By Sarah Glazer
Politicians are blaming as many as 80 suicides in the last few months in the Indian state of Andhra Pradesh on poor borrowers' inability to repay their microfinance loans, according to reports from the Wall Street Journal and the BBC.
This is not the first time that suicides by poor borrowers have been linked to the high-interest microloans pioneered by Nobel Prize winner Muhammad Yunus, as I pointed out in my April 2010 CQ Global Researcher report, "Evaluating Microfinance." [subscription required] It is always hard to know for sure the reason for such suicides, but this time the government of Andhra Pradesh seems to be laying the blame directly at the feet of aggressive lenders. Politicians there have been urging borrowers not to repay their loans, and the state's parliament has passed a law under which lenders can be penalized for arm-twisting collection methods, a crackdown that appears to be spreading to Bangladesh, where Yunus first pioneered microloans.
According to AFP reporting, the new Andhra Pradesh law obliges recovery agents to collect debts at district government offices rather than at home in a bid to stop coercion and also stipulates that debts can be collected only once a month rather than weekly.
"The new system of collecting loans (at designated centres) will make it tougher for borrowers to repay loans as they do not have an organised saving pattern," Santosh Singh, a financial analyst at Execution Noble, was quoted by AFP. The law contains penalties of up to three years in jail for using coercive recovery tactics and insists that all microlenders be registered. It says annual renewal of their registration will depend on their track record.
As I pointed out in my CQ Global Researcher report, some experts have long worried that the multiple loans taken out by poor borrowers with limited ability to repay could trigger a crash similar to the subprime mortgage crisis in the United States. So far, the high repayment rates of up to 98 percent reported by microfinance lenders have assuaged many lenders' and investors' fears. But because the centralized system of credit bureau checks typical of U.S. loans is generally lacking for microloans to villagers in developing countries, some experts worry that lenders are not always aware of the numerous loans borrowers have from other creditors and the precariousness of their ability to repay.
Recent suicides have occurred among borrowers with as many as three loans from separate microfinance lenders, according to the BBC. The crisis in Andrha Pradesh could be a sign of an inherent flaw in the way the industry conducts its business, or it could be a regional blip in an area where too many lenders have urged too many loans on poor people who have too few resources to repay them.
By Sarah Glazer