Loan sharks return to India

source : Mint and

Loan sharks, money lenders who demand exorbitant interest rates, are thriving in Andhra Pradesh, points out the Microsave advisory firm, which has just carried out a detailed report on microfinance customers in that Indian State. This is one of the direct results of the law passed in October 2010, following allegations that some borrowers, harassed by MFIs to repay their loans, had committed suicide. By radically strengthening conditions for obtaining microloans, the law forced MFIs to cease activity. As a result, borrowers went back to unofficial lenders, some of whom are loan sharks, money lenders who practise interest rates far above those of MFIs. According to Microsave, 59% of the 340 borrowers interviewed turned to that type of money lender over the last year.

As another consequence of the regulation change, the report showed that 25% of those who planned to develop their professional activity, shops in particular, declared that they had frozen the project. 12% had had to sell their personal affairs to finance their children’s education or major expenses, such as wedding costs.

The Andhra Pradesh government has tried to justify its policy and has just announced a zero interest-rate microcredit programme aimed at mutual accountability borrower groups (self-help groups – SHGs). They consist of about fifteen members, mostly women, based on the following principle: they start saving together and then obtain a loan from banks. This system is certainly useful but is far from being sufficient, according to Microsave’s report. On the one hand, the time needed to obtain a loan is too long for many borrowers and, on the other hand, some of them prefer to subscribe to individual microloans, a system that is not permitted under SHG practice.

Microcredit isn’t out of the woods yet in Andhra Pradesh.

The report can be obtained here

This article is part of the special report: