Are MFIs the scapegoat for suicides in India?

Much of the financial buzz coming out of India these last few months has been about the country’s drive towards financial inclusion. However, in more depressing news recently, the Hindu and other sources have reported a growing problem of rural suicides in the state of Andhra Pradesh (AP). With up to 30 suicides just this month, microfinance institutions (MFIs) are looked at by some as the root cause, harassing borrowers to repay their loans and pushing them to take desperate action. But in reality, the issue of borrower suicide goes beyond pressures to repay loans; it’s complicated by a combination of factors stemming from broader issues of economic security: these households often face not only high levels of debt, but also low-incomes, growing household expenses that are perpetuated by health issues and inflation, and, to top it all off, a lack of assets to draw on during times of financial crises.  Given this greater socio-economic picture, it appears that MFIs are in some ways unfairly being pegged as the scapegoat for suicides in India.  Still, they certainly haven’t helped.

MFIs that charge exorbitant interest rates and resort to extreme action when collecting loans from rural households, such as allegedly kidnapping one’s child to coerce repayment, should not be let off the hook. There is also, undoubtedly, a problem of poor due diligence in Andhra Pradesh, where a saturation of MFIs allows clients to take out multiple loans simultaneously and often do little to investigate the financial capability and position of those clients.  That’s what India’s numerous vociferous political parties believe. The Communist Party of India and Bharatiya Janata Party have been playing the blame game, pointing to the inabilities of the current party in office – the Indian National Congress - and the Reserve Bank of India to regulate these unscrupulous MFIs. And while the government has stepped in to pass an ordinance, which would crack down on MFIs, this won’t ease the economic woes of rural poor today.

In truth, the deeper issue of financial insecurity that plagues rural India can’t be remedied by debt alone and can only be worsened by predatory lending and forceful debt collection. Here we should look to behavioral economics, which has shown the existence of “asset effects” where the accumulation of assets, specifically savings, can lead to “positive economic, social, psychological and health related improvements” to future wellbeing. With that in mind, India has been leading a strong campaign towards financial inclusion, hoping for all Indians to be “banked” by 2012 with help from the national UID (unique identification) project. But will that be enough to supplement, or even replace, this prevalent culture of borrowing with a culture of saving? Only time will tell. However, in the interim, a strong regulatory framework from the top, to crack down on some MFI’s bullying tendencies, should be coupled with financial literacy programs from the bottom, including consumer protection and steps towards inculcating a habit of saving.