Nov 28, 2009

Micro-finance also leads to suicides in rural areas

Sometime back I read a small news item tucked away in one corner of a newspaper. It mentioned that some women in a self-help group that Rahul Gandhi was visiting in Andhra Pradesh pleaded for the interest rate on micro-finance to be brought down.

In fact, this news report made me sit back and think. A few months back (before this news report) I had read somewhere that some 40-odd SHG members in AP had committed suicide. I checked up with my colleagues in other States where farmer suicides are on an upswing, and to my utter dismay found that many of the farmers who committed suicide also were faced (or let us say shared) with the burden of an abnormally high interest rate that their wives were being made to cough out in the name of micro-finance.

Independent journalist Purusottam Singh Thakur from Bhubaneshwar told me the other day after returning from the suicide-prone areas in Orissa that most of the 32 farmers who committed suicide in the past three weeks or so too had borrowed from micro-finance institutions.

I am not surprised.

Many in the urban centres would commit suicide if the banks start charging us 24 per cent rate of interest. Even at 8.5 per cent rate of interest, those who have drawn housing loans, find it difficult to make monthly EMI payments. Imagine the stress and threat under which the poor in the rural areas are being made to borrow at 24 per cent rate of interest.

The loot doesn't stop here.

The MFI units are now getting ready to extend home loans to the poor. Says a report in The Times of India (Mar 30, 2009): The rural home loan products are structured pretty much the same way as in the cities. The difference being the average loan amount. For MFIs, it ranges between Rs 50,000 and Rs 2 lakh with repayments being in equated monthly instalments (EMIs). Some like Madura Micro Finance also provide a payment holiday of four months for construction.

I am not sure at what rate of interest these loans for the poor are being provided. If you happen to know, please do let our readers know. In any case, you can read the full report MFIs offer home loans at:

Whatever be the justification for charging 24 per cent rate of interest, but how can human beings expoit an hungry stomach in the name of a successful business model? How can human beings be so cruel to fellow humans, not even thinking twice before drawing the last ounce of blood from his impoverished body?

The average monthly income of a farm family in India is less than Rs 2400. And I am talking of 60 per cent of the country's population, including their wives who are more often than not members of the SHGs benefitting from micro-finance. How can you charge 24 per cent rate of interest from people who cannot afford two square meals a day?

While you ponder, let me bring to you an interesting post the other day on the FocusOrissa list. Posted by Sikander Kushwaha, a student from Jabalpur, it makes some interesting points that should add to our understanding of the improper and immoral ways the MFIs operate. I reproduce the text here, and I am sure it will provide more food for thought for those who feel outraged at the criminal role of MFIs. 

WHEN the Bangladeshi banker and economist Muhammad Yunus won the Nobel Prize for Peace in 2006, for introducing the Grameen bank or microfinancing/crediting system, ‘Micro Credit’ hit the headlines in the media and poverty alleviation became a buzzword. Microfinance refers to a movement that envisions “a world in which many poor and near-poor households, have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance and fund transfers."

The concept has grown over the past two decades. The United Nations Development Fund for Women identified it as the key strategy to help poor women. The First
International Micro Credit Summit was held in 1997 at the World Bank
headquarters in Washington DC. The World Bank, United States Agency for
International Development (USAID), United Nations Development Programme
(UNDP) and Citi Bank became its chief patrons and declared an allocation of special fund for it. Over the years, major commercial banks and multinational corporations like Monsanto, Citi Group and others decided to sponsor it.

However, this type of financing has a darker side too. Very few quantitative studies have been made on the subject, which has been able to prove that micro finance can uplift the lives of the poor. Most of studies are qualitative which tell that more than
90 per cent of the people who receive micro credit are poor and most of them
succeed in businesses started with these loans.

Apart from this, micro finance serves not to lift people out of poverty but, assist those near or slightly above the poverty line. Money is given to those people who have a possibility of returning the principle amount. This leads to the fact that lending money to these people is feasible and sustainable, while lending to the poorest of the poor is not.

