In the first part of the series Loans for poor in Bengaluru, we explored how the system of loan from informal sources with high interest rates is pushing the poor deeper into poverty. The second part explored the system of bank loans for poor, to see whether it benefits the poor who don’t have securities. In the third part, we examine how micro-finance institutions function, and what do poor people feel about it.
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Mariyal, a 33-year-old domestic worker living in Ejipura slum in Bengaluru, has taken a Micro Finance Institution (MFI) loan for the first time. She has borrowed Rs 15,000 from the MFI Janalakshmi, by being part of a Joint Liability Group (JLG).
The idea behind JLG is that its members—five or more—are security for each other, since the poor have no assets to give as security otherwise. Mariyal’s interest rate is much higher than that of a bank loan, but much lesser than interest levied by ruthless local money lenders whom she usually depends on. But, she does not want to take an MFI loan again—she finds the MFI coercive and her group members unsupportive.
Hard deadlines for repayment
She says that her group has to pay on the 11th of every month, and the deadline is not relaxed. The MFI will hold a payment meeting on the day, and it is compulsory for all the group’s members to attend and pay. Mariyal says, “If one woman does not pay, others will have to sit at the meeting for the whole day until that person pays. We have to get her to come to the office and make her pay.”
Other group members can pay for the defaulter if they want. But usually they don’t, as they don’t know each other well and also struggle to pay for themselves. Mariyal did not know any of her group members before joining. “Even if I knew them well, they would loan me money only on interest,” she says.
Attending meetings also means that the women have to take time off from work, leading either to loss of a work day or complaints from irate employers. “Even if there is no food at home or even if someone dies, we still have to go and pay,” says Uma M, who has borrowed from MFIs many times. In Bengaluru, a large number of poor rely on MFIs, since they are unable to access bank loans.
MFIs in Bengaluru
When the MFI model became successful in Bangladesh, it was hailed as the solution to poverty in developing countries—providing institutional credit to the poor was supposed to lift them out of poverty. MFIs entered India in the late 90s. But after large-scale suicides of MFI customers, especially in Andhra Pradesh in 2000s, RBI brought MFIs under many regulations in terms of interest rate, loan amount etc. There are four major MFIs in Bengaluru now – Janalakshmi, Ujjivan, Grameen Koota and Equitas.
MFI websites claim that their aim is to uplift the poor and improve their lives, create economic and social change etc. They advertise glossy stories of the poor who changed their own lives by investing MFI loans in business, education etc. But the MFI customers that this reporter spoke to, said that for them, MFI was just one more loan source like pawn brokers and local lenders. They used loans from all such sources for the same purposes—routine expenses, crises, repaying old debts etc.
In MFIs, initially the groups get small loans; once they repay on time, they get next loans of higher amounts. MFIs point out that their repayment rate is excellent. Carol Furtado, COO (South) at the MFI Ujjivan, says that their repayment rate is 99.8%, and that customer retention rate is around 88%. Ujjivan has over 2.5 lakh customers in Bengaluru, and around 27 lakh across India; around 90% of their customers take group loans only.
‘No poverty reduction from MFIs’
However, academics say that MFIs have high repayment rate because borrowers are forced to pay back. Dr D Rajasekhar, who heads the Centre for Decentralisation and Development at ISEC (Institute for Social and Economic Change), says that often people repay one MFI by borrowing from another. “So MFIs say that they are successful as there is repayment, while there is no significant poverty reduction.”
Dr Rajsekhar says that an MFI loan is not enough to cover all needs of the poor. “A woman may set up a good business with an MFI loan of Rs 10,000. But then a family member falls ill, and she has to spend Rs 20,000. Then she can’t borrow again from the MFI, but has to rely on money lenders. Later, profit from business won’t cover daily consumption and both interest payments, so she approaches another MFI and borrows.”
Thus the woman still is in a chain of debt, though she will continue to pay her MFIs without fail. In fact, she may be borrowing from elsewhere just to pay her MFI loans. Getting loans at smaller interest rates may prompt women to keep borrowing from MFIs. Most MFIs lend only to women.
Loan history of the lender doesn’t matter much
Usually in MFIs, whether loans are taken for crisis, food, education or business, interest rate is the same—23-24% per annum. This is unlike regular bank loans, where each loan is given after detailed appraisal, and rates vary depending on the purpose of loan. Bank interest rates generally start from around 10%.
