This is more shocking news from Andhra Pradesh. Obligatory life insurance sold with microfinance loans may be incentivising overindebted borrowers to commit suicide. Worse yet, it appears that loan officers have been pushing debtors to commit suicide as a way out of debt.

Here’s the gist of a Times of India article by Jinka Nagaraju published earler today:

A government study has found that some MFI agents themselves are encouraging the debtors to commit suicide so that their loans are repaid. This happens because the borrowers are covered by insurance.

Till now, there have been at least 45 suicides reported in the state in the last one-and-a-half months allegedly due to the coercive practices employed by the MFIs in recovering the loans. …

According to sources, the MFIs draw up an insurance cover for the borrower at the time of loan disbursement. In the eventuality of suicide, they recover the amount under the Loan Protection Fund (LPF) by which 10 per cent of the loan amount is deposited with the RBI which repays the remaining loan amount due from the defaulter. …

Explaining the methods adopted by the MFIs to trap the rural folk by doling out loans, Budithi Rajasekhar, CEO of Society for Elimination of Rural Poverty (SERP), the monitoring body of Self Help Groups (SHGs), said: “A major modus operandi is to lure a greedy SHG group member by bribing her with money and gifts to introduce the MFI agents to other members. For example, in Dubbaka mandal of Medak district, all the MFIs formed a syndicate to coerce the members to take loans.”

Sickening, if true. Under these circumstances, it only seems right that the A.P. government has halted MFI activities until the smoke clears and the cause of the suicides is established.


UPDATE (21 Oct., 15:00 GMT)

The ToI reports: “The A P High Court on Wednesday asked the state government to explain as to what protective measures it envisaged for the micro finance institutions (MFIs) while implementing its recent ordinance that aims to regulate these MFIs.” However, the bench observed that “the space that ought to govern MFIs is unoccupied so far.”  A further hearing is scheduled for Friday.