Are Micro Finanace Institutions driving defaulters to the depths of despair?

The piece came in GRASSROOTS in July 2011 issue

Are Micro Finanace Institutions driving defaulters to the depths of despair?

The term ‘collection agent’ is often used in a pejorative sense. However, in Orissa, a new low seems to have been reached , with micro finance institutions, in stead of empowering women and alleviating poverty threatening defaulting borrowers to into submission

Pradeep Baisakh, Bhubaneswar

Belonging to a Micro Finance Institution dragged Nirupama Nayak, a 35-year-old woman staying in Salia Sahi slum of Bhubaneswar (Capital of Odisha), rebuked her in filthy language in front of her neighbors, roughed her up and locked her house. The incidence took place in last year when Nirupama failed to repay the installment. She had taken a loan to build her house. A humiliated Nirupama poured kerosene and attempted to commit suicide by setting herself on fire. She was, however, stopped from doing so by neighbours.

“I had taken a loan of 12, 000 from a micro finance institution for starting a small business. As my business did not do well, I could not meet the high interest rate demanded. One executive from the micro finance institution used slang and his boys physically assaulted me” alleges Malati Nayak, a resident of Sarankula, Bhubaneswar.

A leader addressing a rally of women Self Help Group members demonstrating againt micro finance institutions

“Are you such a shameless woman? Had I been in your place, I would have committed suicide!” screeched a agent belonging to a micro finance institution at Babi Parida of Maa Shakti Self Help group in Panchrida village, Nayagarh district. Babi, who had taken a farm loan of Rs 10000, was unable to repay because her crop failed.

Several such complaints are pouring in from almost all Orissa’s 30 districts, drawing the focus on how the much hyped micro finance institutions are being run. The institutions are supposed to empower women and alleviate poverty, but, ironically on many occasions borrowers have attempted suicide and, sadly, some have succeeded.

It may be naïve to consider the behavior of the office bearers of some micro finance institutions as just an expression of anger. The real intention could well be made out if one analyses the insurance linkage of every loan disbursed under the scheme. Under the scheme, insurance cover is also provided for the life of the person availing the loan. In case of her death, the insured money is given to the family, but after balance installments are deducted. Therefore suicides and deaths ensure recovery of the loan amount.

When the person taking loan becomes insolvent, the insurance cover comes in handy for the institutions. In other words, the borrowers who turn defaulter are driven to depth of despair, to suicide. One may be skeptical on such a horrendous linkage, but given the number of suicide cases reported in the state owing to the borrowing from micro finance institutions, it is difficult to throw away the premise altogether.

In Orissa, micro finance institutions have mushroomed in the state in absence of the proper banking network, particularly in the rural areas. The institutions are doing good business with the success almost percolating to grassroots. There are about 30-35 such institutions operating in the state, most of whom function as NGOs. They operate like non-profit organisations, but make huge profit by charging high interest. In the past four years (2006-2010) the institutions have lent Rs 1500 crore, covering 20 lakh customers, the rate of return being 95 percent.

Even though the annual rate of interest chargeable by micro finance institutions has been fixed in the range of 15-28 percent by State Level Banking Committee (SLBC), the real rate of interest varies from 30 to 35 percent. Some institutions allegedly charge up to 60 percent. In the case of Babi, she was given a loan of Rs 10,000 with Rs 1550 being deducted at source citing insurance cover, registration charges etc. She had to pay a Rs 225 every week for 50 weeks. That means for an effective loan of 8500, she has to pay 11,250 in 50 weeks in installments; the interest rate thus hovers around 32-percent mark.

The micro finance institutions use all possible coercive methods to recover the loan installments. They include causing physical and metal humiliations. Sai Prasan, an expert on financial matters, says “Banks give loan to the costumers at 10 percent interest, but micro finance institutions charge more than 30 percent.”

The institutions avail loan from banks at the rate of 12-15 percent. They, however say that they adhere to all norms and guidelines laid down by RBI and SLBC. Bijay Pandia, Branch manager of a micro finance institution says “We charge 1.03 percent interest rate per month and do not use any coercive method for loan recovery”

Devinder Sharma, a critic of micro finance institutions say “If any of us takes loan at least at the rate of 24 percent annual with weekly repayment of installment, s/he will fall in to BPL category in some years.”

Last year in Balasore district a farmer committed suicide owing to his inability to repay a loan. Similar such cases of suicides have poured from various parts of the state. Although the government came out with the figure of 46 farmer suicide cases which occurred in 2009-10 to 2010-11, the real number is quite high. “Farmers borrow from micro-finance organizationsthe money-lenders and of course from the banks. The cases of the farmers committing suicides owing to non-payment of installments to the micro finance institutions are much more than the other two categories.” Says Sai Prasan

A sub committee of State Level Banking Committee (SLBC) was formed in November 2010 by the government to look into the regulatory aspects of the micro finance institutions.

As early as in 2006 such a sub-committee was formed but with no impact. The micro finance institutions seem to have been given a free run in every nook and corner of the state to bring people into debt trap. People have even sought multiple loans from different micro finance institutions. A new loan is taken to repay the installment of an old one.

The Andhra government recently brought an ordinance regulating the micro finance institutions, owing to large-scale instances of suicide by borrowers. The state government of Odisha is yet to take such a measure, although it has written to the central government urging for a comprehensive legislation regulating the functioning of such institutions.