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India?s Microfinance Industry Fuels Mass Suicides

By Nathalie Martin

Most of us remember Muhammad Yunus?s 2006 Nobel peace prize for microfinance, small loans to start businesses, with extremely low default rates. Now it looks like this industry has done what many American financiers have done, lent more than people can ever pay back, in order to make greater profits. In India and other parts of Asia, however, cultural factors mean that over indebtedness causes more than just sadness and bankruptcy. This lending without regard to ability to repay has causes massive suicide on the part of borrowers. This is particularly insidious, given that- unlike home loans or payday loans in the U.S. -  the whole point of microfinance is to help the poor start businesses.

Moreover, the industry itself faces imminent collapse as almost all borrowers in one of India?s largest states have stopped repaying their loans, egged on by politicians who accuse the industry of earning outsize profits on the backs of the poor. Indian banks, which put up about 80 percent of the money that the companies lent to poor consumers, are increasingly worried that they could now face serious losses. Indian banks have about $4 billion tied up in the industry. Initially the work of nonprofit groups, the tiny loans to the poor known as microcredit once seemed a promising path out of poverty for millions. In recent years, foundations, venture capitalists and the World Bank have used India as a petri dish for similar for-profit ?social enterprises? that seek to make money while filling a social need. Like-minded industries have sprung up in Africa, Latin America and other parts of Asia. Some companies have more than doubled their revenues annually. Recently, one of India?s largest for-profit micro lenders, SKS Microfinance, went through an initial public offering, fueling anger. The company is backed by famous investors like George Soros and Vinod Khosla, a co-founder of Sun Microsystems.SKS and its shareholders raised more than $350 million on the stock market in August.

And it?s not just money at stake of course.  People are committing suicide over the shame of not being able to pay the debts back. A 30-year-old mother of two boys poured 2 liters of kerosene on herself and lit a match, after she and her husband argued bitterly the day before over how they would repay multiple loans. Shobha Srivinas, was being pressured to pay interest on her 12,000 rupee ($265) loan. Lenders also were demanding that she cover for the other women who had borrowed, since borrowers essentially guarantee each other?s loans in order to use social pressures to ensure repayment. She had her husband are both dead after he was unable to put out the flames and got caught in them himself. More than 70 people committed suicide in this particular Indian state from March 1 to Nov. 19 to escape payments or end the agonies their debt had triggered. According to Malcom Harper, Microcredit has become ?Walmartized? by unrestrained selling of cheap products to the poor. ?Selling debt is like selling drugs,? says Harper, 75, the author of more than 20 books on microfinance and other topics.?Selling debt to illiterate women in Andhra Pradesh, you?ve got to be a lot more responsible.?

This is obviously not the way Yunus designed the loans. Yunus, 70, had his own ideas about which profits were proper when setting up microloans, which he set at the cost of funds plus 10 percent, he says. Indian micro lenders themselves borrow from banks at 13 percent or more on average and extend credit to the poor. They charge interest rates that can rise to 36 percent. ?Microfinance has been abused and distorted,? Yunus said. ?I feel so sad because that?s not the microcredit I have created.? He also reports being embarrassed, and is now less happy to be a founder of microfinance. 

Full post as published by Credit Slips on January 04, 2011 (boomark / email).