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India Mulls Tighter Microfinance Regulations

Leon Kaye | Friday October 15th, 2010 | 0 Comments

Microfinance has helped lift millions of people out of poverty. Muhammad Yunus and the Grameen Bank won a Nobel Prize for their work on this concept, which has benefited countless borrowers. But for some, microfinance has turned into a nightmare.

Some micro-finance institutions (MFIs) in Andhra Pradesh have taken abusive practices, with tragic results. At least 24 deaths have been attributed to exorbitant interest rates and abusive lending practices—and the past few days, at least two or three suicides a day have been reported. Part of the issue stems from the fact that MFIs in India are not regulated the way banks and other financial institutions are. But all this may change.

Andhra Pradesh’s government is considering legislation that would curb lending rates and avert abuses that MFIs often undertake in recouping their loans. These borrowers, most of whom are women, feel squeezed between the MFIs and the self-help groups (SHGs) under whom they work.  But they may finally gain some help–their plight has caught the attention of officials who feel they can no longer just shake their heads as they read the daily newspapers, which have highlighted these deaths.

It has all started when these loans became past due.  Women who fall behind on their loan schedules have been subjected to another form of bullying—though that term is probably an understatement. Some MFI officials have pushed the boundaries of payment collection, and went beyond simply demanding money from the women–and this involved follow up that involved more than just  badgering. In fact, some officials and MFI representatives would mercilessly harass these women’s families. Another tactic was to induce SHG leaders to start public vilification campaigns against the women in debt. The result: a brutal and sad end to the lives of women who could no longer bear the mental anguish.

Reforms may be on the way, albeit too late for these women and their families. But change is needed because as this industry grows, so could the abuse.  Microfinance is a US$4 billion industry that is a lifeline for almost 27 million Indian borrowers; 40% of microfinance activity is taking place in Andhra Pradesh. More transparency and regulation, such as what is occurring in Africa, will not only prevent such wrongdoing, but could strengthen microfinance as a vital institution. A pilot self-regulation project is underway in Africa—a similar model has started on the Subcontinent as well. Such a push is necessary: microfinance, so vital to social enterprise, should be an uplifting experience, not a death knell.


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