Indian microfinance: a dark legacy of debt and suicide
Andhra Pradesh in India saw 200 suicides linked to debt from small development loans in 2010. With predictions that history is repeating itself, who is failing the most vulnerable?
The tension was unbearable as Vivek Gupta entered the house of Priya Singh* in Mansa, Punjab. The old door and his boots were the only noise he could hear, despite the eight other people in the room as he walked in. The mood was that of mourning. He was shocked to hear that Priya was so in debt that she had to not only sell her house to repay the loan but everything inside it too.
“[She] had borrowed 18 loans from different companies and the amount was more than …, half-million rupee,” he said. Which is thirty times more than the average Indian monthly income of sixteen thousand rupees.
What had started as a few loans to make ends meet had snowballed into repayments she failed to return month after month. He could feel the tension within the family as she explained that she still owes money. Her husband had not said a word, just sat silently drinking his tea. His face and slumped figure were that of a man who had given up.
“There are such examples throughout the market,” said Vivek. “Where a borrower has taken multiple loans well beyond their capability to ever repay the package.”
Whenever he researches in Andhra Pradesh, Vivek cannot help but feel the continuing legacy of the 57 farmer suicides of 2010. In October, almost 11 years ago lenders stuck in cycles of debt were struck down again by the prolonged drought and poor harvests. What followed uncovered how years of unregulated microfinance growth had led to poor governance and cutting corners.
Microfinance aims to provide small loans and other banking services to poor communities and by March 2010, 35.9% of households in Andhra Pradesh had at least one loan.
Immense MF growth in the area meant that between April 2008 and March 2010, each of the six biggest lenders was adding an average of 2,389 new clients or 479 joint loan groups per day. These loans led to 30 suicides in 45 days alone.
Andhra Pradesh has always had a strained relationship with microfinance and debt. The percentage of rural households in debt has risen since the 1980s and in 2003, 82% of farmer households were indebted in Andhra Pradesh. Much higher than the Indian average of 48.6%.
In early 2006 there were allegations of microfinance organisations enforcing incredibly high-interest rates and harassing borrowers. This led the state government to shut down more than 50 branches of MFIs.
Among the regions, Andhra Pradesh is most associated with microfinance suicides, but other states across India also witness these kinds of deaths. ‘Bankruptcy and indebtedness’ continues to be a major cause of suicides among farmers and cultivators. Maharashtra experienced more than 1293 suicides in 2015. 42.7% of all suicides in the region.
Vivek predicts that India could see another microfinance tragedy as his research uncovered poor communities with members with multiple loans.
“As per central government rules one borrower can have a maximum of 5-6 loans from different companies,” said Vivek. However ‘bogus’ loans are becoming more and more common in rural communities. Vivek spoke to many women who had forged the documents in order to get another loan.
“What companies do is that they use the documents of other borrowers and then they give loans to that particular woman on the documents of other women in the village,” said Vivek.
However, these fraudulent loans can’t be entirely to blame. As even when women take out loans in their own names they still end up leading them into debt. As shown by the story published of a woman in Andhra Pradesh in 2010 in the height of the crisis.
Villagers rushed to the well to save 27-year-old Borugadda Sudha as she tried to end her life. After losing her husband six months previously, she had taken Rs 15,000 from microfinance organisations to make ends meet. With a two-month-old baby to provide for desperation had led her to the ‘poorly trained’, lenders, as Vivek described them.
She had been harassed, threatened, and abused by organisation representatives after she had failed to repay two loan instalments. They had detained her and only released her when her relatives promised they would repay the loan.
In Vivek’s experience, this is very common as these loans are often used for non-productive uses
Stories like this highlight the debt trap cycle that is very common in Indian microfinance. Vivek explains that through necessity poor communities will get loan after loan every time, not thinking about how they will return the money.
“They become bonded and then are harassed by loan agents so it’s a dirty loan trap cycle,” said Vivek. “The entire purpose of microfinance loans is to bring them out of poverty but they are literally thrown into that trap again and again.”
Microfinance has become a business to lenders and a successful one at that. The constant dispersal of loans has seen the total of outstanding loans reach over two trillion Indian rupees (roughly £19.66 billion).
“I spoke a lot of loan providers they told me that they have a monthly target they have to disperse that much of amount say 50 Lakh a month so their entire focus is to distribute the loans not much worrying that how the borrower is using that loan,” said Vivek.
Their desperation to hit quotas consumes so much energy for the loan agents that little room time is available to make the borrowers aware of how they should use the loan. Other microfinance organisations such as Five Talents insist on providing training before they ever give a client a loan. Five Talents operate mostly in Africa and offer training in basic literacy and numeracy, savings and credit processes, business skills, financial literacy, financial planning, book-keeping, diversification and marketing. However, Vivek has never seen this kind of training in India.
“They aren’t looking at sustainability or ensuring the money is going to income-generating activities,” said V. Vasant Kumar, the state’s minister for rural development. “They are just making money.”
