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Friday 19 December  
Working in a cotton field in South India
Aletta André's picture
Andhra Pradesh, India
Andhra Pradesh, India

Stricter rules for microfinance after India suicides

Published on : 25 October 2010 - 9:20pm | By Aletta André (Photo: Flickr/jankie)
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The suicides of more than 30 farmers in southeast India have rocked the world of microfinance. The farmers were reportedly deep in debt to microfinance institutions (MFIs). Measures were announced immediately, but who will monitor compliance with the new rules?

The news of the suicides in the federal state of Andhra Pradesh prompted its prime minister to make some strong-worded statements to the media: "Microfinance institutions charge exorbitant interest rates. The poor are driven to take their own lives because of their burden of debt and the brutal methods used to call in the loans." Indian MFIs, on the other hand, have kept conspicuously silent about the incidents.

It took many phone calls before someone could be found who was willing to discuss the issue. K. Balasubranmanyam from Sa-Dhan, a union of microfinance institutions, told Radio Netherlands Worldwide:

"We want to investigate these specific incidents further [...] Many moneylenders call themselves MFIs while they are not registered with our organisation or with the Reserve Bank of India (RBI)."

Sa-Dhan has about 250 members; three-quarters of them provide micro finance.

Brutal methods
Sa-Dhan has pledged to revitalise and to enforce more actively the voluntary code of conduct agreed by most members in 2006 to prevent brutal methods of calling in loans. In that year, MFIs in Andhra Pradesh were also linked to suicides among farmers.

"The people calling in the loans are often not aware of the code of conduct. The membership of the MFI in question can be revoked following complaints, but the agreement was not always adhered to in the past."

A decree issued by the Andhra Pradesh government orders all MFIs to register with the government. Under the decree, unethical methods of calling in loans are punishable by revocation of the MFI’s licence, a fine of up to 1,600 euros, or three years in prison.

Three officials from the microcredit institutions SKS Microfinance and Spandana Spoorthi Financial were arrested after a woman filed a complaint stating they were harassing her. All RNW's attempts to persuade SKS and Spandana to comment on the case failed: they said they were unable to react to the allegations.

Together with other microfinance institutions they have petitioned the court to rescind the government’s decree, on the grounds that it makes it impossible for them to call in loans. The organisations also argue the order is unnecessary, as they are already registered with the Reserve Bank of India. The court has granted the micro finance institutions a one-week reprieve.

Good move
Mr Balasubranmanyam believes the compulsory local registration decree is a good move "so the government will know per district who is operating there."

He also welcomes sanctions against brutal methods used to call in loans. Last week Sa-Dhan’s members promised to lower their interest rates by two to three percent and to extend lending periods to 60 weeks. However, the manager emphasises that "microfinance institutions can no longer operate if they charge interest rates below 24 percent.” At present interest rates on loans are usually around 30 percent.

He also argues that the government should subsidise microfinance institutions to help lower interest rates further. And commercial banks, which is where the MFIs borrow their money, should accommodate them by charging lower interest rates.

Professor H.S. Shylendra from IRMA, an institute dedicated to rural development that specialises in micro financing, believes structural change is called for. He does not feel the federal state government’s decree will make much of a difference.
"I believe it’s mainly intended to make the government look good. There are different kinds of MFIs, and there are so many rules and regulations that the federal state can impossibly enforce them all. We have already seen a large number of MFIs change their legal status to a Non-Banking Financial Company to evade state oversight."

The professor finds it difficult to establish a direct link between debts owed to MFIs and farmers who commit suicide.

"Each year, hundreds of farmers in Andhra Pradesh commit suicide. It’s a structural problem, which has several causes. Most farmers have borrowed from a number of sources before they commit suicide."

© Radio Netherlands Worldwide


user avatar
lizloansbest 4 April 2012 - 3:33am

It's sad to know that it is now harder to get a microfinance due to that issue. It will mainly affect the lives of the borrowers living in India.

Jolan Douwes 29 October 2010 - 12:06pm

For your information:

Indian microlenders face possible collapse: rating agency

NEW DELHI (AFP) - India's government may be forced to step in  to save the country's 6.7-billion-dollar microfinance industry from collapse, a  leading industry ratings agency warned on Friday.
    The Microfinance Institutions Network or MFIN, which represents 44 leading  Indian microfinance lenders, has said commercial bank loans to the sector are  drying up and borrowers are reneging on their debts.
    "It could come to a systemic banking crisis -- that is why I feel the  central government won't let it go that far," said Sanjay Sinha, managing  director of M-CRIL or  Micro-Credit Ratings International Ltd, a New  Delhi-based leader in rating the sector.
The industry was thrown into turmoil this month when the southeastern state  of Andhra Pradesh, the hub of small loan activity, cracked down on  microfinanciers.
    Lenders were accused of benefiting from usurious interest rates of up to 36  percent and using aggressive debt collectors who were blamed for over 30  suicides.

Hiram2 26 October 2010 - 6:18pm

"If the big banks don't get you, the small ones will. For shame!".....Vera is right on "this time" but the shame should be on the Indian government for allowing such high interest rates. As to Jasmin's statement: "Actually people just do not use money judiciously. Major part is spent on dowry for the daughters, and luxury items for home."........The Indian culture of a "dowry" is a very old custom and those poor Indians are trapped into the sytem. Rejection by their religious community is more of a concern than paying back a high interest rate. It is difficult to use money "judiciously" when you live in poverty.

jasmin 26 October 2010 - 7:07pm / India

You are right! But we do have the choice to spend it wisely! Many people are poor because they have large families, and are into some kind of chronic addiction. They ill-spent it. ..;(...

jasmin 26 October 2010 - 5:07pm / India

That's shocking! Actually people just do not use money judiciously. Major part is spent on dowry for the daughters, and luxury items for home. The little money spent on business does not bring the returns to manage household expenses and pay off the debt...very sad..

Vera Gottlieb 26 October 2010 - 5:05pm / Germany

And greed rearing it's ugly head once more - no heart, no conscience. If the big banks don't get you, the small ones will. For shame!

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