Banks drive self-help groups into microfinance debt trap

Starved of legitimate credit, SHGs are borrowing at exhorbitant rates

“To meet RBI targets on priority sector lending, banks are taking the softer option of lending to MFIs instead of SHGs directly,” said Nabard Karnataka Chief General Manager Venkatesh Tagat.  “As MFIs take responsibility for loan disbursal and recovery, this is an easy way way out for banks,” he added.

According to Nabard estimates 5,70,000 SHGs have been linked with banks in Karnataka. But only one-third of these have been able to actively borrow from banks. While banks favour MFIs all over India, in Karnataka, the bias is particularly acute. According to Nabard data, banks lent Rs 2,600 crore to MFIs and just Rs 1,000 crore to SHGs in Karnataka in 2009-10.  In contrast, all-over India bank lending to SHGs at Rs 14,450 crore, outweighed the funds given to MFIs at Rs 10,700 crore, in the same period. Even Karnataka-based commercial banks which lend generously to SHGs in other states are holding back here. Canara Bank and Syndicate banks lent just Rs 42 crore and Rs 34 crore respectively to SHGs in 2009-10 despite having excellent local network. Ironically, these banks respectively gave Rs 142 crore and Rs 189 crore to SHGs in Andhra Pradesh.

Activists say SHGs have better access to bank credit in AP as the state government is actively promoting them and putting pressure on banks to provide funds. “AP has various programmes to help SHGs use bank credit for income generation activities,” said Kolar’s Grameena Mahila Okkuta Administrator M S Jayalakshmi.

Ironically, despite better access to bank credit, MFIs are also more active in AP as the number of SHGs and their demand for credit seem to be higher. “The government programmes have not reached all sections of the population and MFIs stepped in to fill the gap,” said Jayalakshmi. “In AP, MFIs targeted SHGs, which were already borrowing from banks, and gave them loans aggressively,” says Tagat. This saw SHG members borrowing from multiple sources and wading into a debt trap.

Banks typically charge 12 per cent interest rate to SHGs, which in turn may lend to their members at 18 per cent per year.  But as bank credit is difficult to come by, SHGs borrow from MFIs at rates ranging between 24 and 36 per cent per year. As the authorities are moving in to regulate MFIs, activists say they should not turn off the tap for timely credit. Tagat says making banks step up credit to SHGs is the best long-term solution to the problems posed by few MFIs.