Suicides in India show the dark side of micro-finance

http://www.bloomberg.com/news/2010-12-28/suicides-among-borrowers-in-india-show-how-men-made-a-mess-of-microcredit.html

by jlangenauer • 16 years ago

81 67 16 years ago

_ques• 16 years ago

"Peepli Live" ( http://www.imdb.com/title/tt1447508/ , available on Netflix Streaming) is a satire about the state of farmers in debt in India, and is worth a watch.

sdave• 16 years ago

wish i could upvote you twice for 'Peepli Live'. absolutely a must watch.this movie has a more real depiction of state of affairs , though obviously with a polarised satirical tone.

Qz• 16 years ago

India’s booming microlending industry is part of a global phenomenon that began as a charitable movement but now attracts private capital seeking growth and high returns.

Good old capitalism, always there to turn nice things into shit.

stretchwithme• 16 years ago

And how is capitalism turning it to shit exactly?

Many capitalist systems have this thing called bankruptcy which can be used to escape debts you cannot pay.

This particular shit incident was caused by culture and beliefs, if not mental illness, and a lack legal innovations like bankruptcy, not because people started lending money for profit, which is an ancient practice that predates capitalism and microlending.

tomjen3• 16 years ago

Microfinance is capitalism. Without it, none of the good you speak of would be available to anybody.

mindcrime• 16 years ago

Good old capitalism, always there to turn nice things into shit.

And what about all the "nice things" we probably wouldn't have without capitalism? How many drugs and labor-saving devices are in widespread use today because somebody saw a chance to make a profit by producing them?

forensic4• 16 years ago

>Good old capitalism, always there to turn nice things into shit.

The best thing about this meme is that it WILL turn everything nice into shit if people believe it.

Capitalism and free enterprise produced everything good. The issue with suicides is not related to capitalism, it's related to cultural norms and lack of bankruptcy laws.

Your communist spin on this turns my stomach. If you really care about the poor you will recognize that free enterprise is their only true hope for attaining a better life. Lenin is not going to do it. Charity is not the solution. The solution is productive free market wealth producing labor.

z0r2• 16 years ago

Yes, the desire to exploit and the drive to work tirelessly to maximize what you might get from being exploited is the source of all good things.

xlpz• 16 years ago

Capitalism and free enterprise produced everything good? A bit over the top aren't we?

namdnay2• 16 years ago

While I agree with your general gist, "Capitalism and free enterprise produced everything good" is a bit of an exaggeration. Capitalism didn't "produce" labour rights, it didn't "produce" national parks, the sexual revolution or the abolition of slavery. I don't think we can simplistically say that captialism is the cause of all that is great in this world, even though it's a pretty major component.

sundars• 16 years ago

you can watch the decline of SKS Microfinance the poster boy of Micro-finance in India: http://www.google.com/finance?q=NSE:SKSMICRO

richcollins2• 16 years ago

I wonder how many people killed themselves before microlending existed because they had no hope of improving their lot in life.

bryne• 16 years ago

It's rather remarkable how able people are to tolerate a borderline existence until a concrete metaphor for its inevitability and hopelessness - like an unpayable loan - is thrust into their faces.

srean2• 16 years ago

There's more to the suicides than microcredit. I commented on some here http://news.ycombinator.com/item?id=2055046

richcollins2• 16 years ago

How do you know that they wouldn't have killed themselves earlier if the loan didn't provide them some hope of success. Would his business have survived if he didn't take the loan?

shrikant4• 16 years ago

[I was involved in a project for SKS Microfinance in a previous job, and I've gotten up-close and personal with their numbers for a few months, all pre-IPO]

A majority of the small-ticket loans are given out under the umbrella called IGLs (Income Generating Loans), which is basically capital for asset development and/or small-time business building. (e.g. the spice shop woman in the article) These are the loans given out at 24%.

One of the issues is that a lot of borrowers take out IGLs and, once they have the cash in hand, end up spending it non-income generating activities, like weddings, or funerals, or baby births, or girl-child-attaining-puberty ceremonies.

