Suicides and pressure tactics tarnish image of micro-finance lending
India's bitter experience shows the downside to a system for rescuing the world's poor that had Nobel Prize beginnings
Monday 22 November 2010
Lalitha Mursilmula was as bright and lively as any other 16-year-old. Enrolled at the local college where she studied economics and commerce, when she was not in class she liked singing along to Bollywood tunes.
But one day last month, an employee of a micro-finance agency came to her village when her parents were out. At the community office, the agent and other villagers allegedly questioned her over an outstanding loan repayment. According to the girl's mother, she was told to do whatever it took to get the money before the day was out, even if it meant selling her body.
The distraught teenager ran home and called her mother, pouring out to her what had happened. She wrote a note, begging her parents not to take out another loan, and then she swallowed a lethal mixture of fertiliser. Relatives rushed her to the local hospital but nothing could be done to save her. "I was on the bus. I was told to go straight to the hospital," said Lalitha's mother, Laxmi, wiping away tears.
The sad, unnecessary death of the student is one of many such tragedies to have played out among the quiet villages of this part of southern India. Across the state of Andhra Pradesh, at least 75 people have committed suicide in recent months amid pressure to make repayments to micro-finance firms and other lenders. Many more have been pushed to the edge of their wits, or else have taken out further loans that have simply added to an ever-spiralling pool of debt. A number of loan collectors have been arrested.
The wave of suicides and subsequent revelations about the wild, unregulated way in which certain lenders were operating has created a backlash that has pushed the state's micro-finance industry (MFI) to the brink. Encouraged by local politicians who have eagerly leapt on the crisis, customers have increasingly refused to meet repayments while local activists have physically prevented loan collectors from entering some villages. Officials from the MFI say only 15 per cent of loans are currently being gathered.
Questions are even being asked about the broader role of micro-finance, initially established in countless global projects to give a hand up to the world's most abject.
Government officials here say that within just a handful of years, a system designed to help the poor transformed into a fully commercialised industry that ruthlessly exploited them. Even senior figures within the MFI say that should the industry survive, it will struggle to save its name. "This is a significant setback. Unless we reconfigure ourselves, we will have a hard time recovering our reputation," said Vijay Mahajan, a leading Indian social entrepreneur and currently president of the Microfinance Institutions Network, an industry body.
It was people such as the family of Lalitha Nursilmula, agricultural day labourers who live in the village of Godam Guda, 50 miles west of Hyderabad, that micro-finance was designed to help. Pioneered by the Nobel Prize-winning Bangladeshi economist Muhammad Yunus, the founder of the Grameen Bank, micro-finance was designed to provide credit for life-improving projects to people who would never qualify for a loan from a normal bank. By lending to small groups of people – invariably women rather than one individual – and making everyone jointly responsible for the borrowed money, the system used peer pressure as a tool to ensure individuals did not skip on repayments.
But while micro-finance has helped millions of people, in Andhra Pradesh it has also become an aggressive industry where more than 250 organisations compete to hand out loans that currently total £1.65bn. Moreover, the ferocity of competition has meant that over the past five years, many companies have been slack in their due diligence, offering considerable loans at interest rates of more than 30 per cent to people who have little chance of paying back such sums.
There has also been little evaluation of what other loans individuals may have. As a result it is now commonplace for borrowers in the state, which accounts for more than one third of all micro-credit borrowing in India, to have loans from three or four different companies, as well as from traditional unlicensed money-lenders. Employees of many companies receive commission on what they collect.
Somewhat belatedly, the state authorities have taken steps to regulate the affairs of the micro-finance industry, and have issued new rules which demand that a loan's interest cannot add up to more than the principal amount borrowed, that collectors must not indulge in coercive collection methods and that repayments cannot be collected on a weekly basis. Some within the MFI say the new regulations will strangle the business, but local officials appear to have little sympathy.
Indeed, some have suggested that one of the reasons behind the crackdown is the state government's belief that it, rather than the MFI, should be primary lender to the poor by acting as a conduit for funds from the World Bank and commercial banks to self-help groups of women. The suitability of these groups are assiduously assessed, insist officials who say the government micro-lending is driven by a desire to help the poor rather than making profits.
"I have evidence the MFI companies do not have the intention of poverty reduction. [Their intention is] profit maximisation," said B Rajsekhar, a senior official with the government's department of rural development. "Their business model is very clear: you dump money on the poor. They have a better value system. The middle class would say 'get Lost'. They are cashing in on that value system."
Sulthana Begum's husband had taken loans from three micro-finance companies as well as from an illegal money lender. Every month he was obliged to repay 5,400 rupees (£75), even though his earnings selling bananas from a cart never totalled more than 6,000 rupees. "Over the years he had become accustomed to taking more and more loans to pay off earlier ones," said Mrs Begum. He had also become an alcoholic.
