The last few months has been a harrowing time in the world of Microfinance, especially focused on suicides in Andhra Pradesh, the capping of interest rates at 100%, the freezing of MF activities till the Microfinance Institution is registered under a new ordinance, the increase in non-repayments to MFIs and the decision of MFIs to pull out of Andhra Pradesh.
As usual, while one group of academics has been extolling the virtues of microfinance and laissez faire, another group has been attacking the abusive practices and shouting for control.
The question is at what point does one throw the baby out with the bathwater, as the political instigation of non-reimbursements in the State may kill the sector. Oversimplifying stories and attributing blame based on generalizations does nothing good for a sector. With such broad sweeping allegations, people fail to distinguish between genuine MFIs who are working to make a difference and their unsavory counterparts. This generalization then often results in a vicious cycle taking hold – oversimplified news influences public perception, public opinion bears down on policy makers, and any progress made in the sector by decades is reversed due to regulators becoming overtly cautious.
Everything related to any comments on microfinance depends on the data. In this vein, we try to objectively look at the relations between a multitude of factors affecting microfinance borrowers and their propensity to commit suicide.
We first try to see if 54 suicides is normal in a country like India where the average suicide rate is 10 per 100,000. As a benchmark, the average suicide in France is about 16 per 100,000. Thus such a simplistic international comparison would suggest that microfinance lowers the suicide rate because there is a lot of microfinance in India but very little in France. However, from the research of Emile Durkheim, we know that the poor who are supposed to be less suicide prone than the rich. Emile Durkheim’s research on suicides also brings out the importance of factors such as divorce and unemployment which increase the tendency to commit suicide.
At the same time, research on the Japanese experience has also shown that people who are over indebted and have taken guarantees from other people are more prone to suicides. With an average family size of five, there are about 17 million households. Some of these are rich people. So, the number of poor households is less. Of these poor households, some have not taken loans. Some have taken many loans. The general idea seems to be that the average household has taken three or four loans. It is this multiple borrowing which is blamed for the stress of the microfinance borrowers.
Much of microfinance in Andhra Pradesh is distributed through Self Help Groups (SHGs). A SHG may include 5 to 20 borrowers, mostly women, and the average is about 14 members. According to a NABARD report for 2009-10, there are about 6.9 million SHGs in all of India which have savings with different kinds of banks, but only 4.9 million SHGs have taken loans. Thus, microfinance seems to be more savings oriented. This means that about 97 million families have savings and 69 million families have loans in all of India.
Out of this, Andhra Pradesh has 1.5 million SHGs which have taken loans. Using the same average of 14 borrowers per group, this works out to about 21 million borrowers only if no one belongs to more than one group. But the whole overendebtedness debate is based on people belonging to two or three groups. In such a case, the actual number of borrowers is 7 to 10 million. In either case, we should be having more suicides in keeping with the national average. Therefore, 54 suicides should theoretically not be a cause for unjust alarm.
Our next question is whether suicides are increasing as microfinance spreads in India. We investigate time series data on suicides in India and find a just significantly positive correlation with male suicide rates and slightly negative correlations (not significant) with female suicide rates – but no relation between microfinance and total suicides. No causal relationship is suggested.
Similarly, we investigate whether regions in India with more microfinance penetration have higher suicides. Cross-sectional data of Indian states indicates a significant positive correlation of total suicides with number of SHGs loans outstanding to Banks, higher than with microfinance loans provided by MFIs, which only shows a weak correlation. Again, no causation is suggested.
Going beyond India, a global country-wise analysis indicates that there is no correlation between microfinance and male or female suicides, yet regression analysis of 31 countries (weakly) indicates that microfinance penetration among the poor is a causal factor for increased suicides.
Thus, all we cannot really say for the moment is that maybe there is a causal relationship. But both suicides and economic development seem to be moving in the same way.
What we really get from this debate and furor in the media is to see what we can do to alleviate borrower stress.
First, do rapid growth and sustainability aims make MFis forget the human angle? Second, is social pressure necessary to make people repay? Third, if Microfinance increases suicides, is this impact to be differentiated between women and men possibly due to changing roles? Based on these, we tentatively propose policy recommendations.
If the media and the Indian government are playing us these suicides, it is only to drive home a simple message. The microfinance sector has been provided the infrastructure to succeed to pass them on to SHGs. This means lending at reasonable interest rates and making reasonable profits. If however, MFIs such as SKS are having so much profit as to warrant high market valued for their shares, the interest rates charged are just too high and do not warrant any subsidies to the sector. The government is only trying to level the playing field.
Thanks to Isabelle Demay and Julien Hannoun for the french translation of this article.