Prof M S Sriram, Visiting Faculty at Indian Institute of Management, Bengaluru, says that loans that don’t yield quick returns should have low interest rates. But, “MFIs don’t do appraisal like banks. They don’t need to, as they do not tolerate default, and use peer pressure and at times coercive means to recover money. Even if they ask purpose of loan, it is only a token measure.”
Sure enough, the appraisal procedures of MFIs are quite simplistic compared to that of banks. Usually, customers only have to provide two documents like Voter ID and Aadhar card. If one of these are unavailable, another document like ration card or rent agreement can be given. At Ujjivan, there is a three-step process for approving loans, but training women and loan approval all takes only 5-7 days.
Repayment main criterion for new loans
The MFI may put loans under specific categories, but customers may not use them for the mentioned purpose. At Ujjivan, for instance, 80% of group loans are categorised as business loans; 15-16% as consumption loans, and the rest as loans for education, housing and emergencies. Business loans are given only for expanding existing businesses (provision stores, tailoring etc), and not for start-ups.
Carol says that Ujjivan verifies loan usage once, after 60 days of giving the loan (minimum term of a group loan is usually around one year). After this, appraisal is done only if and when the person applies for next loan. Carol says, “The loan may be used for repaying an old debt. But that debt was also for a specific purpose. So we consider the loan as given for that purpose.” She says that the loans may be used for emergencies also sometimes. Carol says that borrowers do repay “as they know that they will get repeat loans only if they repay.” Repayment of old loan is the main criterion for getting new loan.
MFIs are unable to assess customers’ repayment ability too. They only ensure that their customer does not already have two MFI loans, since only two MFIs can serve a customer at a time as per rules. They may also do a physical verification of the person’s house and confirm that she is employed; but her other loans from local lenders, pawn brokers etc are unknown to the MFI.
Interest lower than local money lenders, higher than banks
Carol says that Ujjivan has not been able to reduce its interest rates as banks lend to it at a fixed interest rate. She says that Ujjivan’s interest rate to customers is not high, considering the interest payment towards its bank loans, its operating cost and credit cost. However, from the perspective of the poor, MFI loan interest rates are nearly double that of bank loans’ interest rates.
Banks lend to MFIs at not more than 12-14% annual interest, while MFIs lend to the poor at 23-24%. According to RBI guidelines on priority sector, banks can lend to MFIs indirectly so as to benefit the poor, in addition to direct lending to the poor. But in practice, banks consider direct lending to the poor risky and costly, and prefer lending to MFIs.
Thus, the poor may be borrowing money lent under priority sector at nearly twice the interest rate from MFIs. In turn, MFIs in Bengaluru have expanded rapidly, some of them across the country, in a short period.
In sum, MFIs behave like money lenders, in terms of levying uniform interest rate irrespective of purpose of loan, being coercive in collecting payment, with customers often repaying loans by borrowing from other sources. But the advantage for borrowers is that MFI interest rate is lesser compared to that of local lenders and the term of repayment is fixed rather than infinite; MFIs are also regulated by the government compared to money lenders.
Self help groups vs micro-finance institutions
Though both Micro Finance Institutions (MFIs) and Self Help Groups (SHGs) are meant to empower the poor and both levy high interest rates, Prof Sriram says that these are not really comparable. He says, “In case of MFIs, the interest amount goes out to the MFI. But in SHGs, the money does not go out of the group, and the interest rate is decided by the women themselves.”
While MFIs are not quite considered to be beneficial to the poor, the opinion on SHGs is divided. SHGs, many of which are run by NGOs, exist in most slums in the city. The ones run by prominent NGOs usually have savings and credit, and are also linked to banks. Women in the groups may start by saving as less as Rs 50 per month individually. Once they accumulate enough savings collectively, the group lends to members. Interest rate (as high as 36% annually or more) and term of loan are decided by the group. In many groups, interest paid is returned to the woman later. If the group has enough savings in their bank account, banks also lend to them at low interest rates.
Jyothi S, 34, had joined the SHG Sri Lakshmi Sangha in Jayanagar, in 2002. The Sangha is among the 580 SHGs run by the NGO APSA (Association for Promoting Social Action). Jyothi started off with savings of Rs 20 per week, but now pays Rs 100 weekly as savings. She has taken 10 loans from the group over the years—her first loan was of Rs 1,000, and the current one is of Rs 1 lakh. While the earlier loans were for routine needs, the later ones were for building a house. Jyothi says that she does not have to borrow from local money lenders anymore, and only occasionally relies on pawn brokers. Many women like Jyothi say they have benefited from SHGs.
