The people for whom such micro-credits become a lifeline are those who are not considered credit worthy by the formal banking system.
‘These are the people for whom such micro-credits become a lifeline as they are not considered credit worthy by the formal banking system.’ Photo: Anirban Bhattacharya, Amitanshu Verma and Haripriya Harshan.
Usharani had taken a bank loan five years ago. When we met her in February this year she was still repaying the loan in an effort to get back the jewels that she had left as collateral. Same is the case for Shobha who said that Non Banking Finance Companies (NBFCs) in particular were notorious – they took away bikes or any other vehicle if you missed instalments. This was in Vadakku Peyankuzhi village of rural Kamyakumari district in Tamil Nadu.
“I have taken loans from a gold finance company also and finally had to take a loan from MALAR to pay back that loan,” said Amutha as we gathered around a courtyard in Kulasekaram, another village we visited in course of our study. Others were nodding in agreement as she narrated her experiences with NBFCs. “MALAR was there before any of these microfinance institutions (MFIs). And MALAR will be there for a long after them. Others just come and go,” she added.
When it comes to formal banks, her complaint, which echoed in almost every village, was about the heavy paperwork that they demand. “Formalities are many with the banks, and are not something we can manage easily,” she said.
We were conducting a field based micro-study, comprising extensive interviews, group discussions and a survey, to understand the credit landscape around the Mahalir Association for Literacy Awareness and Rights (MALAR), a 30-year-old women’s collective in Kanyakumari. With its genesis in the literacy movement, MALAR has been an MFI which claims to prioritise socio-economic welfare over profit. The study, spanning nearly 2,900 survey respondents, gave us a glimpse of what is driving people towards micro-credit, and what they would be exposed to in the absence of an organisation like MALAR which has a uniquely progressive legacy.
Just like Usharani, a whopping 30% of the respondents in our survey said that they have taken loans to redeem their gold mortgage at another source of credit. This disturbing fact shows the penetration of private gold finance companies or NBFCs who are preying on the desperate economic conditions of the rural poor. There are instances of people having taken loans from multiple such sources and then having been driven to take their lives by recovery agents who are notorious for their tactics.
This was the pattern in this village. The women’s husbands and older children were all working in neighbouring districts in construction or carpentry, or as security guards or welders, while they were surviving with weaving and the MGNREGA.‘ Photo: Anirban Bhattacharya, Amitanshu Verma and Haripriya Harshan.
Who exactly needs such loans?
As women gathered at the verandah of a MALAR member at Paramankonam Theru one could hear the sounds of a few handlooms in the neighbourhood. It was largely a weaving village and while most families were struggling, a few had managed to set up a power loom at their homes. A few looms lay in disrepair and the neighbourhood seemed poor. This became apparent as we started speaking. “My husband works as a construction worker. I have two children, one weaves at home and the other works as a nurse in Coimbatore. I also do MGNREGA work in the village,” said Ajitha.
Sushila who has been part of MALAR for 23 years said she also has a loom at home for weaving and depend on the MGNREGA.
Rosemary is a widow and her elder boy is in the construction sector. She works as a MGNREGA worker as well.
This was the pattern in this village. The women’s husbands and older children were all working in neighbouring districts in construction or carpentry, or as security guards or welders, while they were surviving with weaving and the MGNREGA.
Then there is, Srikumari, whose elder son died by suicide and her younger son is a temporary worker in the electricity department. Her husband is in the construction sector and she has been taking up MGNREGA work whenever available.
These are the people for whom such micro-credits become a lifeline as they are not considered credit worthy by the formal banking system. The fact that nearly a quarter of the respondents in our survey had a family income of less than Rs 5,000 shows the danger of slipping into a debt trap if exposed to usurious practices. Nearly 63% of the respondents earn less than Rs 10,000 a month as family income. That is near about Rs 300 per day of family income. Nearly 84% of the respondents came from socially marginalised sections.
The Centre for Monitoring Indian Economy (CMIE) data shows that a vast part of India’s poor and low-income households are increasingly resorting to informal and more expensive sources of borrowing for their credit needs. Between 2018-19 and 2022-23, the number of borrowers from the economically weaker sections of society who borrowed from formal channels contracted by 4.2%. Recent trend also shows that while banks are growing more cautious about unsecured loans given the stricter regulatory oversight, the gap is being filled by NBFCs who are disbursing more and more personal loans. They usually cater to those who are otherwise unable to approach banks due to their weaker economic situation and inability to provide required collateral, including those in informal and unorganised work or self-employed. The latest Financial Stability Report shows that nearly 85% of the micro loans (i.e. loans under 50,000 rupees) are being met by NBFCs and fintech firms.
What are they taking loans for?
In our survey, 55% have indicated that education is one of their reasons. In a vastly unequal society, education clearly still remains one of the only social ladders for upward mobility and attracts aspirational investments. But there is one more reason – private schools charging higher fees that have taken over the education space. Vijayalaxmi, a senior executive committee member of MALAR says that “people spend beyond their means to send their children to private schools” and for this, they are willing to take one loan per year to just pay higher fees.
