POVERTY: The seamy side of microfinance (it had to happen!)

The Andhra Pradesh government will file criminal cases against microfinance institutions (MFIs) that resort to coercion and use ‘inhuman’ means to recover loans extended to the poor. It will also invoke the provisions of the AP Money Lending Act to ensure MFIs do not fleece customers with interest charges.
The state will also seek clarity on the interest spread that the MFIs can have from the Reserve Bank of India.
“The cost of funds for most MFIs will be 9-10 per cent but they are charging ridiculously high interest rates, sometimes up to 40 per cent a year,” R Subramanyam, principal secretary, panchayat raj and rural development department, told Business Standard.
Many MFIs are growing by poaching members, mostly from the self-help groups (SHGs), he said. Many also do not do due diligence before extending loans, which leads to multiple loans to consumers and, in turn, results in higher defaults.
“The government will press for more open disclosures from the MFIs. We will write to the RBI to delicence those resorting to dubious means of finding new customers or recovering from them,” he said, adding a few were even bribing the SHG leaders to get other members of the group accept their loans.
The government recently formed a task force led by collectors at the district level to look into the issue. The report is expected in May.
Subramanyam said there were instances of recovery agents pushing women into flesh trade, forcing them to stand in hot sun for about four hours and seizing their ration and aarogyasri cards. “These activities will not go unchallenged.”
However, he said, some of the MFIs were doing good work and the government would associate with them for financial inclusion.
Meanwhile, the MFIs are proposing to form a joint standing committee to ensure there were no arm twisting tactics or coercion on their part. Newly-formed Micro Finance Institutions Network president Vijay Mahajan said MFIs have signed a code of conduct to eliminate coercive practices, if any. Respective companies would be responsible for the behaviour of their field level staff.
http://www.business-standard.com/india/storypage.php?autono=393273