One day in May, the couple's 12-year-old son, Navid, returned from the fruit cart to discover his father hanging from the roof of their kitchen, his sandals left outside the door. "I had been saying to him he should not take out any more loans but he thought he would be able to pay it," said Mrs Begum, sitting with her children in their basic three-room home.
She said she had been left with debts of 90,000 rupees and, apart from the 20,000 compensation she received after her husband's death, her sole income was the 500 rupees she got from renting a room to another poor family. The money lender was now telling her to sell off the home to clear the debts. "I cannot do that. I have two daughters that have to be married off," she said.
Narsimula Erukula, from the village of Malkapur, 25 miles west of Hyderabad, is also bringing up her children alone. Her husband, Manjula, committed suicide in August, just five weeks short of clearing a 16,000 rupee loan he had taken to build their still unfinished house. Unexpected expenses during the summer festival season had meant he was a few weeks behind with his payments. She said the representative of the micro-credit company had been pressuring other members of his loan group, who in turn had been harassing him. On the day he took his life, the day labourer had played with their two children over lunch and then returned to the field where he swallowed pesticide.
To add to her miseries, Mrs Erukula, who earns 1,000 rupees a month working in a scruffy roadside eatery, has been told she will have to take another 20,000 rupee loan if she wants to complete their weed-strewn house and put on a roof. The head villager's son estimated that 100 of the 148 families in Malkapur have loans with micro-finance companies.
The precise circumstances of Lalitha Nursilmula's death are disputed. The teenager's family say the collector who came to their village that day and spoke with her was from SKS Finance, one of India's largest micro-lending companies. SKS began life in 1998 as a non-profit organisation but has steadily grown, annually expanding its profits and revenues by as much as 100 per cent, and now has almost 6 million customers. This summer, the company, headed by US-educated Vikram Akula, a micro-credit millionaire, made a public offering of shares, raising more than £200m on the Bombay stock exchange.
The move was condemned by, among others, the micro-finance pioneer Mr Yunus, who said: "This is pushing micro-finance in the loan-sharking direction. It's not mission drift. It's endangering the whole mission." Last week, however, at an economic forum in Delhi, Mr Akula said anyone who suggested the MFI industry in India had become greedy needed to check the facts.
The Reserve Bank of India has written to SKS about Lalitha's death. The company responded by rejecting any allegations of wrongdoing. An SKS spokesman, Atul Takle, confirmed to The Independent that a company employee visited Godam Guda on 8 October and met other members of the loan group. He said the group members in turn spoke to the teenager and collected 150 rupees from her. He denied claims that the employee had in any way threatened Lalitha. "Any loss of life is a tragic event, and our hearts go out to the families of the deceased. Suicides are also extremely complex subjects, where there is never any direct answer as to the cause," he said.
At the family home, Lalitha's elder sister, Devi, wept as she held up her sibling's college bag, which still held her books. She said: "She was lively and jovial and friendly."
A communal way out of poverty
By Leo Hornak
Based on the ideas of the Nobel prize-winning Bangladeshi economist Muhammad Yunus, microfinance schemes are intended to offer a route out of poverty by offering impoverished people the chance to create self-sustaining "micro-businesses".
In conventional microfinance schemes, village women are given small loans, typically less than $50 (£31) to start with, which they are expected to invest in their own small business ventures, such as a market stall or livestock. The loan and its interest are supposed to be repaid using profits from the business, and any surplus is kept by the woman and her family. As the business grows, larger loans are taken. In theory, a family should be able to escape poverty and achieve financial stability after a few cycles of this process.
Since traditional credit ratings are unavailable for most microfinance borrowers, repayment of the loans is guaranteed through a process known as "social capital". Each woman who takes a loan is expected to sign a pledge promising to share responsibility for repayment with other borrowers in her neighbourhood. If any person falls behind on repayments, the other borrowers are obliged to chip in on her behalf. This has produced extremely reliable rates of repayment, but it can also create tremendous social pressure on individuals who find themselves in difficult circumstances. In effect, rather than using their house or their belongings to secure a loan, microfinance customers are asked to pledge their relationship with their community.
Yunus's system has generated much excitement over the last 10 years, and was widely seen as an effective alternative to traditional forms of aid. The UN celebrated a "Year of Microcredit" in 2005, and Yunus was awarded the Nobel Peace Prize for his work in 2006. In his acceptance speech, he promised that his system offered the chance to "put poverty in the museum" forever.
But the effectiveness of microfinance in alleviating poverty has been called into question in recent years. In India, one study by economists from MIT's Poverty Action Lab found that only around one in five micro-loans resulted in the creation of a small business that would not have otherwise existed. The same study also found little or no evidence for a decrease in poverty levels a year after enrolling on the scheme.
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