Suicides in India show the dark side of micro-finance
bloomberg.com
bloomberg.com
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.
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.
In India, bankruptcy means a rural farmer will lose everything, including his land and his seed corn.
You can't have it both ways. Either the loan is secured and farmers pay low interest rates.
Or a high rate is allowed because the loans is an unsecured loan with high credit risk. But then the debter should be able to default without severe consequences, just a damage to his credit rating.
Neither is possible, because India doesn't know what humane capitalism is.
Edit: Sure 24% is better than 300%. So I should congratulate India for leaving the Feudal ages and entering the Robber-baron capitalist era of the 19th century.
Well OK: Congrats India! Now let's enter that 20th century, shall we?
Furthermore, bankruptcy is not a counterbalance for high interest rates! It's a purely pragmatic tool, not a designed part of the system! It's very delicate to fiddle with what is fundamentally a relationship of trust between lenders and people taking loans through statute, and while improvements are possible everywhere, just saying 'India should have liberal bankruptcy laws' (i.e., discharging loans should be easy) is nonsense because the shocks this would cause in the financial system (at the micro level) would be severe and there's no telling if the long-term benefits (if any) will outweigh the sure short-term catastrophe.
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.
E.g. Alabama: ALABAMA, the legal rate of interest is 6%; the general usury limit is 8%. The judgment rate is 12%.
Like I said, it's not perfect, there are many exceptions. The US has devolved quite a bit from the humane society that built it up.
But generous bankruptcy laws still make it possible for Americans to escape high debt. In India, suicide seems to be the only solution for some.
"But my car loan is higher than that"; "But I'm paying way more than that on my credit cards." That's right! Banks have separate rules. In fact, due to high inflation, in 1980, the federal government passed a special law which allowed national banks (the ones that have the word "national" or the term "N.A." in their name, and savings banks that are federally chartered) to ignore state usury limits and pegged the rate of interest at a certain number of points above the federal reserve discount rate. In addition, specially chartered organizations like small loan companies and installment plan sellers (like car financing companies) have their own rules.
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.
However, it would be useful to me if the person who downvoted both my comments in this thread were to drop a line explaining why/how I was detracting from the conversation in any way...
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.
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)
[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.
In 1978, the Supreme Court ruled that states couldn't enforce their usury laws against nationally chartered out-of-state banks--- the usury laws of the bank's state, not the customer's state, were the only ones that applied. That effectively killed usury laws, because it meant that banks just all incorporated in the states with the weakest usury laws. Then Congress completely preempted state usury laws for nationally-chartered banks in 1980.
But from sometime in the early/mid 1800s to 1978, most states had interest-rate caps in the 8-14% range, and most are still on the books, just ineffectual.
A $100 transaction cost on a $10000 loan is comparatively insignificant to us.
A $100 transaction cost on a $1000 loan is pretty crappy.
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).
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 ?
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%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.
I don't think (and I could be totally wrong, I don't know the process of actually getting one of these loans) that the left column denotes what the borrower took the loan for. I think it's what the loan was actually used for. The data collectors, I believe, sampled some subgroup of people and asked what the loan was spent on.
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.
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.
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.
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.
Aid, on the other hand, engenders the notion of giving and not asking for anything back. Microfinance loans are not intended to be aid.
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.
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.
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.
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.
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.)
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.
Good old capitalism, always there to turn nice things into shit.
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.
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?
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.
And I maintain that you don't actually care about the poor. I don't know wtf you're talking about but I do know one thing has been consistently shown to be true:
Free enterprise lifts poor people out of poverty.
cf. india both in the 19th century (hooray for capitalist genocides) and today, the caribbean (especially jamaica) after trade liberalization was forced by the imf, africa for pretty much all time, the vast majority of the population of china, latin america for its entire history, etc
given your previous post about bankruptcy laws you probably have a more or less moral capitalist system in mind like sweden or canada as opposed to a post-industrial cyberpunk hellhole but you've got to remember that even in those countries capitalism creates more losers than winners and the vast majority of those countries' wealth has been extracted from the third world, the shittiness of life in which i don't need to talk about in detail.
just as an example the capital which propelled britain's industrial revolution was accumulated through the plunder of north america and heavy involvement in the transatlantic slave trade. the same with the dutch, and holland is the birthplace of capitalism after all.
the purpose of capitalism is to defend the private property (particularly ownership in production, for example dudes who hold stocks) of those who hold it against those who do not, and to allow people who have capital to get more of it through investment etc. you can say that people who invest capital deserve ownership because they risk their capital but you have to ask where the necessity of capital comes from in the first place - it's something of a circular argument.
Show me a slave who made something good. There are degrees of freedom, and the good stuff tends to come from those with a lot of it.
Not just capitalism alone.
Pretty much everything good came from free enterprise. The parts of society that engaged in free enterprise came up with the good stuff that would slowly spread free enterprise to the other parts of society.
Specifically:
Are labour rights really a thing? Were they created? "Labour rights" are a communication of certain realities, e.g., treat everyone nicely or we will poke your head with pitchforks.
National parks were not created either. They're an abstract political concept that simply communicates the wishes of a group and the consequences to those who contradict the wishes of a group.
The sexual revolution, another abstract thing, came directly from free enterprise because free enterprise produced the prosperity and technology that caused the changes. e.g. The Pill.
These above good concepts, which are all really just recognitions of the power of the masses, are tightly linked to the power of the masses. And the power of the masses comes from their productive interdependent free enterprise labour.
>National parks were not created either.
National Parks consist of isolated bits of something good that was there long before man. They're definitely not something good produced by free enterprise, rather something good still there because it was protected FROM free enterprise.