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Under water
The very future of microcredit in India is in danger, which is a shame for the country’s poor HER sobbing can be heard throughout her village, Nagaram, in the Indian state of Andhra Pradesh (AP). When visitors from Hyderabad, the state capital, some 80km (50 miles) away, cross the threshold of her bare little house, Narsama Anthaiah flings herself prostrate and wailing onto the dirt floor to touch their feet. Her theatrical grief is heartfelt. Two months ago her husband, aged 40, drowned himself. The AP government blames unlikely villains: microfinance institutions (MFIs), which have been expanding fast in the state. Microcredit—small loans to the poor, ideally to start a tiny business—has until recently been seen as one of best hopes for the three-quarters of Indians who still live on less than $2 a day. But the political fallout from such deaths has put paid, at least for now, to the industry’s expansion. It could even destroy it altogether in AP, and conceivably beyond.
The blame the MFIs shoulder is unfair. Farmer suicides are lamentably common in India. Anthaiah took his own life as a payment loomed on a 15,000 rupee ($333) MFI loan. Heavy rain had waterlogged his cotton crop and left the family struggling to pay the interest rate of 36% a year. But the couple, who had borrowed to build this house, also owed 34,000 rupees to a local moneylender, who charged over 50%.
Even so, Anthaiah’s name features on a government list of 85 MFI “victims”, who had taken their own lives by November 16th. The government has reacted by introducing an “ordinance” forcing MFIs to change their practices—cutting interest rates, changing from weekly to monthly repayments, etc. Opposition politicians, scenting votes, have encouraged borrowers to default. Not surprisingly, recovery rates for some lenders have plunged from close to 100% to around 20%.
This is a huge problem for Indian microcredit. AP is not so much the jewel in its crown as the crown itself. The country as a whole has seen a spurt in microcredit, overtaking, in the number of borrowers, Bangladesh, the global movement’s fountainhead. AP accounts for at least half India’s total, with more than 25m borrowers, up from 8m in 2007. Indeed, the MFIs’ very success in AP is the source of their present troubles.
There have been abuses. Chasing growth, MFIs seem to have piled into the same villages, lending to the same people. Some “recovery” methods have involved intimidation. In Godhumagudu, not far from Nagaram, Laxmi Peta is mourning her 16-year-old daughter Lalitha. The family ran up 66,000 rupees in debts from five MFIs to pay for the wedding of their elder daughter. Unable to meet a payment, they went away to seek help from the new in-laws, leaving Lalitha alone. An MFI officer arrived, along with the village head and the four other members of her mother’s “joint liability group”—fellow villagers who had taken collective responsibility for the debt. After their harangues, Lalitha drank pesticide. Her mother treasures a tattered suicide note. It advises her not to take out any more loans, except for her young son’s education.
The MFIs, however, are less abusive, as well as far cheaper, than traditional moneylenders. Their troubles in AP stem from a mixture of institutional rivalry, politics and ideology.
Among the MFIs’ biggest critics is Budithi Rajsekhar, boss of the Society for Elimination of Rural Poverty, an arm of the state government formed in 2000 to run its own microcredit programme. Set up with World Bank money, this involves a network of “self-help groups”, each of 10-15 women, who pool savings and then have access to bank finance. According to Mr Rajsekhar, there are now about 1m groups, with 10m members, covering 8m-9m households, or 95% of the state’s rural poor. The MFIs “poach” their clients for their smaller, five-member, borrowing syndicates, and “dump” unneeded loans on them.
The antipathy is mutual. For the MFIs, the government’s groups offer too little credit, too late. The MFIs offer an alternative to the old-fashioned usurer. But their success in AP has made them a political target—large numbers of voters owe them money. The main opposition Telugu Desam Party lost power in 2004 partly because it was seen as in thrall to the IT industry and foreign investors. Championing poor MFI borrowers was a cost-free way of burnishing its credentials with the rural poor.
Ideologically, many in India worry that large MFIs have become for-profit firms. The biggest, SKS, was launched by Vikram Akula as a charity, with (according to his divorced and embittered wife) donations from the guests at their lavish wedding. In July it floated on the stock exchange. The issue was 13 times oversubscribed and valued the company at $1.5 billion. It has a star-studded share register and board of directors, and a great appeal for those who like to think you can do well by doing good.
Saints and sinners
Even charitable microcredit, however, is less fashionable than it was. Other countries’ microlenders, too, have had crises. In Pakistan’s Punjab province, for example, it became fashionable in 2008-09 for politicians to encourage borrowers to default on microloans. And this week the movement’s patron saint, Muhammad Yunus, a Bangladeshi economist and Nobel laureate, was cleared of allegations of diverting Norwegian aid money from one arm of his Grameen bank to another. The film making the accusations also aired arguments that microcredit may do more harm than good. In fact, research suggests that it does work—for some people some of the time, as you would expect. It is not a magic bullet, but nor is it intrinsically harmful. In Nagaram, where Mrs Anthaiah still has to pay off the moneylender with only her own labour to sell, her self-help group is arranging a loan to tide her over. India’s problem is not too much microcredit, but too little, too narrowly directed.
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