One of the most popular programs for helping the world's poor has gone sour in India.
Microcredit, the practice of making small loans to very poor people, grew into a multibillion-dollar business. But microfinance companies have been accused of predatory lending and collection practices so harsh that they drove some borrowers to suicide. One state government in India has enacted legislation that will, in effect, put the microlenders out of business.
The idea behind microcredit is to give a small loan to a very poor person to buy some asset that will help her work her way out of poverty.
A typical client is a poor woman who lives in a slum or a rural village. She might earn money as a farm laborer or in small trade, such as selling vegetables by the side of the road.
As little as $200 -- the theory goes -- could allow a woman like that to buy more goods to sell, or a couple of goats to milk, or a sewing machine to make clothing. A working asset could increase her ability to earn a living and make enough extra to repay the loan with interest.
The "up-by-your-bootstraps" capitalism of this idea was so appealing to thinkers in the developed world that one of the pioneers of microfinance, Muhammad Yunus of Bangladesh, won the Nobel Peace Prize in 2006.
Surprising Interest Rates
But microcredit in India doesn't come cheap.
The cost may be shocking to anyone in the United States who's ever borrowed for a car or a house.
"Just so your audience can brace themselves, the typical interest rates are in a range of 24 to 30 percent per annum," says Vijay Mahajan, president of the Microfinance Institutions Network, a trade group. "Most people find it very hard that this interest rate does any good to poor people who are the recipients."
Just so your audience can brace themselves, the typical interest rates are in a range of 24 to 30 percent per annum. Most people find it very hard that this interest rate does any good to poor people who are the recipients.
One reason interest rates are so high, Mahajan says, is that microlending is both time and labor intensive.
Microfinance lenders do their business on the client's doorstep, meaning that representatives have to travel to slums or rural villages to make the loans and then come back weekly to collect the payments. But microfinance was also very profitable. So much so, says Shubhankar Sengupta, director of a Kolkata-based microfinance company called Arohan Financial Services, that it made sense to run it as a commercial venture, tapping into investment banks for the vast amounts of money needed to fuel the growing number of microloans.
It was so profitable that one company, SKS Microfinance, raised $357 million when it went public on the Mumbai stock exchange in August.
One Woman's Story
Rama is an example of microfinance gone wrong. She makes her living rolling bidis, the cheap little cigars smoked by India's poorest people. She lives in the town of Warangal, a farming center in Andhra Pradesh, one of the poorest states in southern India.
One woman cuts the leaves into shape, while Rama and others roll the smokes and bundle them into baskets. A quick, persistent worker can earn between 30 and 40 rupees rolling bidis, less than $1 a day.
Rama says microfinance representatives offered her a loan, with almost no questions asked. She took it, though she didn't have a plan to invest the money or pay it back. She used the money for household expenses, for medical treatment for family members, and to celebrate a birthday. A second company offered her another loan, which she used to make payments on the first.
Kurapati Venkatanarayana, who teaches economics at Kakatiya University in Warangal, says Rama began a downward spiral that's common among debtors in Warangal.
"They get loans from the second company, and pay to the first company. They take the third loan from third company, and pay to the first and second company," he said.
Before long, Rama had five loans from different companies, and no way to pay.
She says the collectors from the finance companies hounded her day and night, shaming her in front of her neighbors. They told her to get the money any way she could, by stealing if necessary, she says, and they told her she'd be better off dead.
Venkatanarayana says that's because, unbeknownst to her, Rama's loan payments had included a life-insurance premium.
"If the people who borrow die, the microfinance companies get the insurance amount," he said.
Rama says her 17-year-old daughter, Mounika, took the threats to heart. Mounika believed that if anyone in the family committed suicide, the debts would somehow be erased: She doused herself with kerosene from the stove. It took two days for her to die from the burns.
State Curbs Industry
Venkatanarayana says he's been keeping count: So far this year, he says, more than 120 people, most of them women, have committed suicide in Andhra Pradesh because of the burden of microfinance debt.
Andhra Pradesh, a sprawling, heavily populated state, is home to about 75 percent of the microfinance companies in India.
Most are based in the state capital of Hyderabad, a modern, bustling city that is so tied into the information technology business that its nickname is "Cyberabad."
After the outcry over the suicides, the state assembly passed a law that makes it so difficult to make loans that the microfinance companies say they won't be able to do business.
Mahajan, of the microfinance trade group, says the companies haven't been able to collect on their loans, even from people who can afford to repay.
"Political leaders have been going around and saying, 'Do not repay MFI loans,' so our repayment rates, which all these 15 years have been around 98 to 99 percent, have come down to less than 10 percent," he says. "So there's a major default that's beginning to happen."
Microfinance companies may not be able to repay hundreds of millions of dollars in loans that they have outstanding from banks. Mahajan acknowledges that greedy lenders and unchecked growth have given the microfinance business a bad name, but he says that shutting down the industry will ultimately hurt the poor.
At 56, he has worked most of his life for nonprofit development groups.
He says that he got into commercial microfinance because he saw it as the only way to increase the scale of financial services to India's poor: not just lending, but access to savings accounts and insurance -- the things people in wealthy countries take for granted.
Now, he says, that cause may have been set back by at least a decade.
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