Debt to microfinance providers resulted in widespread distress in northeastern Tamil Nadu, where we conducted research through the time of the COVID-19 pandemic. We found that the situation was most severe in hamlets with Adi Dravidar, Arundatiyar, and Dalit Christian majority populations.
The study started in January 2020. By July 2022, several women from these historically oppressed caste groups told us about their spiralling debt to banks and non-banking financial companies (NBFCs) that issue microfinance loans. Microfinance providers issue collateral-free loans to sets of five women who function as joint liability groups, with each responsible for the dues of any member who defaults. Microfinance providers charged these women up to 24% interest per annum on the loans they issued. They continued to levy this interest through the state-mandated moratorium and for any delays beyond.
Debts had naturally grown to unmanageable levels. Many of the women we spoke to lamented the harsh consequences that they faced. Ambigai, an Adi Dravidar agricultural daily wage worker in an arid village called Manathur, told us: “The microfinance loan officers are threatening us, saying that they will call the police and file cases against us, that they will seal our houses and prevent us from entering them, that they will lock our Aadhaar cards. Not only will we be denied loans from other companies and banks, the rice and dal we get every month from the ration shop will also be blocked.”
She was not alone; hundreds of others who had taken these loans said a loan provider had warned them of similar penalties.
A locked house in the brick kiln. Photo: Chinar Shah.
Who borrows from microfinance providers?
Microfinance aims to empower women to start their own businesses. Yet, contrary to the portrayal of microfinance borrowers as entrepreneurs, many loan recipients are debt-bonded daily wage workers. In our study region, it was women in landless households from historically lowered castes who borrowed from microfinance providers. The majority of them either did agricultural daily wage work in the village or migrated to work in brick kilns and sugarcane fields (Figure 1). They used microfinance loans to meet their basic needs. The high interest that the women paid came not from profitable small businesses, but from their low and uncertain incomes, and often, from additional borrowing.
Our quantitative surveys with 406 households in 2021-2022 show that close to 70% of lowered caste households and 40% of women from intermediate caste households had taken microfinance loans, compared with only 16% of dominant caste households (Figure 2).
The borrowers used the loans to buy food and pay for healthcare, dedicating 51% and 29% of the loans in part to these uses. Almost half, 45%, of the loans were also used in part to pay off past debts (Figure 3). This proportion rises to almost 80% for women belonging to lowered caste groups.
Another indicator of financial stress is the debt-to-income ratio. It stood at 179% on average, and is higher for lowered caste and landless households, at 210% and 190%. This means that household debt was twice as much as annual income, while debts are short-term and must be repaid within the year for the most part. The disaggregation by gender is alarming. The debt service ratio is 13 for men, meaning that for every 100 they earn, they must repay 13, and for women it is 115. While women can call on men in the household for help to pay loans, they still bear the mental, physical, and sometimes sexual burden of repayment obligations.
How did the situation get so bad?
Women struggled to repay their loans, often borrowing from moneylenders to be able to do so. Even before the pandemic, the women we spoke to said that they faced sleepless nights as microfinance loan collection day approached. They said they would regularly borrow from moneylenders to make their repayments. They had no option but to pay on the stipulated day irrespective of circumstances. Women emphasised the extent of non-negotiability saying that loan officers would insist on repayment even if there was a death in the family. Amudha Mary, a Dalit Christian woman from Selvanagar told us: “They collect their money over the corpse, saying ‘first you pay this and then you cry’.”
When the COVID-19 pandemic began, microfinance operations came to a complete standstill in India. The state issued a mandate requiring lenders to offer a moratorium that allowed borrowers the option not to make loan repayments for five months. This offered relief in the short term. Some households reported eating better than before despite the lockdowns, since they weren’t required to make microfinance repayments. However, lenders were allowed to levy interest at the regular rate of 24% per annum on the principal outstanding on the loans. Debt thus multiplied during a period when incomes came to a standstill. At first, the Reserve Bank of India (RBI) had permitted microfinance providers to charge interest on the interest outstanding to them as well as on the principal. The Supreme Court later reversed this decision, and microfinance providers refunded the compound interest collected.
After the moratorium ended lenders rescheduled loans, but with opaque terms which were not shared with the borrowers. The borrowers said they had no idea how the amount due each month was being calculated or how many instalments they finally would have to pay. In the weeks before the second surge in COVID-19, when it had seemed like normalcy was returning in India, microfinance providers had started netting off loans. They offered larger loans to borrowers and deducted previous dues at the time of disbursal. Those who had availed themselves of this then discovered in a short while that they had much higher debt and microfinance providers did not offer a moratorium when lockdowns were enforced again.
Spiralling debt after the pandemic
Microfinance companies instructed loan officers to continue permitting delays on a case-by-case basis in order to prevent mass default. At the same time, they stressed to clients that interest would be levied for any delay. Women who had borrowed from microfinance providers explained that they had no choice but to agree to this. For instance, soon after the moratorium ended, Parvati, a Dalit woman from the colony in Pudur, said: “I told them to charge as much interest as they want, I will pay it later. I have no money at all now.” By the end of 2021, many borrowers to whom we spoke had missed some monthly payments. Borrowers who belonged to dominant and intermediate caste groups were more likely to own land and livestock, and they had been able to repay loans with income from cattle rearing and by borrowing from other sources.
Borrowers who belonged to lowered caste groups and landless households, who migrated to brick kilns and had missed work seasons for two years, were unable to pay their dues.
A woman shows her microfinance loan repayment record. Photo: Nithya Joseph.
By the end of 2021, for many women, the interest pending on unpaid loans exceeded the principal loan amount and ran into thousands of rupees, the equivalent of income they would earn over several months. In early 2022, Parvati said, “I had Rs 11,000 outstanding in March of 2020. The loan officer came yesterday and told me that now I owe Rs 19,000 in interest alone. There is no way at all for me to get so much money. I am sitting here waiting to find a way out.”
Loan officers from several microfinance institutions working in the area confirmed that their branches faced overwhelming defaults. The majority of their pre-pandemic clients had stopped paying dues despite repeated visits by them. Microfinance providers had also sub-contracted collections to companies who employed loan recovery agents. Loan officers and recovery agents reminded borrowers that companies could use the credit bureau infrastructures to blacklist any defaulters, barring them from all sources of formal credit. Many women told us that loan officers told them: “Don’t pay us, but remember you won’t be able to get a loan from a single other source.”
The gendered financial exclusion as a result of the credit bureau and JAM infrastructure linkage.
Indeed, the registration of loans on the credit bureau and the Jan Dhan-Aadhaar-Mobile (JAM) linkage have made it impossible for clients to negotiate relief without severe repercussions. Microfinance providers can blacklist defaulters using their biometric identification, barring them from all formal loans until they clear their dues, effectively holding them hostage till they are repaid. Microfinance providers had been instructed to stop collecting Aadhaar data in 2018 and to delete records of numbers they had previously collected. However, reports have shown how the credit bureaus to whom they had submitted the data were able to match women to their Aadhaar and send the data back to the microfinance providers. Some women borrowed at even higher interest rates from other sources to repay loans to microfinance providers; others returned to borrowing exclusively from moneylenders.
MFI automatic deduction notification by SMS. Photo: Chinar Shah
Meenakshi, a widowed female agricultural wage worker from a village called Pudur, stated: “A few months ago I tried to get a loan from another microfinance company, but they checked their system and said that they can’t lend to me until I repay the amount outstanding on my loan and come to them with an NOC [no-objection certificate]… I had to pay my daughter’s school fees, so I went to a money lender and borrowed from him at 4% interest per month.”
This cycle of gendered financial exclusion of the most vulnerable was ubiquitous.
Till the end of 2021, the management of these companies had instructed loan officers not to enforce the joint liability clause when women struggled to pay their own dues, knowing from past experience that this could trigger resistance. By mid-2022, they were using the credit bureau linkage to hold women collectively accountable. A woman called Vasuprabha explained microfinance companies club five to six groups together and call them a centre. These centres, comprising up to 30 members, were being held jointly liable. “Earlier they put OD (overdue) only for one person,” she said in April of 2022, “now they are putting centre-OD; if even one person hasn’t repaid, no one can borrow from any company.”
Supporting lending institutions and not the poor during the pandemic
Microfinance providers received the support of the state in the form of low interest loans and credit guarantees during the pandemic. Microfinance lenders were offered loans at the repo rate of 4% per year against securities. The government assured banks that they would cover up to 75% of any defaults on loans that microfinance providers had taken from them to on-lend to their clients. At the same time the Union government cash and food aid to poor households during the pandemic was paltry. Cash transfers of Rs 500 were offered to one woman in each household for the first three months of the pandemic, while incomes were disrupted for two years. Five kilograms of additional grain was provided free to poor households for the duration of the pandemic along with the subsidised food rations already being offered. Households had to borrow to meet all other basic needs – or went without them.
A member of our team conducts the Depleted by Debt quantitative survey. Photo: Chitra S.
Microfinance sector reforms dismantled protections for poor women
In March of 2022, the RBI announced a revised regulatory framework for the microfinance sector that incorporated many changes that microfinance providers had demanded. The RBI agreed to many of their requests, announcing a revised regulatory framework for the sector In March 2022. The changes included removal of the cap on interest rates, an increase in the lending limit, and permission for risk-based pricing. This effectively meant removal of protections put in place after the microfinance crises in 2009-2010 when aggressive lending had spurred a crisis of over-indebtedness. Following the reforms, the microfinance sector has seen rapid growth. The higher interest rates charged to clients made it easier for them to attract them. The raised lending limit meant that they could lend more to each client. Microfinance providers have expanded operations in new regions, which have higher poverty levels and more economic uncertainty. Following these changes, the RBI repeatedly expressed concern that microfinance providers are charging interest at usurious rates and raised alarm that the rapid growth is causing defaults and borrower distress. Recently, regulators have declared that the sector is now facing a crisis caused by the reforms.
Self-help group bank linkage for equitable financial inclusion
Another mode for issuing small loans to women, called the self-help group bank linkage programme, preceded microfinance lending in India. In this model, groups of women come together agreeing to pool savings each month and make loans to each other from the corpus of funds. They share the interest earned. When they are able to show effective functioning, banks sanction them loans at an interest rate of around 12% per annum. This is the same rate charged to other borrowers and half the rate of microfinance loans. Self-help groups continue to operate across the country; but this programme now competes with microfinance providers for bank funds. In India the majority of capital for microfinance loans come from public and private sector banks. Starting in 2011, banks have been permitted to count microfinance loans as part of their priority sector lending targets. Banks meet these targets by issuing loans to microfinance providers to on-lend to their clients, entering into co-lending agreements, or even acquiring MFIs. The higher interest charged to clients and higher collections efficiency from door-to-door visits by loan officers make microfinance loans more profitable than self-help group loans.
In our study region, as elsewhere, women from dominant caste households were much more likely to be members of self-help groups (Figure 4).
While the Union government aid promised to self-help groups at the onset of the pandemic was not provided to them, self-help group members were able to take loans from within the group and from the bank to invest in agriculture, livestock, and small enterprise. Self-help group members were generally more able to negotiate delays and concessions following the pandemic. This was both on internal loans and on loans from banks. Self-help group loans are not registered on the credit bureau, and bank managers have more flexibility in granting waivers. Adi Dravidar, Arundatiyar, and Dalit Christian women were much less likely to be members of self-help groups, and so most didn’t have the option of accessing this credit. Even the few self-help groups with lowered caste group members that did exist were being denied new loans from private sector banks after the pandemic began. This was because of defaults on microfinance loans by others in their joint liability group. The same banks engage in joint liability microfinance provision and self-help group lending, and they could use data from one part of their operations to make decisions about the other.
Microfinance borrowers doing construction wage work. Photo: Sowparnika G.
A pandemic-accelerated process
For the past 20 years, we have been exploring the profound transformation of village economies as members of the Observatory of Rural Dynamics and Social Inequalities in Southern India. We have followed the increasing expansion of financial markets. We have seen how debt compensates for insufficient and irregular incomes from wage labour as well as inadequate social transfers, subsidising private capital and compensating for a failing welfare state. The pandemic accelerated this process.
The state supported microfinance providers during the pandemic at the cost of poor women. The reforms to the microfinance sector enforced by the RBI in 2022 allowed changes that are counter to the interests of the women who take these loans. Microfinance loans have become more expensive, and the revised lending limit means there is more danger of pushing borrowers into unmanageable levels of debt. Strengthening mainstream bank lending to self-help groups would have been a way for policymakers to aid pandemic recovery through equitable financial inclusion. Even now, the priority for financial inclusion in India should be to include more landless women from lower caste groups, who are employed in precarious work, in the self-help group bank linkage programme. This would grant women access to lower interest loans that offer more flexibility in times of crisis and be less likely to cause debt distress.
Nithya Joseph, Venkatasubramanian Govindan, Isabelle Guérin, and Sébastien Michiels are scholars at the French Institute Pondicherry.