Hyderabad, Oct. 18: Public uproar over 20 suicides in two months has forced the Andhra Pradesh government to act to regulate micro-finance institutions.
On October 14, the state government brought an ordinance making it compulsory for MFIs to register themselves, declare the effective rate of interest they charge, ensure that no security is sought for loans and no coercion is used for recovery. Non-compliance will be punished with a three-year prison term and a fine of Rs 1 lakh.
What started off as an initiative for social and economic uplift of rural poor has now morphed into a highly competitive business with the sole aim of making profits. People are getting caught in debt traps and they see no way out, chief minister K. Rosaiah said in a statement on Thursday. All our efforts are to rein in the criminal activities of the MFIs, he added.
Prabhakar, a 28-year-old who ran a petty fruit business in Kurnool town with his wife, had taken a loan of Rs 12,000 from an MFI at 27 per cent interest. He fell ill and missed two weekly payments. Because of his illness, he could not sell fruits, which rotted, adding to his financial burden.
Earlier this month, he hanged himself to death, leaving behind wife Kamala and two young children. The two weeks default had pushed up the debt burden, with the interest rate climbing to 29.5 per cent.
The suicide — the 20th in two months — triggered a public backlash, and offices of MFIs in many district towns were ransacked.
Only because of the coercive methods used by the micro-finance institutions, such incidents are taking place, said V. Vasant Kumar, the states rural development minister.
Today, another debtor committed suicide. K. Narayana, 50, a dealer in pearls, consumed poison allegedly because of harassment by agents of four MFIs. He died in his house at Adilabad districts Nirmal division. According to his wife Nagatha, Narayana had taken Rs 53,000 in loans and MFI agents were harassing him for repayment.
Micro-finance institutions borrow from banks and lend at higher rates, with no cap on the interest they can charge.
The government has now decided to offer a debt-swap arrangement under which MFI customers could swap their high-interest loans with low-interest bank loans. But bank officials warned that if they have to take over MFI loans, the Pavala Vaddi scheme of interest subsidy to womens self-help groups would be hit.
The micro-finance companies claim to have loaned Rs 9,600 crore to tenant farmers, rural traders and small businessmen in the state. During the current kharif season, the state level bankers committee claimed to have doled out Rs 72,674 crore in farm loans.
About a month ago, Hyderabad had hosted a national seminar of the Association of Micro-finance Companies hailing the advantages of micro-finance loans over regular bank loans. We provide credit to small businessmen and retailers at their doorstep and also collect payments at doorsteps, thereby eliminating hidden cost of paper work, transport, time spent on running around and miscellaneous expenses, Vijay Mahajan, an IIM Ahmedabad graduate and a micro-finance leader, said.
Mahajan and another micro-finance leader, Vikram Akula, said small traders and tenant farmers were not bothered about interest rates. All that they cared for was timely and hassle-free availability of funds. They want easy credit and easy terms of payment on weekly or daily basis, another expert said.
Akula is chairman of SKS Microfinance, which came out with a public issue recently. Its share price slumped seven per cent after the suicides and is now quoted at Rs 1,130. About 25 per cent of companys outstanding portfolio of Rs 4,570 crore comes from Andhra Pradesh.
Akula, commenting on suicides by his companys debtors, said: They committed suicide after paying. They were not defaulters.