MFIs lay small-debt trap in Andhra

Microfinance institutions in Andhra Pradesh are being scrutinised as the state government admits to over 20 suicides in the last few weeks due to high interest rates and coercive methods of recovery.

When microfinance started in the country, it was about getting the banks to finance microcredit, and attracting investments. As a pioneer in organising women’s self-help groups (SHGs), Andhra Pradesh provided an opportunity to microfinance institutions (MFIs) to provide small loans to thousands of rural women who were otherwise denied credit by banks.

The mushrooming microfinance sector in Andhra Pradesh was hailed as a saviour of its poor for providing small loans to millions of rural borrowers unable to get credit from mainstream banks. But as MFIs expanded operations in the state, they started targeting individual borrowers too. In recent years, many MFIs turned into for-profit organisations in a race to make a quick buck. These MFIs are now under fire for charging exorbitant interest rates and using strong-arm tactics to collect interest.

Media reports from the state explain the modus operandi of loan recovery agents representing the MFIs. “Seven in the morning was the appointed hour at which loan recovery agents of microfinance institutions would arrive to collect the weekly dues. If the villagers didn’t assemble outside their houses by 7, the recovery agent would charge a ‘waiting’ fine of Rs 5. The 7 am routine has become so ingrained in the lives of the villagers that even those who didn’t have loans to pay back would get ready and assemble outside their houses at that hour,” says a report in The Indian Express.

None of the villagers knew the interest they were being charged. “All I know is that I have to pay a weekly amount of Rs 250 for 50 weeks on a loan of Rs 10,000,” Satyamma, a member of a SHG in Medak, is quoted as saying. She’s not even sure which MFI she has borrowed from. Medak district has one of the highest penetrations of microfinance institutions in the state. In fact, its reach is often compared to that of Bangladesh’s Grameen Bank.

MFIs have reached almost every home in the district. Of the 150 families in Chennaipally village, 147 have taken loans. What’s surprising is that all 147 families have taken multiple loans – six or seven from four or five MFIs. The small village now faces a debt of over Rs 40 lakh.

Villagers say they have been hit by a series of crop failures since 2001 and so took loans from MFIs as the procedure is easier than those at other agencies. The District Rural Development Agency (DRDA) estimates that nearly Rs 9 crore was given by MFIs as loans in Medak district, in the last five years.

“We have had SHGs in the village for several years now and it started with simple chit funds. Then people from SKS Microfinance came and offered us loans of Rs 5,000. All we had to do was furnish a photocopy of our ration card. Even before that loan was cleared, Share Microfin MFI came and offered Rs 10,000 as a loan. They were followed by L&T, Spandana Sphoorti and Basix. Within a year or two, all 147 families had taken multiple loans amounting to nearly Rs 1 lakh or more,” says village sarpanch Siddhiramulu.

“A majority of villagers took the second loan from the same MFI to clear the first loan and make a few household purchases. Then they took the third loan from another MFI to clear the second loan,” says Vamsi Krishna, the village coordinator for DRDA.

Women from the SHGs say they did not know or think about the consequences of taking multiple loans. “The MFI people come to visit us during our SHG meetings with offers that appear good, and we are lured. When you see that one woman who has applied for a loan gets a handful of cash delivered at her house the next morning, you too are tempted to borrow,” says G Swarna, an SHG member who has taken five loans totalling Rs 90,000.

There are 30 SHGs in the village and many members who gathered at the gram panchayat office say that the MFIs fell over each other to dole out loans. “If one company comes and gives loans of Rs 10,000 to a couple of SHGs, the next day another company’s representatives would arrive with an offer of Rs 15,000. We were spoilt for choice,” says Swarna.

In Chennaipally, and in the surrounding three villages, no one used the loan money to start an income-generating venture. B Yadagiri, a daily wage worker, bought a mobile phone worth Rs 3,000 from a loan of Rs 5,000 that his wife took. “The agent of Spandana MFI got me the phone and handed over the balance cash of Rs 2,000 to my wife,” he says.

P Balaiah took a loan of Rs 20,000 and bought a portable TV for Rs 6,000. “The balance was spent on various things. I don’t remember on what,” he says. H Lalitha, who took four loans, admits that she “bought four saris and a small gold coin”. Others took loans to pay for health or hospital expenses, maternity expenses, or fertilisers and seeds.

The easy money brought along some social problems as well. DRDA counsellors say alcohol consumption among men in the villages has shot up ever since their wives started taking loans. “When they had cash in hand, the men even stopped going to work as farm labourers. In spite of appeals and counselling, none of them chose to invest wisely in any income-generating activity,” says DRDA’s project director in Medak, P Ravinder.

In the villages of Medak district, there is no sound as dreaded as that of a motorcycle in the morning. By the time the loan recovery agents reach the villages on their bikes, the men have left their homes in order to avoid meeting them. The women scamper for cover but have no choice but to meet them.

MFIs like SKS, Spandana, L&T, Basix, and Share Microfin offer several kinds of loan. For an amount of up to Rs 10,000, the collection of interest and part of the principal amount is done every week. If the amount is above Rs 10,000, then the collection is monthly. “But it depends on what model of loan repayment the MFIs have offered a particular SHG in a particular village. There are many models to suit as many requirements. I pay Rs 250 a week to Basix on a loan of Rs 10,000, and Rs 1,000 a month on a loan of Rs 10,000 to L&T. Weekly or monthly, it amounts to the same,” says M Mallikarjun who encouraged his wife to opt for both loans.

Share Microfin charges an average of 28%. Its head, Uday Kumar, says they borrow at an average cost of 13%, adding 9% as operational and delivery costs. Share Microfin’s ‘general loans’ are in the range of Rs 6,000 and Rs 25,000 for a period of 50 weeks. The effective interest rate is 23.60% to 28.13%.

“But it is the fine print in the clauses and loan agreement that really creates the debt trap. When borrowers fail to pay one EMI, the additional interest is calculated at twice or three times the interest rate. The interest continues to remain the same until the principal amount is paid off. More often than not, the final interest rate works out to nearly 50%,” says R Subramanium, Principal Secretary, Rural Development.

In an interim order last week, the Andhra Pradesh High Court allowed MFIs to carry on their activities in the state but refrain from using coercive tactics to recover loans. The court directed MFIs to register their activities within a week with the government as mandated by a recent ordinance that imposes severe restrictions on unfair loan businesses till registration.