There is another class of loans called ELs (Emergency Loans) that are interest-free, and meant for 'unforeseen emergencies' - typically critical medical treatment and funerals.

So yeah, when you take a loan at 24%, but spend the money on a 0%-loan-activity, problems abound.

There is a fairly large amount of education and training that has to take place amongst the local populace in terms of fiscal responsibility, and significant cultural obstacles to overcome to teach it to them.

r903• 16 years ago

If SKS microfinance is charging 24% they are a loanshark, period.Rates as high as that are usury and should not be lawful.

I'm of half-Indian and half-European descent and I am always ashamed of my Indian heritage. The Indian people as a collective simply do not know what it means to be humane and have never heard the word solidarity. I don't mean that Western countries are perfect, just that they are lightyears ahead of India.

Civilized countries have laws that protect the poor. Interest rate limits for people (not corporations) are generally and histroically limited to about 8-12%. The US exception caused the subprime crisis, but was compensated for the poor by generous bankruptcy laws.

Also, western countries have bankruptcy laws, social safety nets and a lot of private charity.

Even poort western countries such as Bolivia have a minimal level of solidarity so that no-one should feel that suicide is the only way out.

India, I am disappoint.

klbarry2• 16 years ago

Of course any developing entrepreneurs will have higher interest rates - they are greater credit risks, and the costs of making the loan are similar for small loans an large loans. To properly compare, you have to compare the the 24% rate to the previous lenders, who, if I remember correctly charged rates from 100-300% and up.

gyardley• 16 years ago

There's no 'general and historical' interest rate limit of 8-12%. Credit card APRs in the United States range up to 30% or so, and payday loans can have APRs of well over 100%. In other countries, rates for products catering to the poor are similarly high - this is just the cost of doing business when extending small amounts of credit to poor prospects with high default rates.

The wisdom of that is what should be debated. Since businesses need to charge high interest rates to compensate for defaults, does mean the poor shouldn't have access to credit at all? Note that that's what effectively happening in Andhra Pradesh, where laws to 'protect the poor' have dropped the repayment rate of loans to under 20 percent, ensuring microcredit there will cease to exist.

shrikant4• 16 years ago

I agree with your bit about solidarity in India, but you might be a bit mis-informed about the interest rates.

The CoF (cost of funds) to SKS is in the vicinity of 12-14%, and the norm is to add 10% on top of that. More middle-of-the-curve MFIs usually charge 30%+.

Loan sharks in villages typically charge 100% and/or servitude, and are more often than not the cause of loan repayment related suicides.

namdnay2• 16 years ago

There was a very interesting article in the Economist about this. The gist of it is that 24% is indeed steep, but bear in mind that:

a) These are very small sums of money, so the proportional overhead is much higher b) Microfinance loans represent about 30% of loans, the rest coming from local loansharks, who typically charge around 2-300% apr (and have more violent debt collection procedures). Any cap on rates will lower that percentage, and so make things worse.

triaboat• 16 years ago

Interest rate is basically the price of money. In a developing economy like India, growing at 8-10% the demand for money is greater as a result, it's price is also greater.

If you make a term/fixed deposit in India for a year it attracts an interest rate of 8-9%. Education, Car and Home Loans for credit-worthy individuals from established banks range from 12-18%. Personal Loans, not backed by a security range from 20-24%. So a micro-finance institution lending at 24% p.a to 'non-professionals' in rural areas with no known credit history is not bad at all considering the risk that they take up and the cost of funds that they incur(as pointed out by someone else)

roel_v3• 16 years ago

Interest rate limits for people (not corporations) are generally and histroically limited to about 8-12%.

