corporate tax (2.8) and profit/investment for expansion (5.1).

Compare this with the pavala vaddi scheme of the Congress government under which loans are extended to SHGs at 3 per cent interest. The banks, which are reimbursed by the government for the interest subsidy on pavala vaddi loans, have been found wanting in fulfilling their commitment to what is called, rather ironically, priority sector lending.

As a result, the likes of Govindamma, a resident of a Dalit colony in Nizampatnam of Guntur district, is literally on the street. She has taken to begging as her thatched hut was blown away by a gale. Her only son, Supreme (21), died of viral fever in August, and she is neck deep in debt.

The woman had availed herself of a loan of Rs.40,000 from three MFIs to meet her son's medical expenses and Rs.20,000 earlier for her daughter's wedding. With a little help from relatives and alms from the public, she managed to repay three instalments. It was then that SHG leaders and MFI agents began putting intense pressure on her to pay up the rest of the amount. She filed a police complaint against Spandana Sphoorty, Share Microfin, Asmitha Microfin and SKS only to become an object of scorn and torment among fellow members.

Until a few years ago, Andhra Pradesh was showcased as a model for SHG-bank linkage. It occupied the number one position, covering nearly 10 lakh groups with an outstanding amount of Rs.11,000 crore. This constituted almost 50 per cent of the all-India performance. The recovery of loans extended to SHGs was satisfactory, and banks were liberal in extending finance.

This picture-perfect environment was spoiled during the Assembly election in 2009 when vote-seeking leaders vied with one another to promise sops. Telugu Desam Party (TDP) president N. Chandrababu Naidu called upon the people not to repay the loans as he promised to waive them if he returned to power.

Not to be left behind, the then Chief Minister Y.S. Rajasekhara Reddy promised to introduce the pavala vaddi scheme. Taking their cue from these political leaders, the women's groups defaulted on repayment. Banks stopped giving them fresh loans, forcing the women to turn to MFIs for money.

Chandrababu Naidu has denied any responsibility for precipitating the current crisis. He has attributed the crisis to the wrong policies of the State government in getting the poor into a “vicious cycle” of obtaining fresh loans to clear off pending ones.

However, he has not withdrawn his call to borrowers to stop repaying loans to the MFIs until the Centre and the State governments take concrete steps to stop harassment by the recovery agents. He demanded that the Centre write off loans obtained from MFIs and open a new channel through the RBI to provide loans at lower interest rates to the poor. All India Congress Committee general secretary Rahul Gandhi is also at the centre of the criticism. Rahul Gandhi visited a project of SKS in Nalgonda district in December 2005 to understand the dynamics of microfinance at the grass-roots level. This has come in handy for the opposition to blame him and the Congress for endorsing the unethical practices of MFIs.

Vijay Mahajan, president of Microfinance Institutions Network (MFIN) – a self-regulatory body with 44 members comprising RBI-regulated NBFCs – said it was unfair to single out Rahul Gandhi since politicians of all hues, including senior Bharatiya Janata Party (BJP) leader L.K. Advani, had supported microfinance. Bihar Deputy Chief Minister Sushil Kumar Modi visited Andhra Pradesh to study the concept and Chandrababu Naidu supported SHGs in a big way.

He said MFIN was ready to atone for its alleged sins if the charge that the suicides were triggered by coercive methods was proved. “We will expel the member and pay compensation to the victim's family,” he said. Mahajan contended that the State had no role to play as MFIs were governed by RBI norms.

The ordinance would hurt millions of borrowers and push them back into the lap of private moneylenders. It would rock the MFI industry in the State by delaying collection, which works out to Rs.200 crore every week.

Disbursement and collection have already come to a halt, and if one were to go by the cumbersome registration process stipulated in the ordinance, it would take 60 to 90 days to register. SKS Microfinance and Spandana Sphoorty have challenged the ordinance in the High Court. The court has directed the government to ensure that registration is completed within a week.

For the past five years, MFIs have been talking about evolving a code of conduct, but nothing has been worked out. Consequently, there is no transparency about the interest rates charged and the actual cost of the loans and there is no check on the use of strong-arm tactics and illegal methods to recover loans. The borrowers, mostly uneducated, cannot distinguish between a flat rate and a diminishing rate.

Apart from the harm caused to individual borrowers, the cohesiveness of the SHG movement, assiduously built with the lofty aim of empowering rural women, has been undermined. SHGs were seen as instruments in the government's efforts to eliminate rural poverty, but now one member is pitted against the other who defaults in payment.

Members of SHGs save one rupee a day and circulate the amount thus collected among themselves, with banks lending a helping hand. The money is used for farming as well as non-farming activities like marketing of hand-made goods or even for personal requirements.

Typically, a loan of Rs.10,000 is repayable in 50 weekly instalments of Rs.250 each.

In 2006, T. Vijay Kumar, chief executive officer of the government-sponsored Society for Elimination of Rural Poverty (SERP), submitted a report to the then Chief Minister in which he recalled an instance where the members of a borrowers' group were made to stand in the sun until the defaulter paid his due. In the last four years, the situation has not altered much.

There have been several instances of collection agents obstructing the funeral of a deceased borrower until his/her family repaid the dues.

Frontline, Volume 27, Issue 24, 20 November-03 December, 2010, http://www.frontline.in/stories/20101203272403800.htm

Tagged with: Microfinance



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