Micro-Credit: Bane or Boon?

[Musicwhiz]

A sad tale of micro-finance in India. Similar to loan sharks I guess?

Nov 15, 2010
MICRO-CREDIT: BANE OR BOON
INDIA: Spate of suicides over defaults
By Nirmala Ganapathy, India Correspondent

NEW DELHI: Struggling to meet her expenses, Ms Bandaru Padma took loans from four microfinance firms totalling 79,000 rupees (S$2,300).

The loan repayments came to less than 2,000 rupees each week.

But the 23-year-old, unable to pay the instalments, started to default on them, and had recovery agents hounding her for the money.

On Oct 4, Ms Padma took her two young children and jumped into a well, killing all three.

The tragedy at Chennaipally village in Andhra Pradesh state is not an isolated incident.

Twenty-five defaulters have committed suicide in the past two months in the same state, and 50 other suicides are suspected to be linked to micro-credit woes.

The southern state has the highest concentration of microfinance institutions - around 20 registered and hundreds unregistered.

State officials tell of cases of lenders kidnapping children, making borrowers stand in the sun and taking away household items.

Recovery agents have even been reported to encourage borrowers to commit suicide - after nominating themselves as the insurance beneficiary.

'There are a lot of unsocial elements let loose on the poor who, for many reasons, cannot pay,' said Mr R. Subramaniam, principal secretary for rural development in Andhra Pradesh.

The accessibility to easy loans, he said, had lured many poor Indians into debt traps.

'If they want to marry their daughter with a loan they know they can't repay, they will still take it,' he said.

Pioneered by Bangladeshi Nobel Prize winner Muhammad Yunus in the 1970s, the micro-credit revolution has been feted globally. It has given the rural poor access to small loans to buy cattle and seeds or to start new businesses.

But in India, the microfinance industry today is in crisis, and there have been protests against it.

'Personally for me it's terrible... a complete undoing of what�I have done for the last 20 years,' said Mr Vijay Mahajan, the founder of Basix, one of the first microfinance institutions in the country.

More than 30 million borrowers are estimated to have taken out loans worth a total of US$6.5 billion (S$8.4 billion), of which US$2 billion comes from Andhra Pradesh alone.

There are about 50 main players accounting for 80 per cent of the micro-credit sector in India.

The interest rates for small loans range from 24 to 36 per cent a year.

But some lenders are charging 50 to 60 per cent. The rates are much higher than those charged by banks but it is very difficult for rural borrowers to get bank loans.

The spate of suicides has prompted the authorities to act. Last month, Andhra Pradesh passed an interim law that banned microfinance lenders from charging high interest rates, and also restricted borrowers from taking multiple loans.

A national law to regulate the sector, addressing in particular the uneven interest rates, is also in the offing.

Mr Alok Prasad, the chief executive of the Microfinance Institutions Network, the industry body, said the restrictions were sending players into a tailspin.

With 80 per cent of the sector regulated by the Indian central bank, he suggests that the problems come from individuals or unregulated lenders.

Still, the new law has raised hopes.

'Those who have built an empire on unethical standards may and should collapse,' said Mr Subramaniam.

'This crisis should cut out unwanted tendencies that have cropped up.'

gnirmala@sph.com.sg

[kazukirai]

Hey MW,

Interesting that you should post this. In today's Today, there was a commentary which highlighted a story on micro-finance that worked for the better. I think this serves to illustrate that it's not so much that micro-finance is bad (from the Today account, it's evidently not) but how it's used that makes all the difference. Today article posted below for reading.

In sum, Guns don't kill people. People do.


Here's a woman fighting terrorism - with jobs

by NICHOLAS D KRISTOF
05:55 AM Nov 15, 2010
An old friend of mine here in Pakistan fights terrorists but not the way you're thinking. She could barely defeat a truculent child in hand-to-hand combat, and if she ever picked up an AK-47 - well, you'd pray it was unloaded.

Roshaneh Zafar is an American-educated banker who fights extremism with micro-finance. She has dedicated her life to empowering some of Pakistan's most impoverished women and giving them the tools to run businesses of their own. The United States should learn from warriors like her.

Bullets and drones may kill terrorists but Roshaneh creates jobs and educational opportunities for hundreds of thousands of people - draining the swamps that breed terrorists.

"Charity is limited but capitalism isn't," Roshaneh said. "If you want to change the world, you need market-based solutions." That's the point of micro-finance - typically, lending very poor people small amounts of money so that they can buy a rickshaw or raw materials and start a tiny business.

Roshaneh grew up in elite circles here in Lahore and studied business at the Wharton School and economics at Yale. After a stint at the World Bank, she returned to Pakistan in 1996 to start her micro-finance organisation. She called it the Kashf Foundation.

Everybody thought Roshaneh was nuts. And at first nothing went right. The poor refused to borrow. Or if they borrowed, they did not repay their loans.

But Roshaneh persisted, and today Kashf has 152 branches around the country. It has dispersed more than US$200 million ($260 million) to more than 300,000 families. Now Roshaneh is moving into micro-savings, to help the poor build assets, as well as programmes to train the poor to run businesses more efficiently. She is even thinking of expanding into schools for the poor.

Micro-finance is sometimes oversold as a silver bullet - which it is not. Careful follow-up studies suggest that gains from micro-loans are often quite modest.

