It is time the Karnataka government took robust steps to monitor and regulate the working of microfinance institutions (MFIs). Already weighed down by the impact of the agrarian crisis across the country, the state’s rural population is struggling with the additional burden of mounting debt, much of which is owed to local moneylenders and MFIs. Karnataka is among the states where MFIs have penetrated the population the most. According to a National Bank for Agriculture and Rural Development (NABARD) survey, at the national level, 23% of households have at least one member associated with an MFI. The reach of MFIs in Karnataka is way above this average, with 40% of the state’s households borrowing from MFIs. Karnataka stands fourth in the country in this regard, after Andhra Pradesh, Telangana and Odisha. On the face of it, access to MFI loans is welcome, especially since India’s small and marginal farmers are unable to access institutional loans as they lack collateral. Access to MFI loans was seen as a positive a decade ago, and they were seen to be less exploitative. MFIs were heralded as having the potential to bring about change in developing countries. However, over the past decade or so, the true face of MFIs has become visible not only in India but in other countries, too. Most MFIs charge usurious interest rates, far higher than banks and almost as high as moneylenders. Besides, they use strong-arm debt recovery tactics that have pushed hundreds of indebted marginal farmers to commit suicide.
It was in the context of a surge in suicides in rural Andhra Pradesh a decade ago on account of farmer indebtedness to MFIs that the Andhra government made it mandatory for MFIs to register themselves with district agencies and provide details of interest rates they charge borrowers. Last February, the Reserve Bank of India set up an ombudsman to monitor operations of non-banking financial companies. However, the Karnataka government continues to ignore the predatory practices of MFIs.
Microcredit is welcome as the poor need access to money to begin and run businesses. Studies on micro-credit underscore that providing borrowers training in investment and running a business is necessary to ensure that they use the credit for productive purposes. This, they note, is necessary to enable marginalised sections to dig themselves out of poverty. However, MFIs operating in Karnataka are not training borrowers to use the loans productively. Indeed, they are known to encourage borrowers to get into a debt trap. Writing off farm loans does not help those borrowing from MFIs. The Karnataka government must act to protect marginal farmers from the exploitation of MFIs.