Kolkata — Tensions are simmering in India’s microfinance sector as borrowers stage protests, claiming they are being harassed over loan payments.

Microfinance institutions provide small, collateral-free loans to women in low-income groups who have difficulty accessing formal financial services. Microfinance lending is often a sensitive political issue in India. In the past, political leaders have used debt waivers as a way of wooing voters.

In September, nearly 100 women borrowers staged a sit-in at Patiala in the northern state of Punjab, alleging coercive recovery methods for loan payments.  Then, in October, hundreds of women in the eastern state of Assam staged a similar protest. Other protests have occurred in the states of Madhya Pradesh, Tamil Nadu and Maharashtra.

Most of the harassment reported by the women refers to high-interest rates — said in some cases to be as high as 26 percent annually — and the lending institutions using peer pressure to get them to make their loan payments. Peer pressure often leads to women being ostracized by their village if loans remain unpaid.

“Each woman is under tremendous social pressure from the rest of the group members to pay back the installments on time because of the threat that if they default, the whole group will be debarred from future loans,” states the website of the Communist Party of India, which led the protests in Punjab and Tamil Nadu.

Protests against loan recovery

“There is a code of conduct in place for the microfinance institutions, which is followed by all the members,” said Manoj Kumar Nambiar, managing director of Arohan Financial Services and chairman of the Microfinance Institutions Network.

“In states such as Assam and Punjab, we have been working closely with the state governments on microlending. We have also seen such issues in Madhya Pradesh, Maharashtra and West Bengal. However, these are temporary issues. Over the last few months, the institutions’ network has been receiving customer requests seeking relief in repayment,” Nambiar said. “They protest when the customers complain about their difficulties in repayment. The issue can only be resolved across the table and not through protests.”

“Often, the protests are inspired by local leaders. We have seen this in states such as Maharashtra, Madhya Pradesh and West Bengal,” said P. Satish, executive director of Sa-Dhan, an association for community development financing in India.

In conventional microfinance lending, agents of the lending institutions bring together women from rural areas and low-income families and disburse loans to each member of the group. This model was pioneered by Nobel Laureate Muhammad Yunus of Bangladesh with the idea that lending to the group would create an incentive among the peers to repay the loans on time.

India’s microfinance institutions in the past year had outstanding loans of INR 236,427 crore ($162 billion) as of March 31, according to data from Sa-Dhan.   The institutions’ Portfolio at Risk (PAR) for loans overdue up to 30 days past the original date of repayment was 1.78 percent as of March 31, compared with 0.92 percent in the same period last year, Sa-Dhan states. India follows an April to March financial year.

Overall delinquencies over the last decade were less than 1 percent.

The average outstanding debt increased from about INR 60,000 ($805) to a little over INR 81,000 ($1,087) between March 2017 and March 2019, according to CRIF High Mark, a credit bureau for the microfinance sector, Over the last few years, banks and non-microfinance firms have been increasingly making microfinance loans.

MFI outstanding loans

Meanwhile, the Covid-19 pandemic has severely affected people’s income, which has made it difficult for those from low-income groups, in particular, to repay their loans.

In September, the Microfinance Institutions Network issued guidelines to the firms to “train employees to better engage with the borrowers and ensure more transparency.”

“We are also a self-regulated organization and ensure the customers’ interests are safeguarded through a three-layer structure. While there is a whistle-blower policy for peer companies, the customers can either directly contact us or the Reserve Bank of India (the central bank) for grievances,” said Nambiar.

The state government of Assam also plans to bring new regulations to microfinance lending.

According to India’s central bank’s norms, microfinance lending to an individual borrower has been capped at INR 125,000 ($1,760) in rural areas and INR 200,000 ($2,800) in urban areas. These rules, however, do not apply to banks, which now account for more than 40 percent of microfinance lending.

In view of the rising defaults and overlending, microfinance companies have voluntarily come up with a self-imposed code of conduct, which caps lending at INR 80,000 ($1,074) for an individual borrower.

Though microfinance institutions and some banks and non-banking financial firms have signed on to the code, it is a voluntary effort “and will not be successful if all the entities do not adhere to it,” said Sa-Dhan’s Satish.

Currently, more than 40 percent of the microfinance portfolio is dominated by banks that are not signatories to the voluntary code.

“One aspect of the industry as a whole which keeps faltering is a literal interpretation of the two/three-lender norms and the overall indebtedness,” said M. S. Sriram, professor at the Indian Institute of Management in Bangalore.

“It needs a stronger self-regulatory organization and a stronger code of conduct by the Reserve Bank of India under the NBFC-MFI [non-banking finance companies and Microfinance institutions] guidelines. Clearly, if the state governments are contemplating new laws, it means the redressal mechanisms for the members and the equivalent of an ombudsman is not working. That needs to be fixed. ”

“One must realize, the entire cycle of loans gets broken if the loan is not repaid,” said Harsh Kumar Bhanwala, former chairman of the National Bank of Agriculture and Rural Development. “Sometimes local political conditions emerge in a way that defaults occur.”

The sector was regularized by India’s central bank in 2010, including guidelines for recovery. A spate of suicides by microfinance borrowers in the southeastern state of Andhra Pradesh, allegedly related to coercive methods of recovery, forced the then-state government to impose stringent regulations on loan recovery and disbursements by the lending institutions.

(Edited by Siddharthya Roy and Judy Isacoff. Map and graph by Urvashi Makwana)

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