In Karuparai, as we gathered around a cow shed flanked by palmyra trees on one side and a small kitchen garden on another, we listened to Gita who has been a member of MALAR for 23 years. She said that when her mother was hospitalised, she had no money to even get her discharged after the treatment and buy follow up medicines. It is the medical loan from MALAR that came to her rescue. Medical expenses are the second largest reason for loans – 47% as per our survey. In the absence of adequate and quality public health services, medical expenses become one of the easiest traps to fall into indebtedness and in the absence of affordable credit, it can completely break the back of a family.
Our survey also suggests that the poor are largely taking loans for consumption needs and not so much for building assets or income generation.’ Photo: Anirban Bhattacharya, Amitanshu Verma and Haripriya Harshan.
Our survey also suggests that the poor are largely taking loans for consumption needs and not so much for building assets or income generation – like when it comes to buying land (5.1%) or vehicles (6.7%). Again, compared to medical needs, education or wedding expenses, the loan uptake for economic activities is relatively less (9% for animal husbandry, 2.1% for enterprises, 4.8% for agriculture, and 4% for business).
If one looks at the latest Financial Stability Report, one finds that India’s household debt has been increasing in recent years and what is especially concerning is the fact that among the broad categories of household debt, it is the non-housing retail loans that form the bulk (54.9% of total household debt) which are mostly used for consumption purposes. The share of these loans has been growing consistently over the years, and their growth has outpaced that of both housing, agriculture and business loans, which is deeply concerning.
It is rather unfortunate that in a context of dwindling savings and stagnating wages, when the poor today are cash starved and are desperate for loans to make their ends meet, our credit apparatus and banking system seem to have forsaken them.
Predatory sources of credit
“The banks have too much process and paperwork that requires too many visits to a far away branch,” says Chellachi of Naagacode village. “In comparison, here in MALAR, we have a relationship of trust. We get loans whenever we need even in emergencies and no paperwork is needed.”
While financial inclusion in a substantive sense would have meant increasing public sector bank branches in rural areas and increasing rural credit, what we have witnessed off late is quite the opposite. While the nationalisation of banks had increased their share from a mere 18% in 1969 to close to 60% by the 1990s, it has once again been declining in recent years, reaching a mere 29%. Rural credit which used to be more than 50% in 1995 has come down to 38% by 2024 while urban and metropolitan credit has grown at its expense. This created fertile land for the mushrooming of private micro-lenders and NBFCs.
Mary from Nagacode said that many like her do not trust NBFCs. “We can’t rely on them as they can run away any time, we don’t know them. Also if we fail to pay the charge, then they double the interest rate. We prefer MALAR.” But then MALAR is an exception. The rule is predatory NBFCs and commercial micro-finance companies that charge exorbitant rates and practice inhuman recovery methods that involve humiliation, intimidation, public shaming, and breach of privacy. They often gain access to one’s phonebook to call relatives and colleagues and even access one’s gallery to distort private images and then blackmail with them. There are numerous instances of suicides owing to such tactics and the abysmal rates demanded by these creditors. As per a recent survey, we gather that 45% of users said that the rate of interest charged by loan apps was over 25% per annum; 10% got it at a 50-100% interest rate; and 20% at a whopping interest rate of 100-200%. The latest survey also found 61% complaining about extortion threats or data misuse.
In the latest ‘State of Microfinance in India’ report, the NABARD itself acknowledges that the waiver of a cap on interest rates for NBFC lenders is leading to exorbitant rates and pockets of indebtedness. The same has been echoed by the RBI on multiple occasions in recent years. The RBI governor has even said that the NBFCs are misusing the freedoms that they have been allowed.
But effectively, the policy landscape has only been opened up to allow for the mushrooming of these usurious practices affecting common people’s access to credit. In fact they are also being celebrated for their so-called impact on “financial inclusion”. So, when the RBI celebrates the rise in its Financial Inclusion Index to 67 this year from 64.2, we must qualify it with the experience of the countless people in our countryside whom we have forsaken in the hands of these modern day moneylenders.
Amid rising suicides and harassment, the fact that state governments of the likes of Tamil Nadu and Karnataka are making their own laws to curb the inhuman and illegal recovery practices of NBFCs is a welcome endeavour. But they face a massive roadblock in the way of legislating effectively due to the Supreme Court order in 2022 that puts NBFCs (that are under the RBI’s jurisdiction) outside the purview of state moneylending laws.
The onus thereby is on the Union government. But even a cursory look at the Banning of Unlawful Lending Activities (Draft) Bill shows that the government is only interested in a show of concern, not in an effective measure that may hamper the profitability of big corporates who aim to make a sizeable cut from people’s dire need of micro-credit. The Bill for all practical purposes is only restricted to authorising unregistered lenders. It shows no intent on regulating those already registered and indulging in usurious rates or driving people to take their own lives with their atrocious recovery tactics.
This article was originally published in The Wire and you can read here.
Centre for Financial Accountability is now on Telegram and WhatsApp. Click here to join our Telegram channel and click here to join our WhatsApp channel, and stay tuned to the latest updates and insights on the economy and finance.
