A fear of microfinance companies demanding repayment of loans has gripped rural Karnataka—so much so that some have fled from home or ended their lives. Stories of distress have come in from several districts including Chamarajanagar, Kodagu, Haveri and Belagavi. A woman in Magadi town on Bengaluru’s outskirts claimed that a company staffer was harassing her to sell her daughters’ kidneys to clear her loans; the woman has already sold one of her own kidneys to repay a part. There are allegations of recovery agents stalking women borrowers and even seizing properties, forcing families to desert home and hearth.
The spate of suicides and migration has turned the focus on the state government’s inability to rein in microfinance institutions (MFIs), some of which have morphed into loan sharks. Chief Minister Siddaramaiah met microfinance officials, announced stern steps against those adopting criminal methods to recover loans, and promised a new law to protect borrowers. The police have been directed to file criminal charges against those employing unlawful pressure; helplines have been set up, too. Karnataka has 31 licensed MFIs with Rs 59,367 crore in loans given to 1.07 crore accounts. Some of these institutions are allegedly violating interest norms and upper credit limits set by the RBI. While the central bank set a Rs 2-lakh credit limit, some MFIs are giving up to Rs 6 lakh, forcing the poor into a debt trap. Meanwhile, the business has grown manifold in the state—from 42 lakh clients in 2013 to 1 crore in 2022.
The state government is blaming the RBI for failing to set stringent checks. With the central bank deregulating interest rates in 2022, MFIs now charge 15.45-26 percent interest per year. This borders on the usurious compared to home and auto loans. It is ironical that MFIs, set up to disburse collateral-free microloans with the aim of alleviating poverty, empowering women and giving an entrepreneurial boost to the rural economy, have been given a free hand at profiteering. To curb such practices, the state plans to strengthen the Karnataka Microfinance Institutions (Regulation of Money-Lending) Bill. It should also negotiate an upper limit on MFI interest rates. A change in attitude is required, as the borrowers are largely unlettered people with unsteady incomes. It is cruel to leave them at the mercy of loan sharks.