Death by microcredit

Times of India has a story, the date of which is not clear to me, by Sudhirendar Sharma on how microfinance institutions are fleecing poor people and driving them to suicides. The writer is with Ecological Foundation.

I feel that the writer is entirely off the mark. He is shocked by the fact that MFIs charge over 20% interest rate. I have taken personal loans from Citibank at 24% interest. Today, all Indian credit card companies offer convertion of large single payments through credit card into EMIs with effective interest rate of 2% per month. The outstandings on credit cards are generally charged at as much as 36% in India.

The neighbourhood usurer in Chennai and across Tamil Nadu charges as much as 10% per month simple interest! It is never lower than 5% per month. (It is called anju vatti - 5% per month, paththu vatti - 10% per month in Tamil.) Then there are kandhu vatti, speed vatti and so on, where the interest rates of at least 1% or more charged per day - effectively 30% interest per month, or 360% interest per year!

The poor, if they cannot get loans from Government, will have to depend on such atrocious interest rates.

If MFIs come and offer 20% or 24% per year, Sudhirendar Sharma and others come crying, asking for regulating this sector.

Regulation is one thing, but fiats controlling the upper limit on the interest rates that can be charged is another thing. A regulator can certainly provide a greater degree of transparency, stopping of harassment/physical threat by a lender and so on.

A while back, Tamil Nadu Govt. came up with an act that set the ceiling on what interest can be charged by the private money lenders. If I amnot mistaken, the ceiling was 15%. Obviously, despite being passed as a law, no one is following it. Not even the Nationalised banks (whose personal loan interests generally hover around 16% onwards), though the law was only impacting the private pawn brokers and moneylenders.

The MFIs have to be kind to the borrowers. It does not help driving the borrower to committing suicide. If proven, it is an illegal act, and the directors or trustees of the MFI can be locked up behind the bars.

A state government has all the powers to prosecute the baddies. But they better not muck around with a budding financial sector. The poor needs more credit than stupid regulation.