Andhra’s small-debt trap

It takes at least half-an-hour of explaining that I am not a recovery agent and an intervention from an elderly villager,before the women open their doors and pour out their anger,tears,frustration and helplessness. “I don’t want to die for a few thousand rupees,” says Bandaru Mangamma. “I am scared of venturing out of my house because of the recovery agents,” she says.

Microfinance institutions in Andhra Pradesh have come under the scanner after the state government said over 20 suicides reported in the last few weeks were a fallout of high interest rates and coercive methods of recovery followed by microfinance institutions that lend to women self-help groups(SHGs).

As a pioneer in organising women’s SHGs,Andhra Pradesh provided an opportunity to MFIs to provide small loans to lakhs of rural women who are otherwise denied credit by banks. As MFIs expanded operations in the state,they targeted individual borrowers too. In recent years,many MFIs turned into for-profit organisations in a race to make a quick buck begun. MFIs are now under fire for charging exorbitant interest rates and using strong-arm tactics to collect interests.

On October 4,unable to pay back the five loans she had taken,23-year-old Bandaru Padma jumped into the village well along with her two children. “The total outstanding against her name was Rs 79,000. She had taken loans from Sharemicrofin,Spandana,SKS,Basix and L&T,” says Padma’s father Balaiya.

An uneasy calm settles in the lane,broken by sobs in the background. “I don’t want my children to suffer because of the loans that I have taken which we are in no position to repay. Our maize crop did not yield as much as we had expected and now we do not have money to pay the weekly interests on loans,” says P Satyamma,the most senior member of a SHG.

But none of the villagers knew of the interest they were being charged. “All I know is I have to pay a weekly amount of Rs 250 for 50 weeks on a loan of Rs 10,000,” says Satyamma. She’s not sure which MFI she has borrowed from.

As more women emerge out of their homes,the story differs only in the depth of debt and despondency. Medak district has one of the highest penetration of micro-finance institutions in the state. In fact,its reach is often compared to that of Grameen Bank in Bangladesh.

Villagers say they have been hit by a series of crop failures since 2001 and so took loans from the MFIs since their procedures are easier than those of other agencies.

The District Rural Development Agency (DRDA) estimates that nearly Rs 9 crore has been given by MFIs as loans in Medak district in the last five years. And,Chennaipally illustrates not only how MFIs provided easy credit,reaching almost every home in the district,but also the debt trap they have created.

Of the 150 families in the village,147 have taken loans. What’s surprising is that all these 147 families have taken multiple loans—six or seven from four or five MFIs. The small Chennaipally village now faces a debt of over Rs 40 lakh.

“We have had SHGs in the village for several years now and it started with simple chit funds. Then people from SKS Microfinance came and offered us loans of Rs 5,000. All we had to do was furnish a photocopy of our ration card. Even before that loan was cleared,Share Microfin MFI came and offered Rs 10,000 as loan. They were followed by L&T,Spandana Sphoorti and Basix. Within a year or two,all the 147 families had taken multiple loans amounting to nearly Rs 1 lakh or more,” says village sarpanch Siddhiramulu.

“A majority of the villagers took the second loan from the same MFI to clear the first loan and make a few household purchases. Then they took the third loan from another MFI to clear the second loan,” says Vamsi Krishna,the village coordinator for DRDA.

Women of the SHGs say they did not know or think of the consequences of taking multiple loans. “The MFI people come to visit us during our SHG meetings with offers that appear good and we are lured. When you see that one woman who has applied for loan gets a handful of cash delivered at her house the next morning,you too are tempted to borrow,” says G Swarna,an SHG member who has taken five loans totalling Rs 90,000. “So,all the women apply and go home next day with lots of cash. The husbands are happy,we buy things for children so they are happy too,” she says.

There are 30 SHGs in the village and many members who gathered at the gram panchayat office say that the MFIs fell over each other to dole out more loans. “If one company comes and gives loans of Rs 10,000 to a couple of SHGs,the next day another company’s representatives would arrive with an offer of

Rs 15,000. We were spoilt for choice,” says Swarna.

But other women members admit that the women competed among themselves. “It had become a matter of prestige among the SHG women to take loans. Everyone wanted to flaunt cash,jewellery,expensive sarees. Men were not allowed to attend the SHG meetings,” says G Malamma.