SHGs also familiarise women in dealing with banks and maintaining books. Sheila Devaraj, Director at APSA, says that SHGs are sisterhoods in which women support each other. The groups gradually start tackling issues like domestic violence and trafficking in their slums, and get involved in community affairs and politics, she says. “Women’s decision-making at home has increased—they are able to send their alcoholic husbands to de-addiction centres, support children’s education etc.”
But… all SHGs may not be supportive
But many women do not agree that SHGs are supportive sisterhoods. Many say that there is no support from group members if they cannot pay the money on time. Rajeshwari N, a domestic working living in Ragigudda EWS quarters, was part of a 20-member SHG run by the NGO Kantikirana for eight years. She says, “If I cannot pay on the designated day, others will pay for me at the time, but they will come to my home at night, shout and take money from me. They excuse delay in payment only if it is due to death, marriage or surgery.”
Rajeshwari is currently Secretary at the Domestic Workers Rights Union (DWRU). She had quit her SHG after her group members came to her home and shouted, when she defaulted on her monthly payment once.
NGO-run SHGs also usually have stringent rules. Those run by APSA and Kantikirana NGOs levy Rs 100 fine on women who don’t attend a payment meeting. Rajeshwari says that her SHG used to impose fine of Rs 300-400 if payment was delayed for a longer period, and a fine of Rs 50 for coming late to meetings. “I had to run for meetings in between work, which was difficult as I do full-time domestic work at a house,” she says.
Does caste and class ladder play a role in SHGs?
Geeta Menon, Secretary of the women’s organisation Stree Jagruti Samiti (SJS), says that sisterhood in SHGs is only among those who have money. SHGs are often hierarchical, controlled by women who are higher up in the caste and class ladder, she says. “In Bengaluru SHGs, OBCs mostly dominate Dalits, even though the groups here are more mixed compared to rural ones.”
She says that NGOs may not be deliberately picking better-off women to be group leaders; rather, they ignore the existing cultural framework. NGOs may pick women who take initiative and seem capable of networking and loan recovery, thus ending up working with slumlords or those with political connections. “Ordinary women cannot run SHGs. The leader should be able to get the defaulters to pay, sometimes even using dadagiri, such as by taking away their possessions,” she says.
Also, each SHG member borrows for a different purpose, and the benefits are differential. One woman may use it for investing in business while another may use it for wedding expenses. The economic gap among women in the group need not narrow down. Sheila says that only about 15% women in APSA’s SHGs invest loans in businesses.
Geeta points out that many SHGs do good work, such as using the defaulters’ fine amount to invest in business, build creches etc; but often even gender issues are not addressed. For instance, a member may use her loan to pay dowry, or her husband may force her to borrow so that he can buy a mobile phone with the money.
Banks may not support all SHGs
SHGs are also perceived as increasing the burden on women when they work and manage the family, while their husbands spend money anywhichway. Rajeshwari says that since many NGOs running SHGs don’t have women’s issues as their central focus, they don’t discuss such issues in meetings, and instead only discuss issues the NGO is concerned with.
Though banks are supposed to prioritise lending to SHGs, this does not always happen. APSA’s SHGs in Jayanagar say that the new manager of their bank has refused to give them loans, even though the group had taken and repaid many loans previously. K S Gurudath, Divisional Manager at Canara Bank, says that banks should lend to SHGs irrespective of purpose of loan, and the interest rate varies between 12 and 14.5% based on the rating of the SHG as per a checklist. For example, interest rate is lower for SHGs with more strength and very poor members.
Loan from SHGs to lend to others!
Another problem in SHGs is that many women, especially those better-off, take loans from the group and lend it at higher interest rates to outsiders. For instance, in Ragigudda quarters, the leader of an independent SHG is a well-known local money lender herself. Such groups may not have bank accounts, but circulate money among themselves.
Some SHGs are merely savings groups. Yet others are formed only so that members can get bigger loans from local money lenders, sometimes at lower interest rates. Indira, 34, a waste picker living in a slum near J C Road, is part of a five-member SHG formed only to borrow from lenders. Getting more loans from loan sharks is her only benefit in being part of the group.
The picture that emerges is that MFIs and SHGs may not be the quick and easy solutions to poverty, as they are portrayed to be.