Mumbai: Tanda Srinivas was lounging in the yard of his two-room house in the southern Indian village of Mondrai shortly after noon on October 28 when his wife, Shobha, burst out of the door covered in flames and screaming for help.
The 30-year-old mother of two boys had poured 2 litres of kerosene on herself and lit a match. The couple had argued bitterly the day before over how they would repay multiple loans, including those from microlenders who had lent small sums to dozens of villagers, says Venkateshwarlu Masram, a doctor who called for the ambulance.
Shobha, head of several groups of women borrowers, was being pressured to pay interest on her 12,000 rupee (Dh962.73) loan. Lenders also were demanding that she cover for the other women, even though the state had restricted microfinance activities two weeks earlier. When Srinivas, 35, tried to snuff out the flames with a blanket, his polyester clothes caught fire. Within three days, both parents were dead, leaving their sons orphans.
The horrific scene in Mondrai, 80 kilometres from the city of Warangal, has played out in dozens of ways across Andhra Pradesh, India's fifth-largest state by area and the site of about a third of the country's $5.3 billion (Dh19.46 billion) in microfinance loans as of September 30.
More than 70 people committed suicide in the state from March 1 to November 19 to escape payments or end the agonies their debt had triggered, according to the Society for Elimination of Rural Poverty, a government agency that compiled the data on the microfinance-related deaths from police and press reports.
Rising toll
Andhra Pradesh, where three-quarters of the 76 million people live in rural areas, witnessed a total of 14,364 suicide cases in the first nine months of this year, according to state police.
A growing number of microfinance-related deaths spurred the state to clamp down on collection practices in mid-October, says Reddy Subrahmanyam, principal secretary for rural development. "Every life is important," he says.
On November 8, police arrested two managers of lender Share Microfin on allegations of abetting another suicide, this one of a 22-year-old mother.
Microcredit has become "Walmartised" by unrestrained selling of cheap products to the poor, says Malcolm Harper, chairman of ratings company Micro-Credit Ratings International in Gurgaon, India.
"Selling debt is like selling drugs," says Harper, 75, the author of more than 20 books on microfinance and other topics. "Selling debt to illiterate women in Andhra Pradesh, you've got to be a lot more responsible."
K. Venkat Narayana, an economics professor at Kakatiya University in Warangal, has studied how microfinance lenders persuaded groups of women to borrow. "Microfinance was supposed to empower women," he says. "Microfinance guys reversed the social and economic progress, and these women ended up becoming slaves."
IPO attention
Banco Compartamos, a former non-profit group that's now the largest lender to Mexico's working poor, raised about $467 million in its 2007 initial public offering. The August IPO of SKS Microfinance, India's biggest microlender, drew further attention to the industry.
The company raised 16.3 billion rupees by selling 16.8 million shares at 985 rupees each. SKS shares peaked at 1,404.85 rupees on September 15. As of December 28, they'd fallen to 652.85 rupees.
The upheaval in Andhra Pradesh is a long way from the vision of Mohammad Younus who won the Nobel Peace Prize in 2006 for his pioneering work in Bangladesh providing small sums to entrepreneurs too poor to get bank loans.
Younus, who started the Grameen Bank Project in 1976 to extend banking services to the poor, says he's not against making a profit. But he denounces firms that seek windfalls and pervert the original intent of microfinance: helping the poor. The rule of thumb for a loan should be the cost of funds plus 10 per cent, he says. "Commercialisation is the wrong direction," he says, speaking in a telephone interview from Dhaka.
David Gibbons, chairman of Cashpor Micro Credit, a non-profit microlender to the poorest women in India's Uttar Pradesh and Bihar states, says public, for-profit lenders face a conflict. "They have to decide between the interests of their customers and interests of their investors," he says. Indian microlenders differ from Younus' Grameen Bank in key ways.
To protect depositors' money after bankruptcies among non-banking financial companies in the early 1990s, India's Reserve Bank in 1997 made it more difficult for them to meet the requirements needed to take deposits from the public. Only 36 microlenders are registered as non-bank financial companies, according to information supplied by the Reserve Bank. Indian microlenders themselves borrow from banks at 13 per cent or more on average and extend credit to the poor. They charge interest rates that can rise to 36 per cent, says Alok Prasad, chief executive officer of the Microfinance Institutions Network, which represents 44 microlenders. He says all 44 firms are registered with the Reserve Bank.
Investors
SKS attracted investors such as Khosla Ventures, Sun Microsystems co-founder Vinod Khosla's venture capital firm.
Private-equity investors alone have put $515 million into Indian microfinance companies since 2006, research service Venture Intelligence says. "Over the last two years, we've been seeing explosive growth," says N. Srinivasan, who wrote the report. "Microfinance institutions found that it's easy to make money."
Polelpaka Pula, a mother of two, says she saw microlenders rushing into her village of Pegadapalli to compete for business — with tragic results.
Her husband, Prakash, a painter who made 250 rupees on a good day, first borrowed from a group of villagers to build a house. Each participant of the so-called chit fund contributed 1,000 rupees a month and took a turn collecting the entire sum.
Microfinance officers from L&T Finance, Spandana Sphoorty Financial, Share Microfin and SKS began offering loans in the village starting in 2004, she says. The couple, already contributing to their village fund, took five more loans totalling 64,000 rupees. That saddled them with payments of 7,300 rupees a month, more than Prakash's 5,000 rupee maximum monthly income.
When Prakash ran out of microlenders to borrow from, he went to a village loan shark, who charged 100 per cent interest.
With no way out and debt from multiple lenders ballooning, Prakash hanged himself in November last year, his wife says.
Overlending in Andhra Pradesh calls to mind the US subprime crisis, says Lakshmi Shyam-Sunder, director of corporate risk at International Finance in Washington, which invests in microlenders."Tension arises when you work on activities with both social goals as well as commercial interests," she says, adding that it's important to strike the right balance.
During the past five years, the number of microloans in India has soared an average of 88 per cent a year and borrower accounts have climbed 62 per cent annually, giving India the world's largest microfinance industry, Micro-Credit Ratings says. The tragedies in India present the worst possible outcome, says Cashpor's Gibbons, whose November 15 speech opened a morning session of the annual Microfinance India Summit in New Delhi.
"This is a sad day for microfinance," he said. Often people asked me, ‘What are you doing here?'" he told the audience. "I've been always proud to say, ‘I'm doing microfinance.' Now, when people ask, I feel embarrassed. I feel like hiding somewhere."