Some borrowers squander money or start businesses that fail. Some micro-lenders tarnish the field because they are incompetent and others because they rake in profits with sky-high loan rates. Micro-finance has also generally been less successful in Africa than in South Asia.

Yet done right, micro-finance can make a significant difference. An outside evaluation found that after four years, Kashf borrowers are more likely than many others to enjoy improved economic conditions - and that is what I have seen over the years as I have visited Kashf borrowers.

On this trip, I met a woman named Parveen Baji who says she never attended a day of school and until recently was completely illiterate. She had 14 children but five died.

Parveen's husband, who also never attended school, regularly beat her and spent the family savings on narcotics, she says. The family's only possessions were four cots on which they slept, crammed three or four to a cot, in a rented apartment.

"One night all my children were hungry," she remembered. "I sent my daughter to ask for food from a neighbour. And the neighbour said, 'you've become a beggar', and refused."

Then Parveen got a US$70 loan from Kashf and started a jewellery and cosmetics business, buying in bulk and selling to local shops. Parveen could not read the labels but she memorised which bottle was which. As her business thrived, she began to struggle to learn reading and mathematics - and proved herself an ace student. I fired maths problems at her and she dazzled me with her quick responses.

Parveen began to start new businesses, even building a laundry that she put her husband in charge of to keep him busy. He no longer beats her, she says, and when I interviewed him separately he seemed a little awed by her.

Eventually, Parveen started a restaurant and catering business that now has eight employees, including some of her daughters. She bought a home and has put some of her children through high school - and a son, the brightest student, through college. She has just paid US$5,800 for a permit for him to move to London to take a health-sector job.

Parveen tried to look modest as she told me this but she failed. She was beaming and shaking her head in wonder as she watched her son speak English with me, dazzled at the thought that she was dispatching her university-educated son to Europe. "Micro-finance has changed my life," she said simply.

That is an unusual success story. But the larger message is universal: Helping people start businesses, create jobs and support education is a potent way to undermine extremism.

We Americans over-invest in firepower to defeat extremism and under-invest in development, and so we could learn something useful from Roshaneh. The tool-kit to fight terrorism includes not only missiles but also micro-finance and economic opportunity.

The antonym of "militant" is often "job". THE NEW YORK TIMES



The writer is a two-time Pulitzer Prize winner.

[newborn1000]

Ironic........People who need money the most (or cant repay) gets charge the highest interest rates......

[arthur]

Microfinance under scrutiny


ANDHRA PRADESH (AP), on India's eastern coast, has more people who have borrowed from microfinance institutions (MFIs) than any other state in India. It houses the headquarters of some of India's fastest-growing for-profit MFIs. Of late, though, the state has seen a vicious political backlash against the microfinance industry that has made it virtually impossible for MFIs to operate. Sam Daley Harris, director of the Microcredit Summit Campaign, a non-profit group, reckons that microfinance in the state "is in the midst of a near-death experience."

India is not the only country where microfinance is under scrutiny. On November 9th Bangladesh said it would cap the annual interest rate MFIs can charge at 27%. Critics in both countries accuse microlenders of pursuing growth without regard for their clients' ability to absorb the credit they dole out. A survey of a representative sample of nearly 2,000 rural households in AP released on November 16th by the Centre for Microfinance (CMF), an Indian research institute, makes it possible to assess such claims. It suggests that fears of an epidemic of over-indebtedness due to excessive lending by MFIs are exaggerated.

The state may be India's most developed microfinance market but it is hardly awash with microcredit. Whereas 82% of households have borrowed from informal sources, mainly village moneylenders and relatives or neighbours, only 11% have an MFI loan. On average, borrowers also owe over four times as much to informal lenders, which charge far higher rates, than they do to MFIs.

Nor have MFIs in the state faced rising defaults, as they should have if borrowers were really in over their heads. Some reckon that MFI clients are able to stay afloat only by borrowing from one microlender to repay another. But the CMF survey finds that a mere 3% of those who borrow from MFIs have more than one such loan; in contrast, 70% of people have at least two informal loans. People with several MFI loans also tend to take them out simultaneously, rather than staggering them, as they would if they intended to use one to pay instalments on another. Some probably take out several MFI loans for the good reason that they need a larger lump sum than any single small loan can provide.

Credit is not all that poor people need. There is also an enormous unmet demand for savings accounts. Reducing transaction costs enough to make it feasible to cater to very small savers is difficult. MFIs might be able to do this more cheaply than banks, because they have existing relationships with the kinds of people who would use such basic savings accounts. Yet MFIs are prohibited from taking deposits, or even from acting as local collection agents for commercial banks. Fewer restrictions on microlenders, not new ones, would be the best way of helping the poor.

[sgd]

just to sidetrack here a little.

I notice that there are cases where people borrow money already don''t want to repay then cry wolf, cry to everybody cry to police and say they are victimized and very often when people see this they sympathize with the defaulter without knowing the whole story and say the lender charge very high interest or must be a loan shark. The borrower can be at fault too.

Must be very careful to distinguish as sometime what one sees as white is actually black.

[kazukirai]

For those still interested in the topic. Here's some further reading. Turns out that we really should take everything that's written in the papers with a pinch of salt.

(After all, reporters do have deadlines and word limits to meet so one could possibly postulate that the story written is far from the whole truth.)

http://blogs.reuters.com/felix-salmon/20...a-pradesh/