'Profitable' Even when a Borrower Dies: Microfinance's Unchanged Culture of Lending

Microfinance sector has been in the news in Andhra Pradesh due to its lending practices and their loan collection methods. A very interesting aspect of the present crisis is that while there are a number of arguments about the merits and demerits of the microfinance business, very little attention has been placed on an important historical fact: the nature of microfinance business over the past few years and what form of changes are part of the business (if at all there are any changes). This overview of the historical nature of Microfinance's lending practices may be in order. This becomes all the more important as we find that there have actually been very few changes in substance in the nature of lending practices. We attempt to highlight the nature of the MFI practices that were covered in the popular press a few years back. We look at the culture of lending of the MFIs in 2005-06 in Krishna, Guntur and Prakasm Districts of Andhra Pradesh, the consequences of the way they conducted their business and importantly the reaction in the popular media. The MFIs refer to the problems they faced in 2005-06 as the "Krishna Crisis" as they were forced to suspend their business due to the orders of the Collector of the District.

Microfinance landscape changed in form and substance in 2005, when the MFIs decided to bid adieu to their non-profit motive and embrace the 'for-profit' motive. However, this change was more at the ownership and profit format level than anywhere else. The change model also meant that they were more interested in expanding credit disbursements to increase their profits, using violent methods to collect their loans as well as other tactics that forced borrowers to go to the extreme of taking their own lives. This would reduce their defaults and increase their profits.

The two images below  reproduce the front page of the largest circulation vernacular daily on 20th March 2006. The article gives graphic details about the everyday dynamics of the microfinance business. Interestingly, way back in 2006, itself the article pointed out that it was actually quite profitable for the MFI if a borrower committed suicide as they MFI was collecting a insurance premium that was enabled the company

the MFI to recoup the loan. These institutions charged nearly 50-60 percent as interest rates.

The article pointed out that there nearly 35 MFIs had lent nearly Rs.3500 crores in the three districts. Interestingly, it claims that 50 people had committed suicide due to harassment of the borrowers. The Krishna District itself accounted for nearly 19 suicides. One of the objections raised by the Mr.K.S.Raju, the then Principal Secretary, Rural Development, Government of Andhra Pradesh objected to the fact that the MFIs were accepting deposits from the public in contravention of the RBI regulations, that clearly forbid such deposit seeking activity. 

Ironically, it is interesting to note that the business model of the MFIs does not seem to have changed over the years. Instead the only perceptible change seems to be to expand into new geographic areas as the institutional memory of the excesses in one area seem to be slow to spread, at least among the regualators. Take the case of the present crisis, the MFIs were involved in similar incidents in 2005-06. After a series of newspaper and television reports (along with complaints to the police) and objections from public representatives, the district administration forced the MFIs to suspend their business. This led to the MFIs to expand into new regions of Andhra Pradesh, where they have now become the centre of attention for their business methods. 

It is clear that a moneylender's attitude may never actually change, be it either a banker, non-formal moneylenders or a corporatised version of moneylenders, like the modern day MFI. It is probably high time that the insurance companies too change their conditions for insuring interest after all the MFIs have no 'insurable interest' in the life of a borrower, since the MFI can collect the insurance in case of suicide. Hence the present business model may actually be very conducive for an MFI to implicitly turn a blind eye to suicides, even if they are actively abetting it.