[citation needed]

The evolution of the relationship between social and legal norms re: what are acceptable interest rates is a very interesting topic, with much cultural diversity and a broad range of case studies from canonical usury regulations in medieval Europe to the prohibition of pay day loans in much of the West in the 20th century, but blanket statements about 'loans being restricted from to 8-12%' lack any basis in reality and economic fundamentals. Just one counter example, I know of many people who took out mortgages (i.e., asset-backed securities!) right here in Belgium (a perfectly normal 'Western' country) less than 30 years ago with interest rates of 15 to 18%, and that was perfectly normal at the time, given inflation rates.

raarky• 16 years ago

Keep in mind transaction costs which usually can't come down very much.

A $100 transaction cost on a $10000 loan is comparatively insignificant to us.

A $100 transaction cost on a $1000 loan is pretty crappy.

BvS• 16 years ago

If you give out 50US loans are expexted to do due diligence and are onyl allowed to take 8% (4US) how should that work if you also have to cover for defaulting loans and pay fo the capital you are providing.

Luckily this is not really a problem since you return on investment should be closer to 1000% than to 100% (obviously your returns will diminish pretty fast as soon as your investment gets bigger). Therefore even interests rates of 50%+ shouldn't be a problem as long as it invested in income generating activities.

If you are interested in that topic I wrote my master thesis about it: http://www.scribd.com/doc/92714/Microfinance (partly a bit dated but the basic premise regarding interest rates should be still valid).

ippisl• 16 years ago

Is it possible to combine the microfinance program with the assests , at least for some classes of assets ? maybe things that increase agricultural productivity , or decrease energy costs , i.e. things like drip irrigation tools or solar panels or efficient stoves ?

That way you have some partial collatera- so you might reduce the interest , and you can help people choose the best income generating assets , so you increase loan repayment chances.

Also you can share distribution costs between loans and assets.

Does this model make sense ?

Tichy• 16 years ago

I was so far unable to grasp the justification for the extremely high interest rates of micro loans. What is going on, and how can such high interest rates ever work?

yummyfajitas• 16 years ago

They are risky investments in projects which supposedly have high rates of return.

edge176• 16 years ago

the loans are non-collateralized loans and short-term, and the borrowers are high risk. Think about a pay-day loan with no collateral.

hardik• 16 years ago

I think SKS jumped the shark when they decided sometime in late 08/early 09 to directly sell gold & other consumer durables instead of providing cash lump sum.

edge176• 16 years ago

Thanks for the post shrikant. Most people don't seem to realize this, and it's in part because of all the attention MFI's are getting rightnow. There's very little data and numbers available, but are some - http://microfinance.cgap.org/2010/11/11/who’s-the-culprit-ac...

This table, taken from the above blog post, was of particular interest. It describes what percentage of the loans are used for what. In looking at these numbers it's important to take into account the types of people to whom loans are given to - that is to say, someone that can get a loan from an MFI may not be able to get a loan from a Bank etc etc.

Also note that certain line items like 'Buy Livestock' may be much higher for something like a Bank because the bank's loan terms may incentivize certain types of loan utilizations.

Any time you see data like this, keep in mind it's far from clean and quite imperfect (data collection methods are door to door and done on foot), so take it with a grain of salt. Also, the columns may not add up to 100 because some double c counting goes on (i.e. if a respondent used the loan for more than one thing it will be counted more than once under separate categories) But if this data is an indication of what actually goes on in microfinance, it's not quite being capitalized for it's intended purposes. This seems explainable in that at the end of the day a line of credit is a line of credit no matter what verbage you attach to it. We call it a microfinance loan, but the people that receive these loans probably don't know what microfinance loans are; that's to say they probably just call them loans.

