The microfinancing ecosystem in Karnataka has evolved well over the past two decades and has withstood the stresses of high cost of funds and enhanced provisioning for non-performing assets.
Published Jan 29, 2025 | 9:00 AM ⚊ Updated Feb 03, 2025 | 3:19 PM
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There has been a spate of tragic incidents over the past few months in which 14 people died of suicide allegedly due to harassment and arm-twisting methods adopted by microfinance institutions (MFIs) to recover loans.
The unfortunate incidents occurred in parts of North Karnataka — Hosapete, Yadgir, Raichur, Bellari, Belagavi, Bidar, Haveri, Shivamogga, and Davanagere, besides incidents reported from Ramanagar, Mandya, Mysuru, Nanjangud, and Chamarajanagar. The list seems to grow longer.
It is alleged that the staff of finance companies and agents resorted to aggressive recovery methods such as abusing the borrowers in the presence of the public/family, staying late at night in borrowers’ houses demanding payments, caste abuse especially targeting the women, and torturing them to sell household articles, vehicles and other movable and immovable assets at distress rates to settle the dues and loan accounts.
Karnataka has a significant presence of registered MFIs who play a crucial role in the financial inclusion of women/households that are at the bottom of the pyramid.
The MFIs penetrate to the deepest/farthest part of a district/taluk and lend small ticket size loans (₹10,000 – ₹20,0000), mostly to women under the Self-Help Groups ( SHG) under the joint liability model. Each group member will be a co-guarantor to the other. It works on the golden principle of cooperative movement — each for all and all for one.
The MFIs extend small loans to people in the informal sector, who have no access to formal banking, for profiles such as kirana store owners, auto/cab drivers, mobile canteens, flower/fruit/vegetable vendors, tailors, cobblers, tuition teachers, and small beauty/milk parlours where income assessment is tough and credit risk is high.
Hence, the Reserve Bank of India (RBI), post-2022, has permitted MFIs to charge interest rates based on credit risk assessment and profile with three riders: a maximum ₹2 lakh loan, the cap on a maximum of three loans outstanding from MFIs with 50% cap on the Income Instalment Ratio ( IIR) including all loans (total obligation ratio).
The interest rates range from 15% to 17% keeping given MFIs high cost of borrowings from banks, NBFCs and fixed deposits.
The MFIs who come under the umbrella of Non-Banking Financial Companies (NBFCs) are governed by the guidelines and directions of the RBI. They come under the surveillance of the RBI.
In Karnataka, the Asset Under Management (AUM)/loan outstanding of MFIs was ₹16,946 crore in 2019. It grew to a whopping ₹42,265 crore as of March 2024 with more than one lakh beneficiaries.
With the increasing deaths of borrowers and reports of harassment, the Karnataka government was forced to act immediately to prevent such incidents.
Chief Minister Siddaramaiah held a series of meetings on Saturday, 24 January, with the leaders of MFIs, cabinet colleagues, and senior officials from revenue and police departments to understand and assess the situation and to take corrective and preventive actions.
It is now proposed to draft an ordinance in the next three days to address this critical issue.
Since the matter of suicides, alleged torture, intimidation and harassment of borrowers by lenders has taken political overtones, Siddaramaiah and his colleagues should not rush in with some quick fix and ad hoc solutions to contain the situation.
For the proposed ordinance to be meaningful and effective, the government should take the following into cognisance:
Forensic audits should be conducted on all 14 deaths to understand the real reasons for the unfortunate loss of lives, and most importantly whether the cause of death was primarily on account of harassment and torture by the staff/agents of MFIs as alleged.
Segregation has to be done whether the lenders were the RBI-regulated MFIs/NBFCs or the unregulated MFIs, private moneylenders, pawn brokers or loan brokers who are cheating gullible borrowers by taking 10-20% commission.
Numerous financial entities and moneylenders operate under the guise of microfinance outside the RBI’s surveillance. So, the Ordinance should take care and ensure stringent punishment of imprisonment of up to three years for illegal money lending activities, charging exorbitant interest rates, resorting to unlawful recovery tactics and also abetting suicides.
Licences of such unregulated entities who resort to unethical practices should be cancelled.
All MFIs and NBFCs, who are functioning in the ‘ fair and fit’ method as per RBI guidelines, should not be ‘painted black’ with the same brush. They will be detrimental to the MF ecosystem.
For regulated MFIs/NBFCs, there is already a code of conduct and standard operating procedures (SOPs) as stipulated by the RBI for loan recoveries both for the staff and for ‘collection’ agents.
Police action can always be taken against erring staff/agents if warranted even without the proposed Ordinance. Any overlap actions contemplated in the proposed Ordinance by the government will deter credible MFIs from lending further to the poorer sections of society.
Need for agents
Banning agency services for loan recovery will be a knee-jerk reaction. Most banks (local and foreign), HFCs, and NBFCs outsource recoveries for logistic reasons. Agents being local, establish cordial chords with good resolution rates.
The system should be tightened by insisting on registration of the agencies, obtaining KYC of collection staff with company photo IDs, insisting on proper dress code, lodging their details with the local jurisdictional police stations and ensuring they follow the RBI-stipulated code of conduct. Otherwise, such staff will be taken on the rolls of the MFIs.
The MFI ecosystem in Karnataka has evolved well over the past two decades and has withstood the stresses of high cost of funds and enhanced provisioning for non-performing assets (NPAs).
Stringent clauses in the proposed ordinance should be aimed and directed towards the unregulated MFIs, and moneylenders and not on the regulated MFIs. Otherwise, it will be remedy worse than the malady.
Setting up ‘helplines’ (Sahaayavani) at all DC offices may not yield results. The affected people mostly poor are from far-flung and remote areas in Karnataka and cannot travel to the office to file complaints nor can call and explain their distress. Such complaints should be filed at the local police stations, or tahsildar’s office with a copy to the respective DC.
A bottom-up approach is desirable, considering the profile of the borrowers.
A “war room “ with real real-time “dashboard” should be operated at every DC office to know the progress of the cases and to deal with SOS calls.
These unpleasant episodes shouldn’t get undue publicity. Such publicity can snowball into mass withdrawal of fixed deposits, good borrowers becoming delinquent and fake complaints likely to be filed which will eventually put credible MFIs, borrowers/depositors in jeopardy.
(S Narendra is a Bengaluru-based Banker, Economist and guest columnist. Views are personal. Edited by Majnu Babu).
