Karnataka cracks down on microfinance firms as rural debt crisis deepens

People wouldn’t take loans at exorbitant interest rates of up to 30% if they had access to support from the state or banks.
Image used for representational purpose.
Image used for representational purpose.
Updated on
3 min read

The State Government is cracking down on microfinance institutions, using strongarm tactics to recover loans, and drafting a law to check their excesses. Stringent measures are required to reign in such firms that make borrowers’ lives miserable by pushing them into debt traps. But, that’s just one aspect of the solution.

The current crisis, to some extent, reflects a larger problem -- the distress in the rural economy -- and this calls for a holistic approach, including the law that is in the works.

The system’s failure also seems to be contributing to the problem as people would not take loans at exorbitant interest rates of up to 30% if they have any hope of getting help from the state or the banks. This has created a conducive market space for firms to charge unconscientiously high rates of interests.

According to those in the know of the registered microfinance industry’s operations, as of November 2024, the gross loan portfolio outstanding of the regulated players in the state was around Rs 38,000 crore. Overall numbers will be much higher. There are many players in the market, including non-banking financial corporations, trusts, moneylenders and firms offering loans online. Even some of those associated with the industry term it a ‘messy’ market.

The regulated players lend to households with an annual income of less than Rs 3 lakh a year. The average ‘ticket size’ -- loan amount for a single transaction -- is around Rs 40,000. Repayment has to be done in 24 months. The rate of interest varies from 19% to 23%. The interest rate to be charged is governed by the terms and conditions of the loan agreement between the borrower and the firm. In the gross loan outstanding portfolio, Karnataka is in the fourth position after Bihar, Tamil Nadu and Uttar Pradesh.

While giving loans they are required to check borrowers’ repayment abilities by getting their credit details. It is not clear if they comply with it, but even if they do, the information gathered may not be accurate as there will be no trail of loans taken from unregulated players. Companies looking for profits take risks and so do the people in urgent need of money that they would not get from the banks.

Industry-watchers say that earlier, most people used to invest around 80% of the loan amount on productive purposes and 20% on consumption. That trend almost reversed post-Covid, which led to the deterioration of the asset quality, thereby impacting firms’ profits. Perhaps that could be a reason for them to go harsh on the borrowers, though the firms deny the charges outright. Reports of people leaving their villages and in some cases resorting to extreme measures reflect the sad state of affairs.

This crisis in the rural areas prompted the government to jump into action. However, the government should be cautious as registered firms need to be regulated and not knocked out of business. In such a scenario, those unable to get loans from banks could be exploited by unregulated players and loan sharks.

Apart from taking action against microfinancers, the government needs to strengthen cooperative societies and Self-Help Groups (SHGs), which play an important role in fostering a healthy rural economy. Politics should be kept away from cooperative societies, and they must be empowered to expand their operations to give loans taking into account socio-economic changes in rural Karnataka.

The banks need to become more accessible and simplify the lending process, while the government needs to create awareness about the risks associated with taking loans at high rates of interest.

Leader of Opposition in the Assembly R Ashoka attributes the current crisis to the State Government’s failure to give loans to people through various boards and corporations. According to him, there is a Rs 1,055 crore shortfall in the allocation to various corporations that provide financial assistance to people, and that gap is being filled by microfinancen companies. Perhaps that could be one of the reasons that aggravated the situation.

Now that the government is showing the resolve to address the immediate crisis -- harassment to borrowers -- it must also consider constituting a commission to study the factors ailing our rural economy and take long-term measures for its rejuvenation.

The law to protect the people and ensure fair play in the market is a welcome move. Perhaps, that is a less difficult task compared to the challenge of getting to the bottom of the crisis to make lives better for the vulnerable sections. Can the Siddaramaiah government -- which has implemented five guarantee schemes with a financial allocation of Rs 56,000 crore -- initiate measures to rejuvenate the rural economy? Or, will it end up dealing with just one aspect of the serious problem?

Ramu Patil

Assistant Resident Editor

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