Monday, August 21, 2006

Rapid expansion of Indian microcredit leads to a turf war with the government. Excerpts: The dispute centres on one poor rural district, Krishna. Some women were reported to have killed themselves because they could not repay the MFIs. In March a top government official in Krishna temporarily shut 50 branch offices of four MFIs, seized and destroyed their records and told their borrowers not to repay their loans. He accused the microfinance groups of charging exorbitant rates.

There had been abuses. Viswanatha Prasad of Bellwether, a fund that finances microcredit-providers, blames ?indiscriminate expansion? (see chart). The MFIs were flush with money, partly because commercial banks saw them as a good vehicle for lending to rural areas. Some microcredit lenders were charging interest rates on the full amount of a loan, rather than the declining balance, and some borrowers were bullied and humiliated. Aggressive competition and a failure to share information meant some people were in hock to numerous lenders. That is what seems to have led to the suicides.

The root of the dispute, he says, is competition between non-governmental MFIs and a subsidised microcredit scheme, financed by the state and central governments and the World Bank. According to the bank, some 30% of SHARE’s clients overlap with government-supported ?self-help groups?. Mathew Titus, of Sa-Dhan, an association of Indian microcredit institutions, sees the row as a ?battle of ideas??between the non-government sector and those ideologically opposed to its working with the poor.

Bellwether’s Mr Prasad thinks the scandal could even have some positive consequences. The microcredit groups will have to stamp out abuses, adhere to a code of conduct and recognise that they cannot ignore the government. For its part, the government will have to realise that the MFIs are a force to be reckoned with, and that their mission is not necessarily to exploit the poor.

It is not as if too much credit is available. There should be room for both private lenders and subsidised schemes for the very poor. There may even be room for the despised moneylenders, whose local knowledge and extensive business mean they cannot be ignored either. According to one survey, 30% of MFI clients in Krishna took loans from moneylenders. Nationwide, moneylenders are estimated to account for about one-third of the debt owed by rural households. The Reserve Bank is reviewing the laws on moneylending. One option is for banks to lend to registered moneylenders, using them as intermediaries. Priya Basu of the World Bank, an expert on India’s rural credit market, thinks the idea makes sense ?if they can co-opt moneylenders into the formal system?.

Source: The Economist (link opens in a new window)