 		Usage of Loan Money by Type of Lender

				Bank	MFI	SHG	Informal
 Start new business		2.0%	2.5%	1.9%	1.1%
 Buy agricultural inputs	57.5%	13.2%	19.3%	19.9%
 Purchase stock			3.0%	9.9%	4.2%	2.7%
 Buy livestock			2.7%	6.0%	5.6%	1.7%
 Purchase land			0.8%	0.9%	0.7%	0.6%
 Home improvement		9.7%	22.1%	13.0%	14.2%
 Repay old debt			14.6%	25.4%	20.4%	7.0%
 Health				11.4%	10.9%	18.6%	25.3%
 Education			4.1%	4.4%	5.7%	5.3%
 Marriage			4.3%	4.8%	2.2%	12.2%
 Funeral			0.1%	0.2%	0.5%	1.7%
 Other festival			0.6%	3.5%	3.6%	4.8%
 Unemployment			0.0%	0.0%	0.1%	0.8%
 Purchase jewellery		0.5%	0.6%	1.6%	0.4%
 Other consumption		26.5%	31.6%	49.9%	24.9%

shrikant4• 16 years ago

[...] the people that receive these loans probably don't know what microfinance loans are; that's to say they probably just call them loans.

And this is the crux of the issue.

The table only denotes what the borrower took the loan for, and not for what actual use the money was put to. Basically it boils down to this: once the money is in their hands, unless the borrowers have had some information dissemination of a substantial sort, it can be used for any purpose.

It is typically the lending party's duty to take solid steps towards educating the borrower as to the actual purpose of the loans, and MFIs in India (IMHO) were initially doing a stellar job of this (ok, well, SKS at least - I sat in on some of their 'group training seminars'). I'm not close to the domain now for about a year though, so I couldn't comment for sure any more.

As an aside: (I don't think they'll take action against me for saying good things about them, so I'll go right ahead) SKS' impairment levels were so ridiculously low that I would end up manually re-calculating the figures to ensure Mondrian wasn't lying to me or our software wasn't badly broken.

As another aside: there is also an emerging trend of 'micro-insurance' products (livestock insurance, crop insurance, 'hut' insurance, etc.) being offered by MFIs as well as large insurance companies which I did a field study on, which reached conclusions similar to what I learned from the SKS project - the illiterate and poor initially cannot even conceive that someone would want to help them out without shafting them, but with substantial education to a few key influential and smart members of the community, the message can be gotten across.

gimpf• 16 years ago

14.000 suicides in 74.000.000 people (about 19 per 100.000). Too much, but not way more than to expect, there are western countries with higher suicide rates.

I'm sure there are too many suicides because of micro-loan depts, but I doubt that this part is significant with regard to all the other issues we need to solve.

pm• 16 years ago

Suicides amongst micro-finance customers would be a more appropriate statistic. There are clearly more widespread problems that need to be addressed, but seeing as this behaviour is a consequence of for-profit companies applying First-world credit policies to Third-world customers, i.e., those with no other way to change their financial situation, I consider it irresponsible behaviour on the part of companies who should've known better.

microarchitect• 16 years ago

My dad used to work for an NGO that ran schools in northern Karnataka. He told me unscrupulous microfinance lenders used to badger rural women into taking loans at ridiculous interest rates and then harass them when they couldn't pay up.

The only real solution to this problem is empowering and educating women to be financially responsible and making sure that they have the social courage to refuse these loans. Unfortunately, this will take a few decades to happen and more than a few lives will be lost unnecessarily until them.

mmaunder• 16 years ago

This article illustrates the tension between the original philanthropic intent of micro-finance and the reality that high risk lending requires high interest rates to be profitable. I worry that the micro-finance brand will become usury with a fresh coat of paint.

elvirs• 16 years ago

Every financial instrument was originally designed to help and serve people but somehow some guys who think they are smart manage to abuse the system, make a lot of damage and still get away with it. Why are not there any regulations to prohibit this? Why everybody learns only after game over when its too late? Here you go, the results of capitalism at its best

srean2• 16 years ago

Not all of farmer suicides in India is micro-credit related. There are many other forces in play, for example bad and corrupt policies. You would find it surprising that the worst hit states are those where agriculture is more industrialized than others.

In the name of import reforms, the quality requirements for imported seeds have been drastically lowered. Traditionally germination rates of seeds used to be tightly regulated and the farmers expected that they would be able to re-use part of the harvest as seeds. Lack of mandatory seed quality designation is a problem. Earlier the mandated germination rates were higher than 90% for much of the GM seeds it is 65%, and more expensive.

