India microlenders face heat over rates and debt recovery

By Penny MacRae, AFP

NEW DELHI–India’s biggest lender to the poor, SKS Microfinance, was the toast of investors when it staged a hugely successful public share offer three months ago. Now SKS, India’s only listed microfinancier, faces an unwelcome spotlight as it and other small-scale lenders come under scrutiny over high interest rates, allegations of strong-arm debt collection tactics and a rash of suicides. Last Friday, police in Andhra Pradesh arrested several debt collectors for SKS and Spandana Spoohrty Financial, India’s second-largest microlender, after a borrower alleged she was harassed over two loans totaling US$1,300. The police action followed more than 30 suicides in Andhra Pradesh blamed by politicians on aggressive debt recovery agents operating in the southern state, where many of India’s biggest microfinance institutions are based. After news of the suicides surfaced in mid-October, SKS said that 17 of the dead were among its borrowers, but rejected responsibility for the deaths. “Suicides are unfortunate but there might be reasons other than our loans,” SKS chairman and founder Vikram Akula said. “One thing we are sure about is that our ethical way of doing microfinance has not caused these tragedies.” Both SKS and Spandana have denied using coercion to get back loans. Shares in SKS — which has also made headlines over the abrupt firing of its chief executive early this month due to “interpersonal differences” — have slumped by around a quarter as the company has been roiled by controversy. The mushrooming microfinance sector has been hailed as a savior of India’s poor for providing loans averaging US$250 to millions of borrowers — often small entrepreneurs — unable to get credit from mainstream banks. But the microfinanciers’ strongly growing profits, accusations of coercion and interest charges of up to 36 percent have put them under the scanner, with critics saying they risk turning into despised moneylenders. “Microcredit was designed to serve poor people — to help them overcome poverty. We had no intention of making money for investors,” Bangladeshi microfinance pioneer and Nobel prize winner Muhammad Yunus told AFP. SKS, which says it sees no conflict between pursuing profits and helping the poor, reported last week that its net profit leapt 116 percent to 805 million rupees (US$18 million) for the financial quarter ended September. SKS, which charges 27 percent interest, and other lenders say their rates reflect the high cost of obtaining funds and expenses in servicing borrowers across wide and often hard-to-reach areas. The microfinanciers, who borrow from commercial banks at rates of up to 15 percent, note their rates are still far lower than those charged by moneylenders who typically charge rates such as 70 percent annual interest. Friday’s arrests came as part of a drive by Andhra Pradesh state — which accounts for a third of the microfinance industry’s nationwide outstanding loan portfolio of US$6.7 billion — to rein in the sector. The arrests followed a new state measure aimed at halting alleged “harassment” of borrowers by microfinanciers, whose loan portfolios have been growing by a scorching 70 percent annually. The measure imposes penalties of up to three years in jail and 100,000 rupees in fines for attempting to coerce borrowers. In another move to control the industry, the central Reserve Bank of India recently named a committee to look at how to make microlenders’ rates more “reasonable.” “There is a need for regulation of the sector,” commented India’s Daily News and Analysis newspaper in an editorial.

“The Andhra episode has shown all is not well or clear in the sector and the ostensible financiers of the poor have to be checked from exploiting the poor.”