Death by Micro Credit-2
I don't know why writers always give interest rate charged as just 20% when in GOI report on Vidharba gave the figure to be as high as 5% per month to even 1.5% per day. World Bank report of 2003 (Report No. 25797-IN) also state that interest rate charged from farmers and SME is 36% to 120% per year.
Access to Rural Credit – Page 108 of WB- 25797- IN
[3 .8 1 India has a wide network of rural finance institutions (RFIs), but a large number o f the rural poor remain under-served or completely left out o f the formal financial system. There are over 30,000 commercial bank branches, over 14,000 regional rural banks (RRBs), and over 100,000 rural credit cooperatives (RCCs) in addition to several non-bank financial institutions. This translates to about 4,700 people served by each RFI outlet. However, the last available rural household survey (Reserve Bank of India 1991) found that only about one-sixth of rural households borrowed from formal RFIs. Non-institutional sources accounted for as high as 52-62% of household outstanding debt. The rural non-farm sector also faces constraints to accessing finance. A recent study covering some 20 million small-scale rural enterprises (in the unorganized sector) found that commercial banks reportedly meet merely 4% of the credit needs of this sector, and micro-finance sources provide another 3% of their credit needs.
Various estimates suggest that India's rural poor rely almost entirely on informal sources (money lenders, traders, commission agents, etc.) to meet their consumption credit needs, at annual interest rates ranging from 36% to 120% per annum.]
My uncle told me the standard procedure in Ludhiana, Punjab is moneylenders give a loan of say Rs.1,00,000/- on stamp paper. Actual money released is 85% or Rs. 85,000/- and the loan is payable at Rs.1000 per day or 1% per day from day one.
Compounding of 15% alone comes to 66% annually but again Rs.1000/- returned per day lend at same rate shall also fetch similar return therefore actual interest rate may come close to 100%.
Supply of spurious seeds, pesticides and fertilizers, very low MSP and takeover of farm produce by moneylenders at harvest time when prices are at it lowest compounded with draught or unseasonal rain destroying crops, lack of public healthcare all at add up to the financial burden.
Farmers are forced to sell their land to pay for treatment of their family members or to get them admissions to schools and colleges in mushrooming private hospitals and educational institutions.
Ravinder Singh
September28, 2006
From: sudhirendar <sudhirendar@ bol.net.in>
Date: Sep 26, 2006 3:13 PM
Subject: Micro-Credit
To: krishnagreen@ gmail.com
Date: Sep 26, 2006 3:13 PM
Subject: Micro-Credit
To: krishnagreen@ gmail.com
(from The Times of India, Sept 16, 2006)
Death by Micro credit
Sudhirendar Sharma
The tragic suicides by more than 60 self-help group members in Andhra Pradesh during April this year may have been subsumed under the unending spate of farmer suicides in the Vidharba region of Maharashtra but the hidden dimension of micro-credit revolution in the country has only begun to surface. Reports indicate that the actual number of suicides may exceed 200 in the SHG-saturated districts of Krishna, East Godavari, Guntur and Prakasam where intimidation of families by the Micro-Finance Institutions (MFI) against reporting the matter to police had surfaced.
Following protests staged by mourners and enraged borrowers, the district authorities closed down 50 branches of two major microfinance institutions in the state. The erring MFIs were charged with exploiting the poor with `usurious interest rate' and intimidating the borrowers by `forced loan recovery' practices, combined effect of which drove debt-ridden poor to embrace death. An anguished Chief Minister Y S Rajasekhara Reddy had lashed out: `MFIs were turning out to be worse than moneylenders by charging interest rates in excess of 20 per cent.'
As the government began in-depth enquiry into suicide deaths and the MFIs launched themselves into damage control measures, many affected families were left wondering if the government had not played ignorant to the modus operandi of MFIs. The fact that micro-credit loans earned interest in excess of 20 per cent has been no secret. Borrower harassment by MFIs hasn't been uncommon either. Having been in the business of creating self-help groups and promoting micro-credit institutions, the government cannot absolve itself from being in the thick of the fatal crises.
Given the fact that the commercial banking system has little regard to the bottom-of-the- pyramid group as being creditworthy, the MFIs have enjoyed unrestricted political patronage in extending credit services to the poor. The Reserve Bank of India statistics indicate that micro-credit constitute no more than 15 % of all commercial bank lending, leaving MFIs to cover a clientele of over 200 million families in the rural areas. Taking shelter behind these numbers, the MFIs have requested the government not to pursue the matter further as it was detrimental to the interests of the poor!
Are MFIs genuine in catering to the interests of the poor? So it may seem as easy credit in rural areas has brought about significant turnabout in lifestyle, however, at the cost of plunging poor households under debt. The latest National Sample Survey Organisation (released in Dec 2005) survey reveals that rural households account for 63 per cent of the country's overall aggregate outstanding debt of Rs 177,000 crore. The incidence of indebtedness was reported to be about 27 per cent among rural households, predominantly being in the rural areas of Andhra Pradesh, Kerala, Rajasthan and Karnataka.
There are number of cases which suggest that a large proportion of micro-credit clients are worse off after accessing loans. Since higher interest rates on micro-credit do not provide scope for savings as also for investing in insurance, the dominant risk-covering factors for the poor, micro-credit seldom propels poor out of poverty. Further, there are no businesses that can generate profit after paying an interest of 24-36 per cent on capital investment. Else, why after mobilizing more than Rs 5 billion the average saving per member of the SHG is a pitiable Rs. 377 in Andhra Pradesh?
MFI pay little attention to the core concerns of the poor. For them the critical concern is to sustain services against emerging odds. The brewing crisis in Andhra Pradesh has not only exposed the `unethical' practices by MFIs but has raised serious questions on the regulatory measures applicable to them. As the murky world of MFI operations comes to fore, the government is seized of the seriousness of the issue in the wake of an assessment report on many cases of `unnatural deaths' that has cautioned the state against `an imminent danger of more suicides in the offing'.
With credit being considered the panacea to eradicating rural poverty, it is doubtful if political decisions will weigh heavy against MFIs. As poverty gets directly co-related to reduced cash flow, providing easy credit through host of lending institutions creates an illusion of `feel good' amongst the rural poor. In many ways, micro-credit justifies the ongoing processes of decentralization too. As poor take control of their destiny through soft loans, it becomes convenient for the government and the commercial banks to absolve themselves of their primary responsibility towards the poor.
Micro-credit has caught on so much, courtesy the donors; that its promoters have gained immunity under a weak regulatory environment. Marlene Dietrich had rightly said: `there is a gigantic difference between earning a great deal of money and being rich'. Far from helping people generate wealth, easy credit is being used to encourage primary producers at the farm to become secondary distributors for consumer products. Howsoever lucrative, the transition has severe implications on the livelihoods security, and now on lives of poor people.
As micro-credit takes its toll on the lives of poor households in Andhra Pradesh, the future of the self-help groups and the micro-finance institutions has come under scanner. However, unless the government jumps in to apply stringent regulations on MFI operations alongside throwing a safety net around the poor and the vulnerable, micro-credit related suicides will become more of a norm than exception. In a country where farmer suicides have been largely accepted, accommodating suicides of another kind may not be out of place!
Formerly with the World Bank Dr Sudhirendar Sharma is a development analyst attached to the Delhi-based the Ecological Foundation. He can be reached at sudhirendar@ vsnl.net
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