micro-credit: what is the economics behind it

Micro-credit has been a controversy in some countries, e.g. India.

Death by Micro Credit


(from The Times of India, Sept 16, 2006)

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!

 

In the US the sub prime lending is often associated with predatory lending, as the sub prime borrowers are often better off without the loans. No one would consider a US sub prime lender for a Nobel prize. I believe the sub prime lenders in US will call themselve micro-financers soon and will probably even ask for less regulations.

 

there was an article in the Economist a couple weeks ago no this. it was focused on Africa and the cel phone industry. from what I remember they were using cel phone minutes as a form of currency, buying selling and trading for goods and services. And it was working very well.