MFIs are loan sharks, not saviours of the poor


By Devinder Sharma Food Policy Analyst

Illustration: Sudeep Chaudhuri

LAST WEEK, the 2010 Global Hunger Index placed India in the pit. Except for Bangladesh, India fared much below all the other South Asian countries. The same week, Andhra Pradesh proposed an ordinance to curb the malpractices that have become synonymous with microfinance institutions (MFIs) forcing a large number of rural poor to take their own lives. Coming in the wake of disturbing news reports of a seemingly unending serial death dance by small borrowers, the AP Ordinance, for the first time, tries to regulate the plethora of MFIs and is likely to provide a debt-swap arrangement. “What started off as an initiative for social and economic upliftment of rural poor has now morphed into a highly competitive business with the sole aim of making profits,” said Chief Minister K Rosaiah. “People are getting caught in debt traps and they see no way out.”

No wonder, the business has grown manifold. India Microfinance Report 2009 tells us that the portfolio of MFIs has grown by 97 percent, and the number of beneficiaries has gone up by 60 percent. The unprecedented growth is in a way shifting the game from the hands of the villains of the story, the sahukars or moneylenders, to a sophisticated, media-friendly organised class of neo-moneylenders. These are not the usual banias but a highly educated class who literally rob the poor. And they have done it remarkably well.

Take the case of this woman from Karimnagar district in AP, who escaped a suicide attempt. Harassed for not being able to repay a Rs. 4,000 loan, she was being forced to sell her house. Another woman lost her husband, and while the body awaited cremation, the MFI goons were at her door demanding their pound of flesh. While the RBI remains a mute spectator, the finance ministry too is unwilling to act.

The reason is simple. For the banks, microfinance has come as a saviour. It is a highly profitable business with assured and timely returns. Without making any effort, all that banks and other donors need to do is to provide refinance at roughly 12 percent interest. The MFIs do the rest, including timely repayments. These intermediaries add another 10-12 percent, and therefore end up charging the borrowers anything above 20-24 percent, which effectively comes to 36 percent on cumulative terms. With more than 98 percent assured returns, the banks couldn’t have asked for more. Realising that there is money in exploiting the hapless poor, private banks and companies like Monsanto, Citicorp, Infosys, ABN Amro, ICICI, and even the United Nations and donors like Ford Foundation have joined to earn profits from poverty.

The debt-swap that the AP government is trying to bring in is unlikely to stem the rot. From what appears in the media, it is designed to let the crooks off the hook. While the recent spurt in suicides in AP and Odisha should have landed many of the MFI CEOs in jail, all that the ordinance is trying to do is to pass on the burden to nationalised banks by forcing them to take over the loans. While they will come under an unmanageable financial burden, the MFIs will emerge the true beneficiaries. In reality, what was once intended to be a charitable activity has now turned predatory. It has resulted in multiple borrowings and defaults, thereby adding on to the hunger index.

What is needed is to provide the poorest of the poor with loans not exceeding an annual interest of 3 percent. Like the Society for the Elimination of Rural Poverty in AP, which provides such loans to self-help groups (SHGs), the banks are directly linked to the poor borrowers. The remaining interest is subsidised by the state. By eliminating the middlemen, the SHGs have built a corpus of Rs. 5,000 crore.


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