In India, greed creeps into microlending, critics say

By Rama Lakshmi
Washington Post Foreign Service
Saturday, October 30, 2010; 5:20 PM

NEW DELHI - The microcredit revolution has been celebrated for helping poor women in developing countries start small businesses. By borrowing money for purchases such as a buffalo or sewing machine, the women were able to help lift their families out of poverty.

But critics say the microcredit model has been perverted by commercial greed in India, with reports of abusive collection methods and sky-high interest rates.

"What began as a simple, innovative model of providing credit for the poor women who were excluded from mainstream banks underwent a paradigm shift in India," said R. Subramaniam, principal secretary for rural development in Andhra Pradesh. "Many of these microfinance lenders morphed into for-profit companies six years ago."

In the southern state of Andhra Pradesh, which has the highest number of microlending businesses in India, at least 25 defaulters have committed suicide in the past two months, according to the government. At least 31 other suicides are under investigation.

Founded in rural Bangladesh, the Nobel Prize-winning microcredit revolution called Grameen Bank became a global phenomenon as a system of very small loans to poor people . The industry has boomed in India, growing at 70 percent annually in the past five years.

Critics say that rapid growth has resulted in abuses.

"Each loan agent had a target to fulfill and was knocking on people's door with easy credit without due diligence. That is how the rot set in. It's not unlike the subprime crisis in America," Subramaniam said.

Vijaya Kasipati, who lives in the village of Lachapet in Andhra Pradesh, said she had defaulted on five loans totaling about $2,000 from different microcredit institutions. Loan recovery agents entered her home last week, she said, with dozens of men shouting insults.

Two hours after the men left, she said, her husband, Jangam Kasipati, a temple priest, suffered a massive heart attack and died.

"The shock was too much for him. The agents were rude and very insulting. The whole village heard them," Kasipati, 46, said by telephone. "I just could not repay; I tried hard. The agents harassed me every week."

India's government is introducing a national law to scrutinize the institutions.

Earlier this month, the Andhra Pradesh government introduced an interim law calling for more disclosures, a ban on coercive loan recovery measures and better controls on multiple loans to one person. The law also mandates displaying interest rates prominently on signboards and setting up district-level courts to hear complaints.

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