People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 44

October 31, 2010




‘Protect Women from

These New-Breed Moneylenders’


ON October 22, a delegation of the All India Democratic Women’s Association (AIDWA) met the Reserve Bank of India’s regional director, Rajeshwar Rao, at New Delhi and handed him over a memorandum highlighting the problems being faced by women of the self-help groups (SHGs) due to the unethical practices of microfinance institutions (MFIs) which are charging exorbitant rates of interests from these SHG members and harassing the latter for repayments. The delegation demanded that a regulatory framework must be set up urgently, and a cap on interests rates introduced and effectively monitored. The delegation comprised AIDWA general secretary Sudha Sundararaman, assistant secretary Ashalata and CEC member Manjeet Rathee.


The RBI official responded positively to the suggestions and explained that the RBI was also seized of the matter. He assured the delegation that the committee that had been set up to look into the functioning of the MFIs and related issues would definitely take up these aspects for consideration.


The AIDWA has sent a copy of the memorandum to the finance minister, Pranab Mukherjee, as well and asked for a meeting with him at an early date.




In its memorandum, the AIDWA pointed out that it has been observing with concern the growing exploitation of poor women in self-help groups by unscrupulous microfinance institutions that are charging steep rates of interest and thereby forcing the already impoverished sections into a further debt trap.


In this connection, the organisation referred to the strong-arm tactics employed by commercial and profit oriented corporate MFIs for enforcing loan recovery. In this connection, the case of the SKS in Andhra Pradesh has come to light recently. According to the AIDWA, these are not exceptional cases but rather the rule. In fact, such coercive practices are being resorted to by the MFIs across the country. The number of these MFIs is also growing because banks have not yet developed a women friendly infrastructure necessary for catering to the self-help groups. More significantly, formal banking institutions have failed to meet the credit needs of poor women. It is reported that 35 MFIs in the country are controlling 85 per cent of the market, most of which is comprised of poor women.


It is therefore important that the government of India must intervene and ensure that the interests of the poor are safeguarded from the greedy profit motives of this new breed of moneylenders. 


The AIDWA has also quoted its experience in Andhra Pradesh; this shows that by and large the MFIs are exploiting the people by levying very high interest rates and subsequently resorting to forceful collections as poor women are not being able to meet their demands. Statistics reveal that over the past few months, around 30 people have been forced to take their own lives simply because they were not able to meet the demands of such MFIs.


The modus operandi of these institutions is devious and results in undue harassment of the indebted women. Exploiting the situation that there are a large number of SHGs in the state of Andhra Pradesh, these institutions are targeting poor women, often in the name of eradicating poverty and offering welfare programmes for the poor. Once an MFI is able to persuade some women to form an SHG, the former imposes stringent conditions and pushes the hapless women into a debt trap. The MFIs get loans from commercial banks with the permission of the Reserve Bank of India (RBI), and then give out loans at high interest rates by using the slab rate method. They also collect deposits even before giving out loans.




Of all the Indian states, Andhra Pradesh is the best example of and is ranked first in the way MFIs have set up this web, trapping lakhs of poor and vulnerable women in their net. However, their mode of functioning involving high interest rates, forcible collections, harassment and physical beating etc is leading to a severe social crisis in the state. This is mainly because the banks’ linkages to the SHGs are by and large confined to paper. In the state of Andhra Pradesh, out of the 9.35 lakh groups, bank linkages have been given to only 4.3 lakh groups. This year, the Andhra Pradesh government had decided to give out Rs 12,000 crore in loans. However, only Rs 1,890 crore had been disbursed as loans till August this year. Since 2008, loans at the interest rate of 25 paise per month or 3 per cent per annum have been stopped. As a result, around 40 per cent of poor women are approaching the MFIs to meet their financial needs. It is reported that 30 such institutions have given loans worth Rs 25,000 crore in the state.


However, this is not a problem affecting only one state. In Orissa, recently, thousands of affected women came on to the streets of Bhubaneswar as part of a statewide protest rally on September 30. On the occasion, a delegation from the AIDWA met the finance minister of Orissa and the RBI authorities, bringing to their attention the extortionist practices of the MFIs in many of the rural areas. A survey done by the AIDWA shows that most of the MFIs charge interest on a flat rate basis, ranging from 15 to 45 per cent on an average; some were charging even highly exorbitant rates. The survey also revealed that most of the MFIs were contemptuous of the subsidy cum credit SGSY programme, generally referred to as Mission Shakti in Orissa. This is in total violation of the spirit of the programme that was intended to assist the below-poverty-line (BPL) groups. In fact, these MFIs have, in many cases, blocked the access of the self-help groups to the SGSY support. In the urban areas of Delhi too, the coverage of women’s SHG groups under the formal credit system is minimal. Here, most of the microfinance operations are carried out by an estimated 150 to 200 non-government organisations (NGOs). Many of these NGOs are unregistered and charge exorbitant interest rates of 25 to 50 per cent while banks charge only 10 to 14 per cent from these MFIs. 