The market has been flooded with GM seeds with poor germination rates, higher input costs, no re-usability and lacking the pest resistance that was promised. You would find a high correlation with the suicide patterns and introduction of GM varieties like BT cotton.

The agriculture sector used to be served well by the (national and state) banks. That credit has almost but completely disappeared, by way of change in government policy. On the other hand, in Indian cities it is common to be spammed on your cell-phone by banks continuously, for loans that you do not want or need. Same goes for advertisements on TV. So one major factor is mis-allocation of credit. For the banks it makes sense because there is more profit to be made of (defaulting) car loans than loans to agricultural enterprises. With no banks offering loans the farmers usually turn to private money lenders who charge arbitrary and astronomical interests. Most of the lending related suicides have their source here.

The sad part is that this is a decade old phenomena and the average urban Indian has been unaware of it (partly by choice). The popular media did not report it. The movie "Peepli Live" has given the issue much needed visibility.

If anyone is interested a very good resource with analysis and yearly trends etc. is http://www.indiatogether.org/2010/feb/psa-suicides.htm and http://www.indiatogether.org/agriculture/suicides.htm

I am looking forward to peer to peer lending to start in India, much like prosper and kiva.

Semiapies• 16 years ago

This is the sort of thing that makes me skeptical of this story - people suffer a problem for a variety of reasons, and suddenly, a scapegoat gets seized upon.

motters2• 16 years ago

Surely once for-profit companies get involved there is a conflict of interest between poverty alleviation efforts and the interests of share holders/investors.

anamax• 16 years ago

> Surely once for-profit companies get involved there is a conflict of interest between poverty alleviation efforts and the interests of share holders/investors.

Hint - "not for profit companies" also have interests that may have nothing to do with their supposed clients.

"not for profit" merely means that the investors don't get explicit ownership or dividends. (Many US "not for profits" do special things for their funders and their children.) "not for profit" doesn't mean that the enterprise doesn't make money.

Not-for-profits are often run to benefit the folks working for them. (The higher-education bubble in the US is feeding that right now.)

motters2• 16 years ago

> Not-for-profits are often run to benefit the folks working for them.

You may be right. I can think of a few not-for-profits which seem to be benefiting not much more than their few founders.

forgottenpaswrd• 16 years ago

This illustrates very clearly not only a problem of micro-finance, but other problems as well.

USA and Europe is printing money like there is no tomorrow, money created by big banks at negative interest rates(when real inflation is more than the 0% they pay) and this money is flowing to developing countries because they pay huge interest.

What these countries see is that there is so much people eager to lend them(before Grameen nobody did).This is a big change, because it has produced a flood of money that produces enormous distortion.

Too much money, if the real assets(house, food,energy) remain the same, creates inflation. Economy 101.

This happened in Spain,Grece,Portugal, we were getting loans at 15-18%. There were rules that put limits to in debt years. Entering European Union meant 3% interest rates and debt limits removed,no collateral needed (German and French banks flood as with money). Now everybody could buy a house, any house(signing a 40years loan), and houses got 4x more expensive, salaries growing very little(15-20%).

Got we richer?, no. We got poorer, because the capital that entered the country was external it made things really expensive for people inside the country, more difficult to life with the same money.

ck2• 16 years ago

These are not true microloans in the original spirit of microloans.

The article uses the word "perverted" and I agree it's definitely something entirely different and horrible. Reminds me a bit of payday loans in the USA, except people here aren't killing themselves over it. At least not until one of our political powers finds a way to recreate debtor prisons.

nir• 16 years ago

MIT's Poverty Action Lab did a study of micro finance, and found it much overhyped: http://www.boston.com/bostonglobe/ideas/articles/2009/09/20/...

My personal impression is that microfinance have gone through the same hype curve of many developing world projects: it started as a local initiative by people who knew their environment and did nicely. Then organizations from developing nations picked up on it, knowing little about the place, ridiculously overhyped it and messed it up.

