The deadly price of last-resort loans

A centre leader counts money to be distributed as a micro-loan. Photo / Bloomberg.

Lalitha Nursilmula was as bright and lively as any other 16-year-old. At the local college she studied economics and commerce and she liked singing along to Bollywood tunes.

But one day last month, an employee of a micro-finance agency came to her village when her parents were out. At the community office, the agent and other villagers allegedly questioned her over an outstanding loan repayment.

According to the girl's mother, she was told to do whatever it took to get the money before the day was out, even if it meant selling her body.

The distraught teenager ran home and called her mother, pouring out to her what had happened. She wrote a note begging her parents not to take out another loan, and then swallowed a lethal mixture of fertiliser. Relatives rushed her to the local hospital but nothing could be done to save her.

"I was on the bus. I was told to go straight to the hospital," said Lalitha's mother, Laxmi, wiping away tears.

The sad, unnecessary death is one of many such tragedies to have played out among the quiet villages of this part of southern India. Across the state of Andhra Pradesh, at least 75 people have committed suicide in recent months amid pressure to make repayments to micro-finance firms and other lenders.

Many more have been pushed to the edge of their wits, or have taken out more loans,adding to an ever-spiralling pool of debt. A number of loan collectors have been arrested.

The wave of suicides and subsequent revelations about the wild, unregulated way in which certain lenders were operating has created a backlash that has pushed the state's micro-finance industry (MFI) to the brink.

Encouraged by politicians who have eagerly leaped on the crisis, customers have increasingly refused to meet repayments and activists have physically prevented loan collectors from entering some villages. Officials from the MFI say only 15 per cent of loans are being gathered.

Questions are even being asked about the broader role of micro-finance, initially established in countless global projects to give a hand-up to the world's most abject.

Government officials say that within just a few years, a system designed to help the poor transformed into a fully commercialised industry that ruthlessly exploited them. Even senior figures within the MFI say that should the industry survive, it will struggle to save its name.

"This is a significant setback. Unless we reconfigure ourselves, we will have a hard time recovering our reputation," said Vijay Mahajan, a leading Indian social entrepreneur and president of the Microfinance Institutions Network, an industry body.

It was people such as Lalitha Nursilmula's family, agricultural labourers in the village of Godam Guda, 80km west of Hyderabad, that micro-finance was designed to help.

Pioneered by the Nobel Prize-winning Bangladeshi economist Muhammad Yunus, the founder of the Grameen Bank, micro-finance was designed to provide credit for life-improving projects to people who would never qualify for a loan from a normal bank.

By lending to small groups of people - invariably women rather than one individual - and making everyone jointly responsible for the borrowed money, the system used peer pressure to ensure individuals did not skip repayments.

But while micro-finance has helped millions of people, in Andhra Pradesh it has also become an aggressive industry where more than 250 organisations compete to hand out loans now totalling £1.65 billion ($3.4 billion). The ferocity of competition has meant that over the past five years, many companies have been slack in their due diligence, offering considerable loans at interest rates of more than 30 per cent to people who have little chance of paying back such sums.

There has also been little evaluation of what other loans individuals may have. As a result it is now commonplace for borrowers in the state, which accounts for more than one third of all micro-credit borrowing in India, to have loans from three or four different companies, as well as from traditional unlicensed money-lenders. Employees of many companies receive commission on what they collect.

The state authorities have belatedly taken steps to regulate the affairs of the micro-finance industry, and have issued new rules which demand that a loan's interest cannot add up to more than the principal amount borrowed, that collectors must not indulge in coercive collection methods and that repayments cannot be collected on a weekly basis.

Some within the MFI say the new regulations will strangle the business, but officials have little sympathy.

Indeed, some have suggested that one of the reasons behind the crackdown is the state government's belief that it, rather than the MFI, should be primary lender to the poor by acting as a conduit for funds from the World Bank and commercial banks to self-help groups of women.

The suitability of these groups are assiduously assessed, insist officials who say the government micro-lending is driven by a desire to help the poor rather than making profits.

"I have evidence the MFI companies do not have the intention of poverty reduction. [Their intention is] profit maximisation," said B. Rajsekhar, a senior official with the Government's Department of Rural Development.

"Their business model is very clear: you dump money on the poor. They have a better value system. The middle class would say 'get lost'. They are cashing in on that value system."

Sulthana Begum's husband had taken loans from three micro-finance companies as well as from an illegal money lender. Every month he was obliged to repay 5400 rupees ($158), even though his earnings selling bananas from a cart never totalled more than 6000 rupees. "Over the years he had become accustomed to taking more and more loans to pay off earlier ones," said Begum. He had also become an alcoholic.

In May, the couple's 12-year-old son, Navid, discovered his father hanging from their kitchen roof. "I had been saying to him he should not take out any more loans but he thought he would be able to pay it," said Begum.

She had been left with debts of 90,000 rupees and, apart from the 20,000 rupee compensation she received after her husband's death, her sole income was the 500 rupees she got from renting a room to another poor family. The money lender was now telling her to sell off the home to clear the debts.

"I cannot do that," she said. " I have two daughters that have to be married off."

- Independent