But when it came to repaying the loans,the women found themselves cornered.

“When loans are given on the basis of a ration card,all that husbands of women of the SHGs have to do is put down one signature. The men are not asked about their income or assets or repaying capability. But when the couple starts finding it difficult to repay the loan,the men simply refuse to take responsibility and blame the women for getting them into a debt trap. Only when there is a crisis they want to know at what rate of interest they were given the loan,” says H Lalitha,member of an SHG who has taken loans from Share Microfin.

Where did the money go?

In Chennaipally and in the surrounding three villages,no one used the loan money to start an income-generating venture. B Yadagiri,a daily wage worker,bought a mobile phone worth Rs 3,000 from a loan of

Rs 5,000 that his wife took. “The agent of Spandana MFI got me the phone and handed over the balance cash of Rs 2,000 to my wife,” he says. P Balaiah took a loan of Rs 20,000 and bought a portable TV for Rs 6,000. “The balance was spent on various things. I don’t remember on what,” he says.

H Lalitha who took four loans admits that she “bought four sarees and a small gold coin”. Others took loans to pay for health or hospital expenses,maternity expenses,or for fertilisers and seeds. “Taking loan for farming is a justifiable expense but when the yield is not that good or the crop fails totally,how do I repay the loan,” asks G Mallaesh,pointing at the orange heap of maize kept out to dry on the village road.

The money brought along some social problems as well. DRDA counsellors say alcohol consumption among men in the villages has shot up ever since their wives started taking loans. “When they had cash in hand,the men even stopped going to work as farm labourers. In spite of appeals and counselling,none of them chose to invest wisely in any income-generating activity,” says DRDA’s Project Director in Medak,P Ravinder.

Recovering the loan

In the villages of Medak district,there is no sound as dreaded as that of a motorcycle in the morning. By the time the loan recovery agents reach the villages on their bikes,the men here would have left their homes in order to avoid meeting them. The women scamper for cover but have no choice but to meet them.

The recovery agents who are spreading terror in the villages are far from being the toughies they are made out to be. “They are mostly youngsters who apply for vacancies of ‘business developers’,‘helpers’ and ‘assistants’ advertised by the MFIs. Once they get the job,they are assigned the task of recovery with a carrot-and-stick approach. There are incentives for maximum recoveries and threats of being fired for every bad loan. The MFIs make sure that the recovery agents assigned to one village hail from the nearby town and belong to a caste that is higher than those living in the village they have been assigned to,” explains a recovery manager of an MFI.

“If you are giving money to someone,you will want it back. If you are giving a loan,you will take it back with interest. If that person is not paying,you should know how to recover,” says Venkat,an agent.

MFIs like SKS,Spandana,L&T,Basix,and Share Microfin offer several kinds of loan. For an amount of up to Rs 10,000,the collection of the interest and part of the principal amount is done every week. If the amount is above Rs 10,000,then the collection is monthly. “But it depends on what model of loan repayment the MFIs have offered a particular SHG in a particular village. There are many models to suit as many requirements. I pay Rs 250 a week to Basix on a loan of Rs 10,000 and Rs 1,000 a month on a loan of Rs 10,000 to L&T. Weekly or monthly,it amounts to the same,” says M Mallikarjun who encouraged his wife to opt for both loans.

For instance,SKS Microfinance offers income generation loans ranging from Rs 2,000 to Rs 12,000. The term of the loan is 50 weeks with principal and interest payments due on a weekly basis.

Share Microfin charges an average of 28 per cent. Its head Uday Kumar says they borrow at an average cost of 13 per cent and operational and delivery costs of nine per cent are added. Share Microfin’s ‘general loans’ are in the range of Rs 6,000 to 25,000 for a period of 50 weeks. The effective interest rate is 23.60 per cent to 28.13 per cent.

“But it is the fine print in the clauses and loan agreement that really create the debt trap. When borrowers fail to pay one EMI,the additional interest is calculated at double or triple the interest rate. The interest continues to remain the same until the principal amount is paid off. More often than not,the final interest rate works to nearly 50 per cent,” says

R Subramanium,Principal Secretary,Rural Development.