Tuesday, January 04, 2011

Why microcredit may be to blame for 70 Indian suicides

The suicides of more than 70 people in India who borrowed from microcredit banks have people asking what went wrong. It is said that the people were under so much pressure to pay back their loans that they felt that suicide was the only escape. Some of the victims even took out other loans to pay for the older ones.

When it began, microcredit had only social good as its goal, hoping to lift people out of poverty. Some wonder if microcredit has lost its way. Especially when they see the vast amount of investment from some of big multinational banks, and when they see the big interest rates some charge.

From Gulf News, this Bloomberg article takes a look at the messy situation in India.

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.

Yunus, 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.

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