Further, this project has been running in Bangladesh for about 30 years now, via the Grameen bank. However, the country is still counted amongst poor countries and has not had any significant change.

Moreover, the interest rates charged by micro financing institutions are usurious and raise moral questions as micro finance institutions live "off the backs of the poor." It is the intermediaries -- commercial banks and loan facilitators - that gain the most from the spread between the cost of funds for the intermediaries and the loan interest charged by them. If the system lands in the hands of the corrupt the poor would be trapped in a vicious circle of debt.

Micro finance has now, become a weapon for multi national companies to sell their products, by collaborating with such institutions. This in turn, is destroying the spirit of micro credit. For instance: Recently a mobile phone manufacturer offered a micro financing scheme on a pilot basis in Andhra Pradesh and Karnataka, to sell their handset to the poorest. Under this project, the company was offering an easy payment scheme of Rs 100 per week over a period of time. (emphasis are mine).

Arnab Mukherji, a researcher at the Indian Institute of Management in Bangalore said,“We’ve seen a major mission drift in micro finance, from being a social agency first, to being primarily a lending agency that wants to maximise its profit.”

So, although the option had started with the spirit of poverty alleviation mission, it has now been reduced to a money making tactic of MNCs.


Anonymous said...

Mr. Sharma , I am really surprised , without having knowledge of the industry and the client , how you can write such a irresponsible article , suggest you to go to any microfinance institution and spend some days between the clients and study the model in depth and yes of course it will not happen in day or two , to understand the impact on the society you have to live with them for months , it is really unfortunate that in this country when nobody is bothered about the one third population , if somebody is taking initiative then you are questioning the integrity , writing a column is the easiest thing one can do , it really needs a lot of courage , determination and committment to go to that one third population and design a business model which will make a positive impact in their lives .

Devinder Sharma said...

It requires a lot of courage to expose a rapacious system. It does not mean that if the banking system has not reached 1/3rd of the population, this space has to be used for purely exploitative purposes (ofcourse with a human face).

If this is abusiness model that brings positive impact in the lives of the poor, why don't the MFIs start taking the same model to the urban cities? After all, if it makes business sense for the poor, it should make business sense for the middle class in the cities also.

And also, please tell me who amongst the CEOs of MFIs take loans at 24 per cent interest?

Devinder Sharma

Anonymous said...

We need to organise a forum which would showcase these brilliant men and
who seem to be changing the world of the poor. The micro finance
business is rapacious
and it is time we shouted from the rooftops about this.

We need to put our heads together and strategise about the way forward
and while doing
so we need to include the media.

Executive Director
Pan Himalayan Grassroots Development Foundation
Post Bag # 3
Ranikhet 263 645
District Almora

(from myrighttosafefood blog)

Anonymous said...

To Mr Executive Director,

The strategy is very simple- provide loans at cheaper interest rate to poor and soon these MFI's will be out of business.

MFI's got this opportunity of loot because the civil society organisation got stuck in planning, meeting, strategy etc and some how failed to meet the demands from the poor. It time for all the like-minded NGO's/ societies to wake up and provide stiff competition to these loan sharks.

Shouting from roof top will not met the need of the poor. Do something to full-fill the needs of the poor.


Anonymous said...

As far as i know- MFI's have at least 20% of their portfolio in Urban areas as well. In fact we have few MFI's Like SEWA who is an urban cooperative bank and Ujjivan (NBFC) operates primarily in Urban areas.

So then point you are making that MFI loot the rural poor does not hold true. But why did you bring this rural/ urban ? Do you think that rural people are fool/ ignorant/ can't run their lives in their own ?

Arthi said...

Mr Sharma, Rang De ( a peer to peer lending portal and is a non profit trust. Our microloans to the rural entrepreneur is given at much lower interests. Please visit us to learn more.