In all these states, the AIDWA has been raising the issue of high interest rates and unethical practices of the MFIs. In response, the Andhra Pradesh government recently promulgated an ordinance to regulate the MFIs. This ordinance and draft bill has capped the interest rate at 8 per cent above the basic bank interest rate. At the same time, there are reports that the RBI and the union finance ministry have recently issued advisories to regulate the MFIs and ensure that they do not charge more than 22 to 24 per cent interest rates. However, the AIDWA’s opinion is that while both these developments are in the right direction, it is essential that these regulatory measures are backed up by institutional mechanisms which can enforce these measures. There are media reports that the MFIs are challenging the Andhra ordinance and are certain to oppose any attempts to cap the interest rates. Hence it is necessary that the government must demonstrate the political will to resist this attempt of the MFIs and protect the interest of the poor women.




Further, both the 8 per cent cap above the bank interest rate suggested in the Andhra Pradesh draft law and the 22-24 per cent cap being suggested by the RBI and the union finance ministry are unduly high and unfair. One may note in this connection that it is today possible to get a housing loan for less than 9 per cent and personal loan for 12 to 13 per cent. Thus the suggested interest rate caps too are too high. But, why should the poor borrowers in rural areas pay such a high rate of interest to these institutions? The RBI and the government must cap the interest rate being charged by all MFIs at a rate that is only marginally higher than the prevailing interest rate in a commercial bank, so that microfinance is not a profit making activity based on the savings of poor and labouring women. In this regard, the AIDWA is of the opinion that the SHGs should be provided credit at subsidised, lower interest rates, no matter who they are taking loans from.


Further, there is no single regulatory framework for the MFIs at present, nor is there an adequate definition of what constitutes an MFI. They exist in several legal forms both for profit and not for profit, as trusts, societies, cooperatives, non-profit non-banking financial institutions (NBFCs) registered under Section 25 of the Companies Act and profit-oriented MFIs registered with the RBI as NBFCs. Since there is no capital adequacy requirement for these societies and trusts, they are not subjected to net owned funds requirements or prudential norms. Hence, a larger exercise of identification, registration, and monitoring has to be undertaken at the macro-level. Further, the regulations should also cover those NGOs that carry out micro-credit without being registered as micro-credit, thrift or cooperative societies.


In the light of the above facts, the AIDWA has asked the RBI to intervene in this matter urgently and ensure that the women organised into SHGs are not exploited and harassed by the MFIs. It is essential that the government not only regulate and curb the activities of these MFIs but also extend cheap credit facilities through formal banking institutions in order to ensure that they are not left at the mercy of the MFIs.




1) The government must put in place a regulatory framework under the Reserve Bank of India to monitor all microfinance institutions and NGOs who promote and form SHGs and carry out thrift and credit operations as subsidiary activities. It should constitute an official mechanism at the local level for registration and regulation. 


2) This regulatory framework must curtail the high interest rates and the harassment resorted to by the MFIs. The interest rates of the MFIs should be capped and women should be provided loans at subsidised, lower interest rate, irrespective of what agency from which they are taking loans.


3) Stringent legal action should be taken against microfinance institutions which are indulging in extortionist practices, and have forced people to resort to suicides. Civil and criminal proceedings should be started against such organisations. Officials who resort to uncivilised methods for collections must be dealt with seriously.


4) The slab rate method of applying interest, and the system of weekly collections must be scrapped. Instead, the system of monthly collections may be adopted.


5) Infrastructural extension and easier accessibility of the SHGs to banks must be ensured.  


6) There must be an expansion of credit facilities for all urban and rural women through direct banking operations. There must be fixed a target for all banks to provide at least 10 per cent of their credit to the SHGs under the direct linkage programme in rural and urban areas. Interest rates for loans to the SHGs should be fixed at 4 per cent. This will ensure that poor women are not forced to go the MFIs for loans.   


7) The government must set up separate ministries to look into the SHG and micro-credit issues at the national and state levels. It must provide technical, financial and marketing support to micro enterprises.


8) The government must enact a law addressing all the above issues, to safeguard the interests of the increasing number of women who are organising themselves into SHGs, and to keep the MFIs and other similar bodies within a regulatory framework.