This should be another eye-opener.
cm
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Date: Thu, 28 Sep 2006 09:39:29 -0000
Subject: [WaterWatch] Death by Micro credit
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Moderator's Note: The concept of microcredit can be traced back to
the idea of providing benefits to the poor through numerous small
loans for entrepreneurial activities as a way to alleviate poverty.
Critics of the microcredit movement say that some lending programs
charge excessive interest rates.
Microcredit has been touted as a financial innovation which enables
extremely impoverished people (mostly women) to engage in self-
employment projects that allow them to generate an income and exit
poverty. The World Bank estimates that there are now more than 7,000
microfinance institutions, serving some 16 million poor people in
developing countries. Bank experts estimated that 500 million people
benefited from these small loans, on a total of three billion poor
people.
Due to the percieved success of microcredit, it seems to be gaining
credibility in the mainstream finance industry. Although almost
everyone in larger development organizations discounted the
likelihood of success of microcredit, the United Nations declared
2005 the International Year of Microcredit.
But The Times of India article of Sept 16, 2006 "Death by Micro
credit" raises stark questions which deserves unambigous answers
from the micro-credit movement. It questions the rationale of
Microcredit which lays a debt trap through micro-enterprise
development as a substitute for meaningful economic development and
fundamental changes in the economic policies. It does appear to take
one's attention away from finding real answers to the very real
problem of poverty.
Moderator
Death by Micro credit
The Times of India, Sept 16, 2006
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!
Dr Sudhirendar Sharma
Formerly with the World Bank Dr Sharma is a development analyst
attached to the Delhi-based the Ecological Foundation. He can be
reached at sudhirendar@ vsnl.net
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