An estimated 30 million households in India now borrow money from microfinance institutions (MFIs), companies who offer small loans to those who are too poor to access traditional banking credit. Such is the demand in India, that outstanding credit has been growing at over 50% per year and India has overtaken Latin America as the world’s fastest growing microfinance market. But some social commentators are worried MFIs may be lending to people who are unable to repay their loans, leading to a growing number of premature deaths and suicides.
The south-eastern state of Andhra Pradesh accounts for around a third of all MFI loans across the country. One family here is mourning the loss of 40-year old Ketadi Ramchandra Moorthy. A carpenter by trade, Mr Moorthy took out loans from MFIs to build a new home and pay for his children’s education. Unable to meet his repayments and under pressure from the companies who had lent him money, Mr Moorthy suffered a heart attack and died. Another family in Andrah Pradesh is mourning the loss of their mother. Mylaram Kallava was defaulting on four micro-loans amounting to 840 dollars, money she borrowed to pay for private hospital treatment for her daughters, with the nearest state-run hospital over 70 kilometres away. Ashamed of being unable to meet her payments, Mrs Kallava committed suicide in the week the micro-loan agents were due to visit her.
Government statistics reveal that more than 80 people in India have taken their lives over the last few months after defaulting on repayments. According to the government, the average debt of families in Andhra Pradesh is 660 dollars, when average annual income in the region is a mere 1,060 dollars. This means that households are paying more than 60 per cent of their earnings into loan repayments. Some politicians are now encouraging borrowers to stop payments, triggering a crisis in the industry and causing larger banks to stop lending to MFIs.
The chairman of India’s Microfinance Institutions Network, Vijay Mahajan, has accused some organisations of encouraging “multiple lending, over-indebtedness [and] coercive recovery practices”. However, finance experts are warning India’s government not to ‘throw the baby out with the bathwater’. They point out that MFIs in India have repayment rates of over 95 per cent (99 per cent in the case of some individual companies), indicating that only a small proportion of borrowers struggle to repay the debts they take on. In addition, borrowers often use the MFI loans to pay off money lenders who charge much higher rates of interest (between 36 and 120 per cent) compared to MFI rates (normally 24 – 30 per cent).
Many MFIs operating in India understand their social commitments. The best organisations do not incentivise officers to make larger loans and provide ‘financial-literacy’ training to customers in order to ensure they understand interest rates and instalments. Even if new regulation takes time to be introduced, good practitioners in the industry hope competition in a growing market will lead to innovation, efficiencies and better practices, providing the poor with a choice of who they turn to when they need credit.