MFIs must go beyond lending

Foxconn , the world’s biggest manufacturer of electronic components, runs an entire city of 4,50,000 workers in China, Foxconn city. This summer, 14 workers committed suicide. The media blamed this on low wages and bad working conditions. One Chinese professor wrote that Foxconn’s working conditions were actually high by Chinese standards. Another said 14 suicides in a population of 4,50,000 meant a suicide rate of just 3.5 per lakh of population, far lower than China’s overall suicide rate of 14 per lakh.

But these cold facts could not counter the terrible publicity of the suicides. Foxconn decided to cut its workforce in the city by one-third, raise wages and relocate in several other interior cities. It plans a total workforce of 1.3 million split into several locations, in none of which it has a dominant population share. That way, even if total suicides do not fall, suicides per location will be few, and cease to attract media or political attention.

The main lesson for Indian microfinance institutions (MFIs) is that allegations of suicide cannot be rebutted by technocratic analysis. They can be met only through politically sensitive solutions, including dispersion among several locations.

SKS chief Vikram Akula investigated allegations of 17 suicides among his borrowers, and found that none was a defaulter. But as in Foxconn’s case, this did not change SKS’s image. Any group with more than a lakh members is going to have some suicides, and SKS has 5.7 million borrowers. If the media look for suicides in any large group, it will find many instances. The company in question cannot escape blame.

Many people think suicide is a rare phenomenon caused only by great financial distress. Alas, suicide is not uncommon at all, and has little to do with financial distress. The accompanying tables list suicide rates. The highest rates in India come from Puducherry (47.2) and Kerala (31.0) which are by no means the poorest states. But poor Bihar (1.1) and Uttar Pradesh (2.1) have the lowest rates. Low rates occur in poor states Jharkhand (3.6), Rajasthan (7.7) and Orissa (10.8). States with the best welfare systems (Kerala, Tamil Nadu, Goa) have high suicide rates.

Examine WHO data on suicides in 2003. India (10.7) is on par with much richer USA (10.8). China is much worse (14 per lakh). The highest rates come from Belarus (36.6), Sri Lanka (30.7) and Japan (25.3). The highest suicide rates in the West come from prosperous Finland (18.8) and Switzerland (17.5), which have strong welfare systems. By contrast, low suicide rates come from poor Zimbabwe (7.9) and Nicaragua (3.5).

Suicide and living standards have little correlation. Suicide is caused substantially by psychological and cultural factors. It is strongly associated with depression and mental disorders. Antidepressants have brought down suicide rates in the West. Cultural factors explain exceptionally high suicide rates in Japan and Finland.

What does this imply for the accusation that (MFIs) have driven borrowers to suicide in Andhra Pradesh? The state has just under 15,000 suicides per year, or almost 40 suicides per day! MFIs have been accused of using coercive tactics, but this relates to very few cases in millions of loans.

Have MFIs worsened the suicide rate? Very careful statistical work is needed to throw light on this, but nobody is even attempting this, since the issue is political, not technocratic. The state has enacted a draconian law enabling it to arrest MFI staff even on flimsy grounds like causing annoyance. Unofficially, borrowers have been told to stop repaying. Hence repayment rates have plummeted from 98% to 20%. This threatens all MFIs with bankruptcy.

MFIs in other states think they can survive by having a closer linkage with state government anti-poverty schemes. Not so — the problem in AP arose because opposition parties (Telugu Desam and the two communist parties) decided that MFI suicides could be a good tool to whip the state government with. The government sought to protect its flanks by cracking down on MFIs itself.

This can happen elsewhere. MFIs are growing in UP, and there will doubtless be some suicides among borrowers. If Mulayam seeks to make this an election issue, Mayawati will crack down on MFIs before this can become Mulayam’s platform.

India has an ingrained political culture of loan waivers. Agricultural credit co-ops went bust because politicians urged default. For the same reason the IRDP programme of small loans from government banks became a fiasco. The central government itself decreed bank loan waivers in 1990 and 2008.

Across developing countries, MFIs have been hailed as heroes aiding the poor. Only in India are they castigated. Why? First, only in India is there competition between government-sponsored and private MFIs, with the government wanting a monopoly. Second, India alone has a tradition of politically-induced default. Third, India alone has rival MFIs giving multiple loans to borrowers, leading to overborrowing and unsustainable debt.

Indian MFIs hope that the Malegam Committee of the RBI will come out with regulatory guidelines that defuse political opposition and ensure MFI viability. This is too optimistic. The main threat is political, not technocratic.

