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In the overall interest

Microfinance institutions' activities need regulation but they do have a major role to play in the rural economy, writes Prasad Nichenametla.

india Updated: Jan 19, 2011 12:04 IST
Prasad Nichenametla

Kanakam Ramesh, 28, who lived in a Dalit colony of Warangal district, took his life at the time of Dussehra last year.

A marginal farmer, Ramesh hanged himself from a tree after a fight with his wife over failing crops and mounting microfinance loans - weekly installments they could not repay.

Following the more than 100 deaths in Andhra Pradesh because of strong-arm loan recollection methods of microfinance institutions (MFIs), the state government passed an ordinance in October and a law in December, effectively bringing MFI loan repayments to a standstill in a state that accounts about 40% of the sector in the country.

The repayment rate dropped to 10% from more than 98% in the past three months.

As a result of this, a somewhat contrasting picture is evident on Sankranti (Pongal) in Peddakandukur of neighbouring Nalgonda. Neelam Srinivas, 37, is helping his wife to prepare mutton biryani. The couple repays R900 every month (Rs 225 a week) for the Rs 10,000 loan taken in May for farming.

"I do not know the reason but the agents who used to turn up strictly have not been coming for three months," said Srinivas, working in the Premier Explosive factory near the village. With some money in hand now, he can afford biryani on the occasion of Sankranti.

The Debate
The Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2010, mandates MFIs to specify the area of operations, interest rates, and recovery practices, apart from compulsory registration and government approval before issuing loans. Violation leads to penalties and prison.

Rural officials say the law protects the rural poor from MFI coercion, while the latter are challenging the law, terming it "cutting off a lending hand to the rural poor where government is not reaching".

MFIs take loans from banks at 11-14%, add the operating costs (doorstep transactions) of 10-15% and with margins lend small loans at 25-40% to the rural poor. This, when urban Indians get car and house loans at 10%.

"We cannot service loans lower than 28% interest - comparable to consumer finance rates - but still much lower than 60-120% charged by moneylenders and 30-50% real cost borrowing from banks," an MFI player says.

Some MFIs charge an advance interest (Rs 100 on Rs 10,000 loan) and an insurance cover of Rs 300-700.

"MFIs operate on the doubtful premise charging exorbitant interests rates, even the average of which goes up to 32%. Analysis shows two-thirds of loans are for non-productive activities," says Reddy Subrahmanyam, principal secretary, Andhra Pradesh rural development department.

Middle-level MFIs admit commercial interests are creeping in, threatening their initiative - creating a replica of Grameen Bank of Bangladesh's Mohammed Younus, who won the Nobel Peace prize.

To start with, MFIs rescued villages from abject poverty but later mushroomed leaps and bounds, with private investors sniffing good profits, says Ernest Paul, chief executive officer of Sadhana, a non-profit MFI in Kurnool pointing to the recent IPO of a major operator.

NRIs such as Vikram Akula, founder SKS Microfinance, have brought the stamp of social entrepreneurship to an otherwise backward sector, attracting more investment from venture capitalists, analysts observe.

"But when the need is to control a few (offenders), the law is strangulating the much-needed socio-economic initiative. It will kill thousands of small, non-profit MFIs," Paul says.

The dilemma of the poor
Though they dread the return of MFI recollection agents, villagers are concerned that the law might phase out MFIs, which cater for many of their needs - agricultural, business or family.

"Are we supposed to repay the loans or not? Will the MFIs come back? Will they give us further loans," ask the eager villagers in the two Telangana districts.

Even though they pay high interest, villagers want the MFIs.

"Where else could we go? I am fed up with going to banks that won't give loans, and cannot afford the high interest charged by moneylenders. The MFIs, we have realised, are no good either, but provide money when needed," says Nagi Reddy, a farmer in Venkatadripeta. He and wife took loans of R18,000 and R12,000, respectively, to invest in farming cotton, which did not bring much return.

Though the state government is facilitating bank loans to self-help groups, villagers say the money is inadequate and the wait is long.

Humane face needed
"There are benefits with MFIs, but interest rates should be reasonable and suitable for poor people like us," Gandra Subhadra, 40, in Aler (in Nalgonda) says. Srinivas wants loans to be repaid in a higher number of installments and more choice as regards days of repayment.

"The MFIs should not lend loans without knowing repaying capacities. When repaying one loan is difficult, two or three MFIs give loans to a woman. They hold every member of a group guilty if just one is not able to pay in a particular week, creating divisions within the group," says Tadagoni Radha, leader of SHGs in Venkatadripeta.

"After a flow of money into villages there is a vacuum now - more so at a time when farmers are going to sow the second crop," K Venkatanarayana, professor of economics at Kakatiya University, who has extensively researched MFIs, says.

With government pamphlets explaining restrictions on MFIs, the rural poor wonder what the government will do to support their activities.