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The Andhra Pradesh crisis has been something of a turning point in public assessment of microfinance, with a suicide wave caused by widespread overindebtedness badly tarnishing the sector’s image in India as well as abroad. Some Indian politicians are now beginning to identify the idea of alleviating poverty with microfinance as “crap“.
Source: M‐CRIL Microfinance Review 2012 (vii)
Microfinance in India remains in protracted decline since 2010 (see graph), although talk of “green shoots” and catharsis after “near-death experience” has been around for some time. The industry’s stance for the past two years has been to deny responsibility for any wrongdoings, downplay its role in precipitating the dozens of suicides, and claim that the AP government’s October 2010 legislation was a surprising and unjust crackdown on healthy practices. I have claimed otherwise.
Yet, fairly surprisingly, my new paper investigating the causes of the crisis, and a recent interview with SKS Microfinance senior managers come to some similar conclusions about the causes. In particular, both versions see the unregulated hyper-competitive market as a significant cause of the tragedy which led to microfinanciers’ troubles. How can this be?
The microfinance industry, which once set out to protect the poor from extortionate moneylenders, may depend on those same moneylenders for its business success; and these moneylenders in turn may be profiting from microfinance. So reports the Wall Street Journal today.
Ketaki Gokhale is a Stanford University graduate student currently working for the WSJ as this year’s Daniel Pearl Memorial Journalism Intern. Earlier this year Gokhale reported on credit bubble tendencies brewing in the microfinance sector in India, an article which provoked controversy and some indignation among the microfinance industry and its advocates.
One of Gokhale’s interviewees reported being overwhelmed by the sudden and forceful supply of credit in her neighbourhood. “Suddenly, in the shantytown where she lives, lots of people wanted to loan her money. She borrowed $125 to invest in her husband’s vegetable cart. Then she borrowed more.” The lady descended into a borrowing binge, at the end of which she even bought a television. She was forced to sell virtually all of her assets and still remained in debt worth around a quarter of her annual income.
Refinancing microfinance loans through the grey market
Gokhale has now followed up her earlier investigation into the dark side of microfinance and uncovered structural complementarities and interdependencies between the microfinance business and local moneylenders. The irony and sadness of the story is that microfinance originally set out to put these same moneylenders and their practices of extortion out of business by offering the poor loans which they could afford. Moneylenders in India are reported to charge interest rates even beyond 1000 per cent annually, leading to debt bondage and other existential problems for the poor.
The entry of microfinance banks into the market may have pushed down the interest rates of some moneylenders, but paradoxically the moneylending business appears to be growing. As Gokhale reports, more than 80% of registered moneylenders in Mahabubnagar started their businesses after the year 2000, which coincides with the phenomenal bout of growth in microfinance in India in the past decade.
It appears that many microdebtors cannot afford to comply with the extremely rigid repayment schedules of microfinance banks, so they must turn to moneylenders, thereby re-financing their loans through the grey market – the market which microfinance sought to protect them from. Read the rest of this entry »
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