

Suicides in India show the dark side of micro-finance - jlangenauer
http://www.bloomberg.com/news/2010-12-28/suicides-among-borrowers-in-india-show-how-men-made-a-mess-of-microcredit.html

======
shrikant
_[I was involved in a project for SKS Microfinance in a previous job, and I've
gotten up-close and personal with their numbers for a few months, all pre-
IPO]_

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.

~~~
r90
If SKS microfinance is charging 24% they are a loanshark, period.Rates as high
as that are usury and should not be lawful.

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.

~~~
gyardley
There's no 'general and historical' interest rate limit of 8-12%. Credit card
APRs in the United States range up to 30% or so, and payday loans can have
APRs of well over 100%. In other countries, rates for products catering to the
poor are similarly high - this is just the cost of doing business when
extending small amounts of credit to poor prospects with high default rates.

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.

~~~
r90
Check your facts: <http://www.lectlaw.com/files/ban02.htm>

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.

~~~
roel_v
Did you even read your own link? Here's the second (!) paragraph from it:

 _"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._

~~~
_delirium
That seems to support the claim that this is a recent departure from the
"general and historical" caps on interest rates, though: most states have long
had usury laws with interest-rate caps, and national banks were only exempted
from them in 1980.

------
nir
MIT's Poverty Action Lab did a study of micro finance, and found it much
overhyped:
[http://www.boston.com/bostonglobe/ideas/articles/2009/09/20/...](http://www.boston.com/bostonglobe/ideas/articles/2009/09/20/small_change_does_microlending_actually_fight_poverty/)

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.

------
srean
Not all of farmer suicides in India is micro-credit related. There are many
other forces in play, for example bad and corrupt policies. You would find it
surprising that the worst hit states are those where agriculture is more
industrialized than others.

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.

~~~
Semiapies
This is the sort of thing that makes me skeptical of this story - people
suffer a problem for a variety of reasons, and suddenly, a scapegoat gets
seized upon.

------
DaniFong
Every life counts. But I feel like this is only showing one side of the issue.
Capital is distilled, economic trust. All human beings deserve a baseline
level of trust. As such, access to capital is a human right. Without some form
of trust extended to those in poverty (through capital lending or otherwise)
how could they ever emerge from their poverty?

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...](http://www.theatlantic.com/magazine/archive/2009/09/how-american-
health-care-killed-my-father/7617/))

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.

~~~
edge17
Capital - assets available for use in the production of further assets
[http://www.google.com/search?hl=en&source=hp&biw=120...](http://www.google.com/search?hl=en&source=hp&biw=1209&bih=617&q=define%3A+capital&aq=f&aqi=g10&aql=&oq=&gs_rfai=)

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.

~~~
DaniFong
Why would a baseline level of trust equate to 100% risk?

~~~
edge17
How else would you be all-inclusive? If interest rate is a measure of risk,
i.e. the riskier the individual the higher the interest rate, then the most
untrustworthy person can only get a loan, or access to capital, at the highest
possible interest rate and at the greatest possible risk. The greatest
possible risk is the situation in which the loaning party never gets their
money back. If the baseline is to include everyone, it means you have to
include the situation of greatest possible risk, i.e. hand out cash to someone
you know won't pay it back. Intent to pay back is well and good, but risk
profiling exists for a reason and microfinancing is a banking practice aimed
at empowerment.

Aid, on the other hand, engenders the notion of giving and not asking for
anything back. Microfinance loans are not intended to be aid.

~~~
DaniFong
To me, baseline trust means that if they squander their first access to
capital they do not gain access again. Such a lending strategy would not raise
this issue.

------
microarchitect
My dad used to work for an NGO that ran schools in northern Karnataka. He told
me unscrupulous microfinance lenders used to badger rural women into taking
loans at ridiculous interest rates and then harass them when they couldn't pay
up.

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.

------
_ques
"Peepli Live" ( <http://www.imdb.com/title/tt1447508/> , available on Netflix
Streaming) is a satire about the state of farmers in debt in India, and is
worth a watch.

~~~
sdave
wish i could upvote you twice for 'Peepli Live'. absolutely a must watch.this
movie has a more real depiction of state of affairs , though obviously with a
polarised satirical tone.

------
richcollins
I wonder how many people killed themselves before microlending existed because
they had no hope of improving their lot in life.

~~~
bryne
It's rather remarkable how able people are to tolerate a borderline existence
until a concrete metaphor for its inevitability and hopelessness - like an
unpayable loan - is thrust into their faces.

~~~
srean
There's more to the suicides than microcredit. I commented on some here
<http://news.ycombinator.com/item?id=2055046>

------
gimpf
14.000 suicides in 74.000.000 people (about 19 per 100.000). Too much, but not
way more than to expect, there are western countries with higher suicide
rates.

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.

~~~
pm
Suicides amongst micro-finance customers would be a more appropriate
statistic. There are clearly more widespread problems that need to be
addressed, but seeing as this behaviour is a consequence of for-profit
companies applying First-world credit policies to Third-world customers, i.e.,
those with no other way to change their financial situation, I consider it
irresponsible behaviour on the part of companies who should've known better.

------
elvirs
Every financial instrument was originally designed to help and serve people
but somehow some guys who think they are smart manage to abuse the system,
make a lot of damage and still get away with it. Why are not there any
regulations to prohibit this? Why everybody learns only after game over when
its too late? Here you go, the results of capitalism at its best

------
mmaunder
This article illustrates the tension between the original philanthropic intent
of micro-finance and the reality that high risk lending requires high interest
rates to be profitable. I worry that the micro-finance brand will become usury
with a fresh coat of paint.

------
forgottenpaswrd
This illustrates very clearly not only a problem of micro-finance, but other
problems as well.

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.

------
ck2
These are not true microloans in the original spirit of microloans.

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.

------
sundars
you can watch the decline of SKS Microfinance the poster boy of Micro-finance
in India: <http://www.google.com/finance?q=NSE:SKSMICRO>

------
motters
Surely once for-profit companies get involved there is a conflict of interest
between poverty alleviation efforts and the interests of share
holders/investors.

~~~
anamax
> Surely once for-profit companies get involved there is a conflict of
> interest between poverty alleviation efforts and the interests of share
> holders/investors.

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.)

~~~
motters
> Not-for-profits are often run to benefit the folks working for them.

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.

------
bocajuniors
If propert rights included poor people's properties nobody would have to pay
24% interest.This happened 100-300 years ago in Europe and America.According
to Hernando de Soto this is what it takes to make capitalism work.If you leave
out the majority of people you tend to leave out, if not the majority,a large
fraction of the capital.

------
Qz
_India’s booming microlending industry is part of a global phenomenon that
began as a charitable movement but now attracts private capital seeking growth
and high returns._

Good old capitalism, always there to turn nice things into shit.

~~~
forensic
>Good old capitalism, always there to turn nice things into shit.

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.

~~~
namdnay
While I agree with your general gist, "Capitalism and free enterprise produced
everything good" is a bit of an exaggeration. Capitalism didn't "produce"
labour rights, it didn't "produce" national parks, the sexual revolution or
the abolition of slavery. I don't think we can simplistically say that
captialism is the cause of all that is great in this world, even though it's a
pretty major component.

~~~
forensic
I said "capitalism and free enterprise".

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.

~~~
flatulent1
>Capitalism and free enterprise produced everything good.

>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.

