Virtue of ‘microfinance’ turning to vice?

Small-lending industry has grown too fast, leading to abuses, critics say

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Government lending programs for the poor in India have been losing ground to microfinance groups.

In 2007, state-backed self-help groups, which link local borrowers with banks, sometimes at subsidized interest rates, added 8.5 million clients, while microfinance groups added 3.2 million.

Two years later, self-help groups added just 6.7 million clients, while microfinance groups added 8.5 million, according to M-CRIL, an Indian microcredit rating agency.

M-CRIL Director Alok Misra said the gains by the private microfinance groups have shamed the government and unsettled politicians who believe the self-help groups are an important means of securing votes.

“It is showing the government its own inadequacy,” Mr. Misra said. “That’s a big challenge for the politicians. Politicians feel poverty lending should be in the government’s name.”

R. Subrahmanyam, principal secretary of rural development in Andhra Pradesh, dismisses charges of politicking as “a figment of the imagination of disgruntled elements.”

“How can microfinance institutions step on political interests?” he said. “If poor are getting exploited and commit suicides by dozens, should government be a mute spectator?”

He said the state is preparing to prosecute 51 cases of suicide allegedly linked to coercive microfinance groups. Meanwhile the central bank is considering new regulations that would, among other things, cap microfinance interest rates.

“Irresponsible lending leading to multiple loans without due diligence, unproductive loans for consumption and consumer durables, lack of transparency in operations, usurious interest rates, coercive recovery practices, have all resulted in hyper-profits to microfinance institutions and impoverishment of the poor,” Mr. Subrahmanyam said in e-mail.

Many within the industry would agree with that assessment and welcome better regulation.

The Microfinance Institutions Network plans to launch a microcredit bureau in India within a few weeks, which should help reduce the problem of borrowers taking too many loans.

The Microcredit Summit Campaign announced Monday an initiative to reward groups that do more to fight poverty — a goal that has proven maddeningly elusive.

Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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