Microfinance groups like these in India are facing intense scrutiny. Photo:lecercle (flickr)
Despite long being hailed as a key player in resolving global poverty, microfinance has faced intense criticism in the past few weeks. Much of this criticism is coming from India, a country that has long been seen as a microfinance success story.
According to the Wall Street Journal, Indian policy makers who once endorsed these small scale lending programs are now encouraging people not to pay back their loans, even when they have the money to do so. Lawmakers in India are linking microfinance institutions (MFI's) to harassment cases and even a recent string of suicides by borrowers unable to repay their climbing debts. Many of the problems facing the institution come from lack of regulation— allowing borrowers to take out an unlimited number of loans with skyrocketing interest rates, sometimes as high as 100 percent the cost of the loan itself.
Often people find themselves in a debt cycle wherein they must take out loans as means to pay back previous loans. Microlending doesn't require financial counseling, which means that people often don't have the information they need to make financially sound decisions.“When you take the loan they say, ‘Don’t worry, it is easy to pay back,’" a 38-year-old farmer currently stuck in a debt cycle told the Times. She now owes five times the cost of her original loan and doesn't have the income to pay it back.
One of the biggest problems is that microfinance has grown from a non-profit to a for-profit industry. While not inherently problematic, this shift brought with it some major changes.The industry has attempted to grow too fast, says the Times, causing lenders to approve loans in cases where they perhaps should have turned them down. “They were more concerned about growth — not growth of the livelihoods and economic status of the clients, but only the institutions’ growth,” Ela Bhatt, one of India's leading social workers, told NYT reporters. Without proper regulations, some lenders were not even asking for borrowers' income before approving loans.
In response to the criticism facing them, microcredit and microlending institutes do seem willing to adjust. Many are working on establishing a plan to help borrowers struggling to make repayments. Lenders are also looking at capping their interest rates at 24 percent, but are asking for time and patience as they struggle to shift policies in light of recent problems. Whether MFI's can shift toward stronger regulations is undeniable. The question that remains is whether microlending will be able to remain a solution to, rather than an obstacle for, rural poverty.
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