India’s Looming Microcredit Crisis
Image Credit: Sirensongs

India’s Looming Microcredit Crisis

 
 

A garlanded picture of a young woman stares out into the emptiness of an abandoned house. The small building in India’s south-eastern state of Andhra Pradesh was once home to a family of four. But everything changed the evening that Laxmi Narayan found his 20-year-old daughter, Monica, on fire. Unable to cope with the grief, and the constant reminders of what happened, the family decided to move in with relatives.

Monica’s family had borrowed about 50,000 rupees ($1,100) from a microfinance company. However, unable to make the repayments, the family say they were harassed and humiliated by recovery agents from the lender. One evening last October, agents told Monica’s parents that the young woman should be sold to pay off the loan. For Monica, it was the final insult. She poured kerosene over herself and set herself alight.Narayan says he tried desperately to save her. The scars on his face and hands are a permanent reminder of his failure to do so.

Microcredit, in which small loans are typically given to the very poor – mostly women – to help them generate their own incomes, was once hailed as the solution to global poverty. Yet for many of the rural poor, such schemes have become more like a death trap, including in Andhra Pradesh where micro financing was tied to at least 80 suicides in the state last year.

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The problem for many in rural areas is that they are ill-serviced by mainstream banks, and even when big banks are present, many find the application process too challenging.But while microfinance schemes were meant to offer hope to the poor, they have frequently been the source of exploitation, with some institutions charging interest rates as high as 50 percent. It’s stories like that of Monica that have put microfinance under the spotlight in India – and created the worst ever crisis of confidence in the industry.

It wasn’t meant to be like this. The United Nations declared 2005 the international year of microcredit. In 2006, Bangladeshi economist Muhammad Yunus and the Grameen Bank he founded were awarded the Nobel Peace Prize. At the time, Yunus said boldly that microcredit had the potential to create a world in which poverty could only be seen in a museum. 
 
But less than half a decade later, microfinance is fighting for survival. In Andhra Pradesh, known as a hub of micro credit, debt repayments from the state’s about 8 million micro-borrowers have dropped to around 20 percent following a government crackdown in response to the large number of suicides. 
 
The microfinance crisis is reminiscent of the 2008 subprime mortgage meltdown in the United States, where companies handed out easy loans to higher risk homebuyers who suddenly found they couldn’t repay their debts when house prices crashed.

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