The biggest hurdle to microfinance sustainability might not be its financial viability, but social acceptance. In reaction to local regulation changes, thousands of micro-debt holders in India recently stopped making loan payments even though they have the money to pay. Microfiance, an industry with a history of overcoming criticism and obstacles in offering small loans to millions of the world’s poor, is facing its first major direct pushback.
Local politicians in India’s southern state of Andhra Pradesh recently enacted policies aimed at curbing the activities of microfinance lenders operating in the state. State officials have arrested several micro-lending agents following alleged harassment of micro-debt holders. In several cities, local leaders are actively restricting groups of borrowers, who are willing to make their regular debt payments, from making payments to the lending agents. As a result, thousands of loans have gone unpaid, even when loan holders have money to make payments. See this Wall Street Journal Article for additional information.
This organized payment boycott is unprecedented for a microfinance industry that has received mixed criticism and billions of dollars in private investments since being introduced into mainstream investment by industry leader Mohammed Yunus. The payment boycott in Andhra Pradesh represents a significant concern to major microfinance organizations. This state is one of largest micro-finance markets in the world, maintaining around 30% of the micro-loans in India.
The government of Andhra Pradesh government points to poor lending practices and a recent series of suicides it believes resulted from microfinancing debt as the reason for the stricter policies. V. Vasant Kumar, the state’s minister for rural development, believes that, in contrast to the image microlenders portray, the microfinance loans are often made at the expense of the poor, who are pressured into unnecessary debt. Kumar’s ministry released a study linking 54 recent suicides in the state to pressures and harassment resulting from microfinance debt.
Microlenders disagree with officials over the cause of the suicides. Lenders claim that the industry adheres to the highest level of corporate governance and accountability. Lenders’ investigations reveal that some of the fifty-four suicide victims were more concerned over money owed to local loan sharks than to microlenders.
Additionally, others living in and involved with Andhra Pradesh society and politics believe that sexism and local political parties, rather than debt-holder animosity towards the microfinance industry, are the source of the current issues.
Microloans are generally given exclusively to women’s groups. “Anything that empowers women or gives them some control over the financial tools is likely to be resented by some parts of a conservative rural population,” said K. Sree Kumar, the chief executive officer of Hyderabad-based Intellectual Capital Advisory Services, which advises companies about the industry. In many villages, men, who are third parties to the microloans, rather than the women debt holders are the driving force to boycott the payments.
There is also a political undertone. The Telugu Desam Party is a major force behind the recent policy change. The party offers government based microloans at much lower rates but is regularly unable to keep up with private lenders’ success and growth. This result has embarrassed the government and generated suspicion as to the success of private microlenders. Party critics maintain that the new policies are merely an effort by the party to gain influence over the region.
In an attempt to pacify the concerns expressed by the local governments, many microlenders in the area have planned to cap their interest rates at 24%, below the 35% global average, and have instructed loan agents to be flexible with debt holders until the turmoil pacifies.
Andrew Moore has a BS in Finance and is currently pursuing a JD. His interests include finding responsible success through creative, sustainable profit alignment.