Amount × Collection Practices = Debt Burden

February 3, 2012

Sanjay Sinha points out that government-backed Self-Help Groups (SHGs) have indebted the poor of Andhra Pradesh three times as much as the microfinance institutions (MFIs) have. That certainly should be food for thought for anyone who heaps calumny on the MFIs.

Still, I think an element is missing from this analysis, at least if one is concerned about the role of debt in extreme events such as suicide. It was my impression from visiting Andhra Pradesh just after the crisis broke that the microfinance institutions were more aggressive in collecting payments. I wrote:

I spoke with Parmesh Shah, a rural development specialist who is centrally involved in the [World] Bank’s support for SHGs. Naturally that role colors his perspective. But he told me something that sheds light on the charges of suicide that been leveled at MFIs. He told me about confidential research the Bank commissioned after smaller microcredit crises in Andhra Pradhesh about the causes of suicide. Apparently 300 cases were studied in depth. At least among debt-related suicides, the typical pattern was that the loan troubles would build up over years, as the people borrowed from whomever they could. Then, typically, some traumatic event would trigger the suicide—a public shaming by a creditor, a beating, a threat of rape. Thus when people end their lives they may owe only a small share of their debts to MFIs. Yet I can imagine that MFIs, because they insist on on-time repayment and because hypergrowth may have outrun the inculcation of appropriate procedures and norms, have been more prone than SHGs to provide these triggering events.

Now, I’m sure SHGs marshal peer pressure too, and so can be sources of stress for women in duress. I could even be completely wrong as an empirical matter—as I say, it was just an impression. But it seems to me that collection practices, along with amounts owed, are part of the equation that determines the full burden of debt.

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1. Hans Dieter Seibel Says:
   February 11th, 2012 at 2:50 pm

   “Sanjay Sinha points out that government-backed Self-Help Groups (SHGs) have indebted the poor of Andhra Pradesh three times as much as the microfinance institutions (MFIs) have.” This statement may be misinterpreted, leading the reader to assume that the SHGs have overindebted their members.
   Here are some facts and figures: According to NABARD there were 4,813,670 SHGs with bank loans outstanding in India as of 31/32/2011, including 1,683,993 SHGs in Andhra Pradesh.
   In all-India the average loan outstanding per SHG was Rs63,625 ($1418), or around Rs4,850 ($108) per member. The respective figures for Andhra Pradesh are Rs76,420 ($1698) in bank loans outstanding per SHG, or around Rs5,878 ($131) per member (31/3/2011). Total SHG loans outstanding to members (from bank borrowings, internal funds and grants)in Andhra Pradesh are around 30% higher than the bank loans outstanding reported by NABARD, i.e, around $170. The problem is not overindebtedness, quite the opposite: SHG loans to members are mostly term loans (average maturities around three years), with limited, if any, access to small short-term loans as need arises. As banks are inflexible with regard to additional loans to SHGs, the gap has been filled by MFIs (uncontrolled of SHGs and their federations). SHGs tend to be lenient when it comes to recovery, repaying the bank from internal funds (mandatory savings and retained earnings)in cases of member delinquency. The ultimate problem is that neither MFIs nor SHGs have included the collection of voluntary savings withdrawable as need arises.
   Hans Dieter Seibel (seibel@uni-koeln.de)