India: Microcredit driving poor into further misery, joint liability causing communities to implode Print E-mail
April 2012

Entrepreneurial investment turns to consumer loans

Microfinance for profit

Microfinance was meant to enable the poor to set up small businesses and improve their lives. In India, it has become credit for consumer goods, driving the poor into debt and profiting private loan companies

by Cédric Gouverneur
Read also "Women the significant victims of India's FOR-PROFIT Micro-Finance industry's sharks"

Lakshmi and his wife Rama, from Warangal district in the southeastern Indian state of Andhra Pradesh, were tired of rolling thousands of bidis (aromatic cigarettes) 12 hours a day, to earn 70 rupees ($1.34) for them and their two children. So they borrowed 5,000 rupees, to be paid back at 130 rupees a week, from a microcredit lender to open a tiny stall selling betel nuts. The income would allow them to live a little better. But Lakshmi fell ill. “He wasn’t able to work for four months,” said Rama. Deadlines passed and the interest mounted. The neighbours became aggressive, because microcredit companies have perfected a system of joint liability: when a debtor defaults, others in the community have to pay. Feeling harassed and frightened, the couple took out a second loan to pay back the first. Then a third to pay back the second... In the end they took out five loans, in all $1,300.

The creditors camped out in front of Lakshmi and Rama’s rundown little house. They illegally seized the betel nut stall, a gas cooker, gold jewellery, and even the sewing machine which the couple’s daughter, Eega, 20, used to make clothes to sell. When she asked how her family were supposed to feed themselves, the creditors replied: “You are pretty ­ prostitute yourself.” Humiliated, she committed suicide by setting herself on fire on 28 September 2010.

“The poor have access to easy credit that is within their reach,” said Reddy Subrahmanyam, head of the state’s rural development ministry. “But at what cost? When you add on the service charges, the interest rate works out at nearly 60%.” When the Bangladeshi economist and Nobel laureate Muhammad Yunus invented microcredit, the idea was that it should be invested in a new source of income, not supplement existing income. It is a subtle difference. In India, microcredit is now used in lieu of loans for buying consumer goods. “The poorest take out loans to cover medical expenses, a wedding or a dowry, or even to buy a television or go on a pilgrimage,” said Subrahmanyam. “Microcredit was meant to empower the poorest, give them back their dignity. Instead, it is driving them further into misery.” Instead of creating solidarity, joint liability has caused village communities to implode.

Countering the Maoists

A quarter of India’s microcredit loans are concentrated in Andhra Pradesh: in 2010 52bn rupees ($997m) were lent to 6.25 million households (1). “In the past decade,” said N Abhay, editor of the online journal India Microfinance, “the regional government launched several social programmes aimed at countering the influence of the Maoists” (who are active in the rural areas) (2). The state government encouraged banks to lend to villagers formed into self-help groups, while it took responsibility for paying some of the interest.

In Dharmasagaram village in Warangal, Bhergya told me how she borrowed the equivalent of $1,300 from the bank through a self-help group at 12%, of which 9% was paid by the state government, to buy a rickshaw which she then hired out to her brother. “Hiring out the rickshaw brings me 6,000 rupees net per month, and I pay back 2,700.”

But private companies have used this network to canvass villagers and sell them loans to buy consumer goods. Most of India’s 66 microcredit organisations are now motivated by profit. The leading company, SKS Microfinance, was set up in 1998 by Vikram Akula, a graduate of Chicago University. SKS started out as a not-for-profit company. “This status prevented them from borrowing enough money,” said the company spokesman at their headquarters in Hyderabad, “so Mr Akula decided in 2005 to turn it into a non-banking finance company.” Under Indian law, such companies can lend money but cannot take deposits. Like all the other heads of microfinance companies we contacted, Akula was “too busy” to see us. (In November 2011 he decided to stand down.) The industry seems to be following the advice of French humourist Alphonse Allais, who wrote: “Money should be taken where it can be found: among the poor. They don’t have much, but there are so many of them.”

The Andhra Pradesh state government (Congress Party) recently banned creditors from going to the homes of debtors, and made taking out further loans subject to the consent of the authorities. The opposition Telugu Desam Party (in power in Andhra Pradesh between 1999 and 2004) says these measures are insufficient, and has called on millions of debtors to stop paying.

In Hyderabad, we met Mrs Kaushalya and her neighbours. She borrowed money to look after her hemiplegic husband and was unable to pay it back. Her neighbours, who had joint liability, would usually have harassed her, but the women decided to stand together, and stop paying altogether. “We have paid nothing since November 2010,” they said proudly. “The people from the credit company threaten us, and tell us we will go to prison, but nothing has happened, they don’t even bother about us any more.” There are similar stories of village solidarity across the state, and the rate of repayment has fallen from 97% to 20%, even 10%. Subrahmanyam has promised that “investigations are underway into about 50 suicides. Those responsible for harassment will have to answer to the courts.”

Sensing the tide turning, 39 SKS directors have sold off their stock options since the crisis began in 2010 (3). Apparently, microcredit companies are now canvassing indigenous Adivasi villages: these isolated, poor and illiterate people are less wary.
Translated by Stephanie Irvine

Cédric Gouverneur is a journalist

(1) Narasimhan Srinivasan, “Microfinance India: State of the Sector Report”, SAGE Publications India Pvt Ltd, New Delhi, 2010.

(2) See “India’s undeclared war”, Le Monde diplomatique, English edition, December 2007.

(3) Express India, New Delhi, 11 February 2011.