The makings of a debt trap in Andhra Pradesh

S. Nagesh Kumar

Faced with a new crisis in the rural areas, the Andhra Pradesh Government is contemplating legislation to punish erring MFIs and asking banks to enforce a code of conduct on them.

Some of the debt-recovery methods described as `barbaric'Cohesiveness of self-help groups disturbedA secondary industry of moneylenders is flourishingUp to 70 per cent of poor in areas where MFIs operate affected

A NEW breed of moneylender is seen in the rural areas, quite unlike the stereotype of the village moneylender. Agencies hiring this breed can boast of chief executive officers with management degrees and foreign accents. Collectively, they have acquired a fancy generic name microfinance institutions (MFIs).

For many borrowers, a deal with an MFI agent is turning out to be as risky as one with the traditional moneylender. At last count, 60 people have committed suicide in Andhra Pradesh unable to bear alleged harassment by MFIs. It is a seeming replay of suicides by debt-ridden farmers during the last decade. This is the official toll: the actual figure is said to be around 200.

MFIs are also disturbing the cohesiveness of the self-help groups (SHGs) carefully nurtured by the Andhra Pradesh Government and showcased to important foreign visitors, including U.S. President George W. Bush recently.

Loans availed by the SHGs from commercial banks are given a whopping 9 per cent interest subsidy. Andhra Pradesh has a strong network of over three lakh SHGs, whose members save a rupee a day and circulate the amount thus collected among themselves.

Now many SHG members are unable to save regularly in the groups or repay the bank linkage amount as MFIs have caused division among them.

Easy access

The MFIs have succeeded where banks in the organised sector have not. Petty borrowers find access to these institutions easy compared to the daunting rules and formalities involved in applying for a bank loan. But, this is where the smooth run ends. When it comes to recovering dues, the methods adopted by some of the MFIs have been described as "barbaric."

T. Vijay Kumar, an IAS officer, the chief executive officer of the government-sponsored Society for the Elimination of Rural Poverty, has sought to expose the activities of some prominent MFIs operating in Krishna, Guntur, and West Godavari districts where he had deputed a team of officials and visited some villages himself.

In a report submitted to Chief Minister Y.S. Rajasekhara Reddy he stated how in one instance the members of a borrowers' group were made to stand in the sun till the defaulting member brought the instalment due.

According to the official, even alleged cases of outraging the modesty of women by MFI staff have been reported. "They pass very humiliating comments whenever the women are unable to pay the week's instalment," he observed.

For all their showmanship, the MFIs have been found to be rather unprofessional. Noted Mr. Vijay Kumar: "Their loan officers have no technical appraisal skills. They are rude to the poor borrowers. There is no analysis of the incremental income generated on account of the loan and how much of the income can be set apart for servicing the loan."

MFIs operating in Andhra Pradesh lend at least Rs. 2,000 crores to an estimated eight lakh borrowers, most of whom belong to the poorest sections. They have names that make them appear to be committed and well-meaning non-governmental organisations. This they are not, if their usurious interest rates are any yardstick, it is pointed out.

Unethical practices

A typical loan taken from an MFI can range from Rs. 3,000 to Rs. 25,000. The interest rate is 15 per cent flat, which works out to an effective rate of 33 per cent per annum on a declining balance. But the rural poor or the slum-dwellers, who borrow from the MFIs, can hardly distinguish between flat rate and diminishing rate.

All they want is money on hand and the MFIs are ready to lend it.

In several instances, the rate of interest works out to a staggering 50 to 60 per cent per annum thanks to unethical practices such as altering the date of loan liquidation and hidden costs such as membership fee, card fee, insurance and bank and stationery charges. Insurance charges are collected at the rate of Rs. 25 for a loan of Rs. 1,000 but the borrowers are not given the insurance policy papers.

They are told that the loan would be waived in case of the borrowers' death and an amount of Rs. 2,000 paid for funeral or cremation expenses.

The report says that owing to such practices, a large number of families that have gone in for the loans are in a debt trap. The spread of the MFIs is so extensive that nearly 60 to 70 per cent of the poor in a village or a town ward where they operate are affected. A number of instances have been reported to Mr. Vijay Kumar where husbands deserted their wives because of the increasing loan burden and constant humiliation. "There is an imminent danger of more suicides occurring," he warns.

The MFIs have spawned a flourishing secondary industry of moneylenders. Unable to repay loans availed from MFIs, some are borrowing from them, never mind if they are charging an astronomical interest rate of 10 per cent a month.Recently, 30 women members of SHGs from Krishna district narrated to the State Human Rights Commission (SHRC) how MFIs were harassing them. Paying attractive salaries, they were employing youth from other villages to recover loans. Among them was Kanna Venkayamma of Paritala village in Kanchikacherla mandal in Krishna district whose son committed suicide, and D. Shouramma of Allapuram village in Gannavaram mandal whose daughter-in-law ended her life after being tormented by an MFI.

Youth hired by the MFI prevented the funeral of Venkayamma's son until his debt was cleared, she told the Commission.Coming close on the heels of suicides by hundreds of farmers and weavers, the new crisis in the rural areas has made the Andhra Pradesh Government sit up and take note. It is contemplating legislation to punish erring MFIs and asking banks to enforce a code of conduct on the institutions to which they are lending.

Three MFIs that were under the Government's scanner were found to have registered an "explosive" lending growth in the last 18 to 20 months. The reason: aggressive lending by a certain upcoming bank and also a few `new generation' banks which, in the absence of a branch network in the rural areas, were financing the MFIs.

In fiscal 2005-06, banks are estimated to have disbursed loans to the tune of Rs. 1,500 crore to Rs. 1,800 crore to MFIs, the report said.

Gaining acceptability

Until the suicides began hitting newspaper headlines, MFIs were gaining acceptability and respectability. In December 2005, Rahul Gandhi, Congress MP, spent a day studying a project of the Swayam Krushi Sangham (SKS) in Nalgonda district to understand the dynamics of microfinance at the grassroots level and possibly replicate the model in his Amethi parliamentary constituency. The chief executive officer of SKS, Vikram Akula, a former management consultant with McKinsey, along with CEOs of two other MFIs, has called for evolving a code of conduct since several fly-by-night operators were damaging their collective reputation.

What is worrying officials now is the recommendation to the States by multilateral agencies such as the World Bank to involve MFIs in anti-poverty programmes. The Ministry of Finance too is contemplating a move to involve them in rural development programmes.

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