In the past few months, the Indian microfinance industry has been in the spotlight for the wrong reasons. A few Kiva Fellows wanted to learn what the issues were, and what can be done to prevent them in the future. We will present our findings in a series of posts over the coming days. Given the inherent complexities, the multiple viewpoints and an ever changing political and legal landscape, our work is only intended to provide a top-level summary of the situation as it stands now. If you are interested in learning more about microfinance in India, we encourage you to explore these issues beyond what is presented, and to draw your own conclusion. The series of posts will be:
1. Current state of microfinance in India
2. The issues, players and outcomes
3. Borrower protection practices at Kiva partners
4. What is the industry doing to protect borrowers?
Without doing any reading or research on the topic, I am willing to bet that the average American has heard through the media that microfinance is having problems in India. On one hand, microfinance has been heralded as an innovative solution which reaches the impoverished in third world nations. On the other hand, microfinance has been criticized for reckless lending that harmed the impoverished more than it helped. Articles in The New York Times, The Wall Street Journal, and The Washington Post have recently focused on the negative impacts of microfinance in India.
Let us take a closer look at the current state of the industry, the government’s response to the issues at hand, and the media coverage.
The Current State of the Industry
It is interesting to note that there is extreme concentration in the Indian microfinance industry – approximately one-third of all outstanding microloans and borrowers are from the state of Andhra Pradesh. It is also interesting to note that despite the recent growth of the industry, around 90% of the Indian population remains without access to financial services.
Microfinance in India is funded by private and public capital. Private capital comes in the form of private equity investments and funds from the capital markets. Loans from private equity firms and the recent initial public offering of SKS microfinance are examples of private capital. Public capital is known in India as priority sector lending. The Indian government mandates all banks in India to lend to the priority sector. The priority sector includes agriculture, small enterprise, retail trade, education, and housing finance. The intent behind this policy was to make sure that under-served markets are not ignored by commercial banks. Microfinance falls into this definition of the priority sector, and this capital has been the primary driver of the recent growth in microfinance. From 2003 to 2009, the number of microloans extended to the poor in India grew from 1.0 million to 26.7 million. For additional information on priority capital, please click here.
The Andhra Pradesh Government’s Response
In recent years, Indian microfinance has been a lucrative business for investors, evidenced by SKS Microfinance’s $358 million initial public offering in August 2010. Following in the footsteps of SKS, other microlenders found that it was easier to disperse loans to borrowers who already knew how the game was played than to disperse loans to borrowers who needed to be educated about the rules. What occurred was similar to the way that college students in the U.S. rack up credit card debt; villagers in India were offered easy access to capital, which piled on top of prior debts from village lenders, family members, friends, etc.).
Eventually, the debt repayments became too high and families began to have trouble meeting repayments. As reports of investors becoming wealthy from microfinance reached villages and microlenders relentlessly sought repayments, villagers began to feel that they were being taken advantage of. Last fall, encouraged by political leaders belonging to the opposing party to the one in power, these villagers began to stop repaying their loans. To further complicate matters, the Andhra Pradesh government issued an Ordinance on October 14, 2010. This Ordinance required MFIs to halt operations, register with the government, and wait for those registrations to be processed before resuming operations. In addition, the Indian government began to fear that it would not recoup its loans to microfinance institutions, and it halted loans to MFIs. The government backstops nearly all the priority capital lent to the microfinance industry, exposure valued at approximately $4 billion. With their main line of credit turned off and the number of clients defaulting on loans climbing, MFIs faced the threat of bankruptcy.
The Media Coverage
In response to the state of microfinance in India, Western media outlets such as The New York Times and BBC News ran articles covering the developments. In articles such as these, the authors present stories of women and men who are negatively impacted by microfinance. The stories range from a man who dropped dead from a stress induced heart attack at the age of 40, to a woman who abandoned her family to escape the pressure from lenders, to a woman with financial difficulties who hung herself in her home. These articles implied that microfinance destroyed families and was the cause of suicides. Though over-indebtedness adds to social pressure, it is difficult to suggest that microfinance causes suicides.
Reports suggest that over 90% of Andhra Pradesh’s rural population have some sort of loan. Therefore, there is an obvious correlation between those who are committing suicide with those with microloans. However, the initial claim that one caused the other has gone through much scrutiny in recent months. Studies done across Europe and Asia have tried to look deeper on whether one could really accuse MFIs of being the reason behind the suicides.
Turns out, most of the rural population in Andhra Pradesh get their debt from numerous sources, most of which are informal (money lenders, family members, and friends). To imply that people killed themselves due to MFIs is a push since they were expected to pay back all the debt they had from different sources. Furthermore, some smaller development organizations had since gone back and interviewed the families of those cases which the Western media picked up on. Most of the family members have tried to better explain their position and have admitted that the loan sharks had created the majority of the problems and repayment pressures.
While a (weak) correlation is obvious, it is a stretch to link the growth of MFIs to a rise in suicide rates. More likely, it is the high level of overall debt and the lack of regulatory oversight that results in putting borrowers at a point of despair where they feel they have no other option.
In the series of posts to follow, we will discuss the issues with microfinance in India in greater detail, what the MFI partners Kiva works with do to protect their clients, and how the broader microfinance industry is addressing these issues. For additional information on the matter, please check out Kiva’s official response to these issues here.
Tran Chau is a Kiva Fellow (KF13) currently based in Ha Noi, Viet Nam.
Want to volunteer with the Kiva Fellows Program? Learn more here and apply to be a Fellow!