Stricter rules for microfinance after India suicides

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The suicides of more than 30 farmers in southeast India have rocked the world of microfinance. They were reportedly deep in debt with microfinance institutions (MFIs). Measures were announced immediately, but who will monitor compliance with the new rules?

The news of the suicides in the federal state of Andhra Pradesh prompted its prime minister to make some strong-worded statements to the media: "Microfinance institutions charge exorbitant interest rates. The poor are driven to take their own lives because of their burden of debt and the brutal methods used to call in the loans." Indian MFIs, on the other hand, have kept conspicuously silent about the incidents.

It took many phone calls before someone could be found who was willing to discuss the issue. K. Balasubranmanyam from Sa-Dhan, a union of microfinance institutions, told Radio Netherlands Worldwide: "We want to investigate these specific incidents further".

Many moneylenders call themselves MFIs while they are not registered with our organisation or with the Reserve Bank of India (RBI)." Sa-Dhan has about 250 members; three-quarters of them provide micro finance.

Brutal methods
Sa-Dhan has pledged to revitalise and to more actively enforce a voluntary code of conduct agreed by most members in 2006 to prevent brutal methods of calling in loans. In that year, MFIs in Andhra Pradesh were also linked to suicides among farmers.

"The people calling in the loans are often not aware of the code of conduct. The membership of the MFI in question can be revoked following complaints, but the agreement was not always adhered to in the past."

A decree issued by the Andhra Pradesh government orders all MFIs to register with the government. Under the decree, unethical methods of calling in loans are punishable by revocation of the MFI’s license, a fine of up to 1,600 euros, or three years in prison.

Three officials from the microcredit institutions SKS Microfinance and Spandana Spoorthi Financial were arrested after a woman filed a complaint stating they were harassing her. All our attempts to persuade SKS and Spandana to comment on the case failed: they said they were unable to react to the allegations.

Together with other microfinance institutions, they have petitioned the court to rescind the government’s decree, on grounds it makes it impossible for them to call in loans. The organisations also argue the order is unnecessary, as they are already registered with the Reserve Bank of India. The court has granted the micro finance institutions a one-week reprieve.

Good move
Mr Balasubranmanyam believes the compulsory local registration decree is a good move "so the government will know per district who is operating there."

He also welcomes sanctions for brutal methods used to call in loans. Last week, Sa-Dhan’s members promised to lower their interest rates by two to three percent and to extend lending periods to 60 weeks. However, the manager emphasises that "microfinance institutions can no longer operate if they charge interest rates below 24 percent.” At present interest rates on loans are usually around 30 percent.

He also argues that the government should subsidise micro finance institutions to help lower interest rates further. And commercial banks, which is where the MFIs borrow their money, should accommodate them by charging lower interest rates.

Professor H.S. Shylendra from IRMA, an institute dedicated to rural development that specialises in micro financing, believes structural change is called for. He does not feel the federal state government’s decree will make much of a difference.
"I believe it’s mainly intended to make the government look good. There are different kinds of MFIs. And there are so many rules and regulations that the federal state can impossibly enforce them all. We have already seen a large number of MFIs change their legal status to a Non-Banking Financial Company to evade state oversight."

The professor finds it difficult to establish a direct link between debts owed to MFIs and farmers who commit suicide.

"Each year, hundreds of farmers in Andhra Pradesh commit suicide. It’s a structural problem, which has several causes. Most farmers have borrowed from a number of sources before they commit suicide."

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