According to Vivek though, it is very rare for organisations to follow the rules framed by these regulators.
“There are around 100 hundred companies that operate in the microfinance industry in India and all those companies are registered under two major associations and they have their own set of rules,” said Vivek. “There are no checks there’s no common check on whether the rules framed by the Central Bank of India are being implemented.”
The rules are easy to get around. Companies need to see productive needs for the loan, such as a buffalo or sewing machine, but borrowers often lie on the form and very rarely get caught. “I met a lady who told me that when loan borrowers come they simply ask us to fill in anything relating to an income-generating activity,” said Vivek.
Borrowers know that the companies will never regulate the loans after they are given. Vivek heard a similar narrative from borrowers that, as there are no checks if the loan is used for the purpose that is mentioned in the loan form they feel free to use the loan for anything they see as most important.
Vivek believes it is the companies responsibility to make sure the loan is being used productively. Otherwise, he said, you cannot make the borrower responsible for the loan.
“At present it is self-regulated …,” said Vivek. “Our economy is not very mature to allow a private sector to work without government regulation, so we need some kind of government regulations so that there are proper checks and balances.”
One of the issues that stem from lack of regulation is loans being used for non-productive uses, Vivek explained. Many borrowers took loans from MF companies for personal expenditures, which they could not generate income from. They ultimately found it very difficult to repay those loans so began to feel their debt spiral out of control.
Most of the people that Vivek met had used the loans for either building homes, health, household electricals or marriages. “I interviewed more than 40-50 ladies during my study, and I hardly found any lady who told me that that they bought something with that loan and now they’re earning income,” he said.
Vivek met a lady who had taken a loan to cover her husband’s medical bills. She knew that there was no way she could repay the loan, but the stress of losing her husband left her desperate. Loan providers preyed on this hopelessness to offer her a loan with incredibly high interest.
“She knew very well that she had to repay the loan but she had no income sources and now she is entrapped,” he said.
This is now the case for many borrowers in India.
“The purpose of the microfinance market is that poor people are empowered with a loan so that they can start some income generation activities,” said Vivek. “So there is huge conflict now as they are unable to pay that loan because it not used productively.”
These non-income generating loans are compounded also by the incredibly high-interest rates on microfinance loans. “They’re about triple the interest rate of a home loan from a public bank in India,” said Ramakumar. “You can get a home loan for 8-9% but you get a microcredit loan for the poor for 24-36%.”
This trend of rising interest rates has been going up since 2014 when the Reserve Bank of India (RBI) actually removed some regulations on lenders. The 26% interest rate cap that was put on microfinance organisations was taken off, which would give lenders even more leeway over how much they charge.
Vivek believes that interest rates must be as low as profitability allows. “I understand that those interests are collateral-free, there is a risk involved whether borrowers will be able to pay but if you give a loan with that apprehension of whether the loans will be recovered that is a wrong practice,” he said.
The entire purpose of the loans should be underpinned by the hope that if you train the borrowers and make them independent, the loan will be returned. Ramakumar believed that the interest rates show a lack of trust in the borrowers and undermines the soul of microfinance.
Professor Ramakumar, explains that it is unlikely that microfinance will ever eradicate poverty. “The already high-interest rates militates against that objective so it is very unlikely that income will increase due to microcredit loans,” said Ramakumar.
This survival strategy is ever more present with the rise of unlicensed lenders who prey on the poor and vulnerable. “I have come across 2, 3, 4 companies who were working without licencing,” said Vivek. “If you’re not licenced you’re not at all under compulsion to follow RBI rules so one of the unlicensed companies drove a lady suicidal.”
Though suicides in India are caused by both, the rise of unlicensed lenders has raised concerns over how they behave in what should be a highly monitored market. “It’s a nasty problem, the licenced companies have they own their own set of problems but unlicensed companies they’re free to do anything to earn money out of microfinance,” said Vivek.
The entire purpose of the loan market is to eradicate poverty and empower the poor with some financial liquidity. “There are major claims made in microcredit that we will send poverty to the museum and so on and a Nobel prize has been given but I don’t think a lot of that actually correspond to what is actually happening on the ground,” said Professor Ramakumar.
Professor Ramakumar does believe some changes have been seen. “There is some difference about the charging of very high-interest rates very high levels of harassment that existed in the earlier models all those are not reported to that extent,” said Ramakumar
So it appears that despite their faults economic professors do not believe that microfinance should be thrown out altogether. “I personally believe that microfinance loans are the need of the hour, we need those companies who can lend to the poor of poorest people who are not part of the formal banking system,” said Vivek.
There is growing evidence that microfinance loan distribution is again growing rapidly in India. However, the market needs to be improved by greater regulation and control over borrower loans.
“Banks won’t give a loan to poor customers,” said Vivek. “That is why to fill that gap we have microfinance companies who give collateral-free loans to those borrowers but those loans must be used for productive purposes, they must start some income generation activities from that loan.”