First, a la Foxconn, MFIs must spread activities among several states, and not become dominant in any one state. Second and more important, MFIs must start organising women borrowers to stage demonstrations on their behalf when needed. Politically, that alone will take the sting out allegations that they are driving people to suicide.

To achieve this, MFIs will have to do more than pure lending. They need to get involved in livelihoods development, in providing veterinary services and insurance, and in lowering prices of basic goods for clients by clubbing their orders together, passing on wholesale discounts to clients. Only such activities will convince borrowers that they truly need MFIs, and should demonstrate against state action to hobble these.

If MFIs cannot persuade women to demonstrate on their behalf, it will prove that they have lost their social mission and are seen by clients just as commercial lenders. If so, they cannot expect to be exceptions in a political system that revels in loan cancellations.

8 thoughts on “MFIs must go beyond lending”

  1. reasons given above truly reflects the analysis based on the previous data of suicides. but why always every problem curl itself and face just in front of India,is it because we are focusing on problems only or is it really true, we know that despite being a part of poor countries we have a very low rate of suicides than others which are more capable of us financially.
    so, where the fault is residing :- in our government system,in our peoples or in the thinking, unless we come with a concrete answer for this we will continue criticizing our country as we are doing right from independence

  2. Kshitizraj Singh

    I in toto agree with you sir. The financiaol distress is one amongst the rarest reasons behind suicide. Durkhiem’s study on suicide also indicates the same. Instead the financial inclusion which is aided by MFIs helps in reducing the anomie suicides.Secondly its more a political gimmicking, the high rate of interest charged by the MFIs has a rationale. Suppose a vegetable vendor whose working capital is Rs 1000/- borrows from MFIs and repays them Rs 1100/- next day,interest rate charged is more than 3000% annually. But out of that capital he earns Rs 500/- so he doesnt mind paying
    Rs 100/-. And regarding regulation the Govt. should not regulate the interest rate as all lending business doesnot fall under banking ambit. MFIs business flourished in A.P. because of Anti Arrack movement which culminated in forming of quite a large no. of SHGs, thats a business opportunity for MFI-SHG linkage.

  3. Jayadeep Purushothaman

    Though I don’t know the real story, I wouldn’t trust your story because as usual it is based on statistics and they lie typically and you have vested interest in MFIs and naturally money making is primary to any corporate. It is a joke the Foxconn cares about people – get real Mr. Swami!

  4. Sir, you could have also provided a link to your article on how ITC won and Reliance suffered set backs while implementing rural procurement. It was a classic, albeit, with the same message.

  5. This revealing article provides a fresh perspective on suicides allegedly due to debt trap by microfincial organisations.While most of media is carrying stories of excesses commited by microfinance companies it is courageous on your part to reveal the truth..The usual story in media focuses on an isolated victim while ignoring the larger picture. The goverment should take proper measures to correct excesses by companies rather than give knee-jerk reactions and that should be the real significance of these suicide stories .

  6. how come the issue of very high interest rates charged by MFIs is not figuring in your analysis vis-a-vis the SHG-Bank linkage of the government. True, Populistic politics has a major role to play, but spurt in MFI activities has been driven by the profit motive which becomes unsustainable as poor can not go on shouldering the responsibility of this ever increasing burden of high administrative costs etc. Further entrance of Private equtiy into MFIs and taking the IPO route made them vulnerable to volatility of market. I think article could be bit more realistic in it’s analysis by showing the true picture at the MFi front also rather than blaming politics and government responsible for everything bad.

  7. While it is true that MFIs charge exhorbitant rate of int. and crucification on this pretext will kill the market and will freeze all the options of credit for rural poor hence, blaming MFIs needlessly is not the solution for this problem.We must remember that Banks have by and large kept off from the rural consumer which is largely due to politcally infused defaults and in such a situation MFIs have found an opportunity in lending.Mind you, not all of them charge exhorbitant rates. After all it is upto RBI to stepin and crack the whip, set up the rules of game and devise an organised setup. It is indeed clear that RBI wants Banks to step into shoes of MFIs which is not going to happen overnight. MR Swami is right in approach of using SHGs to demonstrate for their cause rather than lying low.It is right using the same tactics will help teach the greedy politicians a lesson. Lastly, Goverments are not commercial entities to compete with Financial institutions and if they do so, will have to bite dust if borrowers turn defaulteres expecting debt waivers every five years.

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