What we're doing in Africa and Asia now is a continuation of the imperial age. In the past, we needed stuff, so went in and took it, regardless of the impact on locals. Now we have our stuff, and having climbed Maslow's pyramid we're looking for self-actualization - so we go to Africa and do projects that make us feel good, again regardless of the actual impact in the field (health projects not included). We should start listening to Esther Duflo and Bill Easterly, rather than Bono and Angelina Joli.

DaniFong3• 16 years ago

Every life counts. But I feel like this is only showing one side of the issue. Capital is distilled, economic trust. All human beings deserve a baseline level of trust. As such, access to capital is a human right. Without some form of trust extended to those in poverty (through capital lending or otherwise) how could they ever emerge from their poverty?

I hope this does not sound too callous. Every single suicide is a tragedy. But only 70 of 14,364 suicides were related to microloans -- only half a percent. 70 suicides represents only one millionth of Andhra Pradesh's population, a state with an infant mortality rate of 5.2%. If the actions of those 70 suicides merely improve infant mortality by even one percent for one percent of the population, microfinance will have paid itself back for the health of families several fold -- and for the families who strove and succeeded, not those who, by their own actions, created a situation they did not have the willpower to escape.

1.2 million people a year are killed by automobiles -- and yet they have given us tremendous freedom. The solution to the problem of automobile deaths is not an outright ban, but infrastructure, norms, and education -- which can drop deaths from nearly than 80 per annum per 100,000 inhabitants in Iraq and Iran to over 50 in South Africa to less than 5 in Canada, Australia and Argentina.

Though hundreds die from general anaesthesia each year, its positive impact on medicine and surgery has been tremendous. The solution to these deaths is not a ban, but improved education, environmental support, and systematic changes in health care (see for example: http://www.theatlantic.com/magazine/archive/2009/09/how-amer...)

Access to capital -- and more generally, access to trust, is a powerful force. Wielded properly, it is can be a tremendously powerful tool for good -- but also for harm.

I hope that these revelations will be a learning experience, and force us to think more deeply about how to connect with the impoverished. Clearly, access to capital alone is not enough to enable the ascension from poverty. But in many cases, it is a limiting factor. We must not retract willingness to lending of capital -- our trust in a whole class of impoverished people -- as a result of these early mistakes.

edge176• 16 years ago

Capital - assets available for use in the production of further assets http://www.google.com/search?hl=en&source=hp&biw=120...

Baseline level of trust = 100% risk

100% risk = 0% return

0% return = Charity

That's not to say charity doesn't have a place in the world. But the conversation about microfinance is about empowering individuals, and you don't empower individuals by writing them a blank check. You empower them by helping them overcome difficulties (i.e. paying back loans that may or may not be favorable to them).

To touch a little more on the suicides, these loans are often structured such that 3 or 4 people are cosigned. So if I can't pay, the other cosigners have to pay. Social pressures can make people do extreme things. When the article says stuff like

Shobha, head of several groups of women borrowers, was being pressured to pay interest on her 12,000 rupee ($265) loan. Lenders also were demanding that she cover for the other women, even though the state had restricted microfinance activities two weeks earlier, Bloomberg Markets magazine reports in its February issue.

The don't point out that that's the kind of agreement she signed up for. There's no collateral, so the social pressure is intended to serve as the incentive to repay. Of course this has consequences. To draw a parallel, think about social pressures in an enclosed environment where people are counting on you, like the office or high school.

DaniFong3• 16 years ago

Why would a baseline level of trust equate to 100% risk?

bocajuniors• 16 years ago

If propert rights included poor people's properties nobody would have to pay 24% interest.This happened 100-300 years ago in Europe and America.According to Hernando de Soto this is what it takes to make capitalism work.If you leave out the majority of people you tend to leave out, if not the majority,a large fraction of the capital.

Suicides in India show the dark side of micro-finance

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