Microfinance companies typically lend small amounts of money to women who are denied credit by regular banks. They require no collateral. In India there are 27 million such borrowers, lured by the prospect of a loan to keep the farm going or to open up a tiny shop.
In addition to charging exorbitant interest, from 25 percent to 100 percent according to the Wall Street Journal, many microfinance companies insist on deducting another 10 percent for a mandatory savings account. That money can then be lent to other borrowers.
Most people who receive loans have to start making payments the very next week, giving them no lead time to accumulate enough cash. They often take out another loan from a different microfinance company to be able to make the first loan repayment. Failure to make the payments often results in threatening visits from collectors. In Andhra Pradeshs Vishakapatnam district, a workers 10-year-old daughter was kidnapped by a microfinance institution for collateral, according to a recent article in the Deccan Herald.
The Financial Times described the story of Kanakam and Rajiti Ramesh, who farmed on one-quarter of an acre of land and were unable to make ends meet. When a microfinance agent came to their village offering loans to women, Rajiti, already $450 in debt, borrowed another $225. According to the terms she had to repay $6 every week for a yeara fortune given that most small farmers in India live on less than $1 a day. Seeing no way out of this debt death trap, Kanakam Ramesh killed himself.
There have been at least 57 suicides in Andhra Pradesh in recent months, many of them people owing money to microfinance outfits that usually charge at least 26 percent to 30 percent interest. Many farmers have simply stopped paying off their loans. Collectors have found themselves unwelcome in many villages. The state government declared a temporary moratorium on debt repayment in October and urged microfinance companies to lower their interest rates and end harassment of debtors.
The biggest microfinance company in India is SKS. Our purpose is to eradicate poverty, it says on its Web site. The firm started out as a small NGO, the site proudly notes, and today does business with some of the largest banks and investors, such as HSBC and Citibank. Advertising a broad range of repackaged debt for investors, the SKS site says, The poor especially constitute a large market with untapped potential. In response to the suicides SKS offered to lower its interest rates by 2 percentto about 24 percent.
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