Just right now, a severe microfinance crisis appears to be brewing in Southern India. A large number of suicides has led to a legal clampdown and a corporate backlash. With a complaint launched by microfinance institutions (MFIs) at the Andhra Pradesh High Court in Hyderabad against the Andhra government, the recent conflict over MFI practices and borrowers’ debt levels – debt which may be responsible for the deaths of over thirty people – has come to a head. How this case develops is bound to shed light onto what actually matters in microfinance in India today. Bluntly: is it power, profits or people?
Flashback: In August and September, nineteen microfinance borrowers in Andhra Pradesh (A.P.) took their lives because of overindebtedness blamed on microfinance – some reports say more than 30 (or even 57; see updates below). Then, in early October, the debt-driven suicide of a fruit-seller named Prabhakar in Kurnool, southern A.P., triggered public outcry and attacks on several MFI offices.
On October 14th, the A.P. state government “brought an ordinance making it compulsory for MFIs to register themselves, declare the effective rate of interest they charge, ensure that no security is sought for loans and no coercion is used for recovery. Non-compliance will be punished with a three-year prison term and a fine of Rs 1 lakh.” In response, yesterday a consortium of MFIs operating in A.P., MFIN, filed a petition at the Andhra Pradesh High Court seeking an order to squash the ordinance issued by the government (NDTV, AP). Meanwhile, another overindebted microborrower, K. Narayana, who was harassed by the agents of four MFIs, took his life by drinking poison.
Video: “The microfinance institutions hit back,” questioning A.P. government’s power of jurisdiction.
For the microfinance industry, the regulatory initiative is clearly a bombshell. Registering with local authorities and improving transparency will require time and herculean effort. Vijay Mahajan, chairman of BASIX and speaker for the MFIN consortium, thinks it impossible in the short run. He explained today: “Our agents are idle. Our members (customers) have stopped attending the meetings where we seek repayments. About 9,000 crore [almost 1.5 bn Euros] is at risk. And there is a much bigger danger of the entire system collapsing if this situation continues for another 60 to 90 days.”
This conflict hasn’t come out of nowhere, though. Nicaragua saw a popular campaign of repayment refusal last year called “No Pago” (I’m not paying); this was dismissed by MFIs around the world as mere political campaigning. Wall Street Journal Intern Ketaki Gokhale caused a stir (and a backlash) when she found bubble symptoms and high pressure on borrowers last year simply by talking to borrowers – and the potential consequences of microfinance indebtedness have been known for some time.
But locally, tremors could be heard before the earthquake, too, and were probably ignored. Andhra Pradesh’s capital Hyderabad was the site for the large-N, randomised control trial performed by JPAL researchers which last year failed to find positive outcomes for urban microfinance on almost all counts. While these results were challenged by the microfinance industry and also later re-interpreted n a softer light by the study’s authors, the upshot of the study was pretty clear: microfinance in Hyderabad wasn’t actually fighting poverty. The city is also where SKS is based; SKS is the MFI whose IPO in July famously heaped riches onto founders and investors but generated serious questioning inside and outside the microfinance community about the MFI’s mission. The CEO of SKS was sacked earlier this month amidst a nebulous high-level power struggle and shaken investor relations.
Power, profits or people?
Those who are interested in where microfinance is going (and the poor experience on the ground) should keep their eyes peeled on Andhra Pradesh right now. At the moment, I can discern three drivers in this ongoing struggle with completely open outcomes: will this mean the demise of microfinance in India, heavy regulation, or a return business as usual?
First driver: the state is asserting its legislative power. The A.P. government has performed something of an about-face from its previous microfinance-friendly approach in the past, such as creating the MACS Act which gave special legal status to borrower groups; or supporting microfinance-funded attempts at providing water and sanitation, which my own field research in A.P. earlier this year dealt with. The form in which this newly-asserted power is exercised may be wild and populist, it may be ostentatious muscle-flexing by a weak government to distract attention from other issues (such as looming state disintegration), but this much is clear: state bodies do have the authority and the duty to act when their citizens’ lives are at risk. This is especially clear when suicide notes evidently point to harmful business practices as the cause. What role the A.P. government finally should play in regulating is up to India’s government to decide; but for now it has rightly acted to prevent more harm to lives and livelihoods.
Second driver: MFIs are moving to protect their business models and profits. While the allegation that MFIs can act like moneylenders isn’t that new, the A.P. crisis is starkly revealing a callous ego-perspective among MFIs. “I had no arrears with these people so where is the question of coercive recovery tactics?” SKS spokesman Atul Takle said yesterday, and “I personally don’t think a person would take her life for 225 rupees ($5.08) a week.” In a country where four out of five people live on less than 20 Rupees a day (2007), Takle’s statement is so far removed from reality that one wonders whether he has lost all connection. Meanwhile, Vijay Mahajan has explained MFIN’s hostility to the recent regulatory initative from an investor’s point of view: “It is quite understandable that our investors are concerned because as I said 80 per cent of our balance sheet is debt and the rest is equity”. So what? I ask, when lives are evidently at risk. Mahajan did also admit that an MFI responsible for at least one suicide was a MFIN member and would be expelled from MFIN – the blame game of pointing at black sheep is winding up.
Third driver: the people are fighting for their own welfare. Suicide in India already is horrendously common amongst the poor, especially farmers, who are choked by debt before they physically end their lives. Suicide is their last feeble outcry against a cruel world. Traditionally, moneylenders have been blamed, and traditionally it is rural farmers who have suffered. Now, apparently the poor (both urban and rural) are crying out against microfinanciers. How, I wonder, can a microfinance “community” that set out to help the poor justify suicides as a potential consequence of its activities? With their desparate actions, the poor of Andhra Pradesh have brought an issue to the fore which has thus far rarely been heard – that microfinance loans can, and often do, lead to severe overindebtedness. The trouble is that compiling databases of overindebted households and withholding them credit, as Mahajan now suggests, will not make things better: anyone who is deep in debt fears denial of credit most of all, because it finally locks them in insolvency. Real solutions are needed, not ones to save the balance sheets. Now, the crisis is unfolding, and I sincerely worry about some of the kind, hospitable (and indebted) people I met in Andhra Pradesh in the course of my research. I hope they are not stuck in the middle of this.
UPDATE (20 Oct., 15:00 GMT):
- Late yesterday, MicroCapital Brief reports: “Indian government finalizes debt-swap scheme”; going on to explain, “Under the scheme, self-help groups would take out loans at lower interest rates from banks to pay off loans of higher interest from MFIs. The scheme is set up in response to news that some self-help groups are struggling to repay their loans.” However, this news remains unreported by others.
- India Microfinance Business News launches this bizzarre poll, asking who is primarily responsible for the microfinance crisis in A.P. (Some even say China)
- Bala Murala Krishna at Asia Sentinel shames India’s microlenders as “loan sharks”, and asks, “What is society to do if for-profit microfinance, in its quest for ever-higher profits, pushes the boundaries of usury and becomes exploitative?”
UPDATE (20 Oct., 22:00 GMT)