Megha said...

Your article would have been very different had you taken the effort to study the business model of Microfinance institutions more carefully instead of relying on hearsay.

Have you wondered how MFIs raise money to be able to lend to customers? They borrow from banks at an average cost of 13-14%. On top of this, their operational cost of serving customers on a weekly basis in remote villages works out to be anywhere between 8 -12%. Which means that their profit margin is a nominal 1-2%. Not so high you would admit as the figure of 24% sounds.

The urban middle class is able to access funds at a lower rate because both the cost of funds as well as operational cost for commercial banks is very low
> access to low interest deposits and low cost debt through bond etc.
> nominal collections cost in giving a one year loan with monthly online repayments as opposed to the weekly door to door recollection conducted by MFIs

Undoubtedly, MFIs don't serve the poorest of the poor. If they did, they wouldn't be able to survive and serve even the not-so-poor who are currently financially excluded and exploited by money lenders charging 5% a day.

Microfinance is not a panacea for poverty but certainly a very useful intermediation to help a certain segment of people rise slightly above poverty line and have access to choices.

Several other complimentary interventions would be needed to make a stronger and sustainable impact.

Unfortunately, writing ill-researched articles is not going to be one of them.

vr said...

Devinder Sharma,

You write things for shock value.

we know better.

Devinder Sharma said...

Truth is always bitter, my dear.

Devinder Sharma

Sikander kushwaha said...


Ur article work as a brain storming within the micero- finance practitionare at the same time it is also attracted the intelectuals/ researchear to start fresh debate on this business. this article may be serve as a new inovation/ model in micro finance.

Bharati said...

I am shocked by your absolute lack of research before writing this topic.

Basic facts horribly wrong in your article:

The Grameen Bank started by lending ONLY to those who were below the poverty line and such customers still are a majority of its clientele.

This is exactly the opposite of what is claimed in your article.

In many rural areas where microfinance institutions function, interest rates are as high at 10% a week or even more. That makes a rate of 24% a year look rather measly, doesn't it?

Also, according to their records, 58% of the women who have borrowed from Grameen Bank have risen above the poverty line. I would consider that an a significant achievement even though 'Bangladesh is still a poor country', Wouldn't you?

Please research your articles before you write them. And if you can't help in eliminating poverty, at least don't mislead people who wish to do the same.

Ramesh Sivashanmugham said...

Dear Devindra sharma,
Your allegation that MFI lends to people with repayment capacity is true.I am working as the managing director of a federation of women SHGs promoted by a reputed NGO. The NGO has two decades of experiance in the field. We directly link the SHGs with the bank, with a service charge tag. Also we get bulk lending and inturn lend to them with a interest margin. Many initiatives taken to improve the standard of living of rural poor backfired. Primarily the housing loans we gave- 70 % of them became default. In the federation where I work, Rs30 lakhs is unrecoverable. But the federation has closed the entire liablity with the apex bank.
A person choses to be poor. If he has the right attitude, hard work and takes proper financial decisions with the support of genuine NGOs, they can come out of poverty with the microfinance support extended.
One women member of SHG looted Rs1.00 lakh, from the money intended to be repaid to the bank every month.She was clever enough to alter the bank payment challan after the payment is made. Also people have become greedy and borrow from more than one MFI or SHG federation. Most of our members has borrowed from other MFIs also. The money is not used properly. MFIs sees them as a source of business and people see it as an opportunity. They never worry about their real capacity to repay and the real need. I know women who has borrowed from even 5 such MFIs/banks. Most of them were wilfull defaulter. They will wait untill they get a bigger loan. Then it becomes the problem for the ban/MFIs.
The society by large has to change. But greediness is on increasing trend and everyone is after easy money.
If feel my role is to do something to make this society somewhat better and educate the society as far as possible. I am doing it whenever i get a chance ( I get it often since i prefer to work in grassroot)

with regards