The microcredit sector in Andhra Pradesh recently saw a series of challenges and mishaps as a result of extensive and uncontrolled lending. The overall effect was over-indebtedness and, consequently mass loan repayment defaults. Lending institutions resorted to unethical financial activities for recovering loans, such as confiscation of property and social shaming of the defaulting borrowers. These actions by the microfinance institutions led to widespread suicide cases among microfinance borrowers. This paper critically explores the disadvantages associated with the microfinance sector, especially among the poor in the society who hold to the perception that loans can provide their exit to poverty. The piece of writing will primarily focus on the case study of the microcredit borrowers in Andhra Pradesh, India. A brief overview of the microfinance concept will be provided in the first section. The second part will incorporate the description of the case study context in regards to the disadvantages of microfinance. The major cons that will be comprehensively examined in the paper, include the rising death cases among borrowers due to financial stress, deepening poverty, high-interest rates, in-dignifying the borrowers, and overall decline in the community cohesiveness. These cons contributed to the crisis of Andhra Pradesh which rose to become a reference point as a catastrophic financial intervention of the century. The paper concludes by suggesting a community-based approach to lending that ties the level of credit to sustainability and viability of a micro venture.
Keywords: microfinance, poverty, Andhra Pradesh, self –help groups, India, women.
Brief Description of the Microcredit Concept
Isserles (2003) defined microcredit as a poverty eradicating program aimed at granting small loans to the low-income earners who cannot access mainstream financing to improve their livelihoods. Such microfinancing is aimed at encouraging the borrowers to become small-scale traders and farmers. Therefore, the microfinance institutions (MFIs) play a crucial role in rendering financial access in terms of loans to poor households (Kumar & Sensarma, 2017). In some instances, the MFIs advance their loans to individuals without the need for collateral. They achieve this by utilizing a system known as group collateral. Group lending is mostly preferred because of their better performance and desirability. Most MFIs require weekly or biweekly loan repayments in addition to attending group meetings, where the rebates are collected (Isserles, 2003). Since most of the recipients of the loans have no or few assets, the group members act as collateral- commonly known as ‘social collateral’ (Isserles, 2003). As such, fellow members provide the required pressure necessary to ensure loan repayment, and if one member fails, the entire team is held liable.
The principle of micro-lending originates from a Bangladeshi economist, Muhammad Yunus through his bank Grameen which means village (Isserles, 2003). Grameen Bank was established in 1983, the largest in Bangladesh serving over two million dollars members and operating 1,046 rural branches in 34,913 villages (Isserles, 2003). According to Isserles (2003), the micro-lending institution has a cumulative investment exceeding one billion US dollars. The Grameen model stipulates that any given group should compose six non-related members having same socioeconomic status in regards to assets and housing arrangements. In the beginning, two members are allowed to access loans, then after four weeks of exemplary performance, another two members are granted loans (Isserles, 2003). Excellent performance in Grameen's model is when the borrowers successfully attend all the weekly meeting and repaid their loans promptly (Isserles, 2003). When the loan cycle finally ends, and the group members consistently made payments, they can seek more massive investments to improve their lives by expanding their business ventures.
In India, microfinancing is dispensed through two broad instruments namely Microfinance Institutions (MFIs), which are the institution that grant microloans, and Self-Help Groups (SHG) (Shylendra, 2006). MFIs may operate as Non-Governmental Organizations (NGOs) or Non-Bank Finance Companies (NBFCs). On the other hand, SHG may act as bank linkages (Shylendra, 2006). Over the years, despite significant growth in MFIs, the overall national outreach is tremendously low, as only a fraction of the intended population is reached and served. Notwithstanding, the broad network of cooperative and banking commercial institutions coupled with strong microfinance aspects in a variety of programs continue to enhance the financial performance of India. However, it is interesting to note that South of Asia being home to some of the main MFIs and other microcredit outreach programs, millions of low-income earners still lack access to semiformal or formal financial services. Presently, only about 12% of poor Indians have access to Microfinance Institutions including other outreach services such as SHGs, NBFCs, NGOs MFIs, cooperatives and micro-lending commercial banks (Priyadarshee & Ghalib, 2011).
Microfinance Institution in Andhra Pradesh
The majority of Indian states faced the initiation and the subsequent development of SHG movement, which is the starting point of Indian micro-financing, the Andhra Pradesh government systematically developed and nurtured SHGs by using public resources for political reasons (Mader, 2013). In the long-run, October-2010 when the crisis of microfinance erupted, SHGs were deeply entrenched in the Andhra Pradesh culture (Mader, 2013). The local government, therefore, comprising an independent body, Rural Poverty Elimination Society tasked the institution with institutionalizing Indira Kranthi Patham (IKP) projects throughout the twenty-two districts in Andhra Pradesh (Priyadarshee & Ghalib, 2011). The methodology of the project comprised organizing and mobilizing rural women into Self Help Groups of about 10-15 members (Priyadarshee & Ghalib, 2011). Group activities involved regular saving from member women, accessing financing from both external and internal sources, and regular member weekly meetings except for those groups which are newly formed (Priyadarshee & Ghalib, 2011).
The Self-Help Groups are further federated within village levels to Village Organizations (VOs), which further devolved at the mandals or sub-districts to become Mandal or Samakhyas Organizations (MOs) (Priyadarshee & Ghalib, 2011). All groups within a locality nominate two of its fellows to their corresponding VO, and one member if a village has more than 20 of such groups (Priyadarshee & Ghalib, 2011). On the other hand, every VO in a given sub-district elects two members to their concerned MOs. More importantly, the MOs organizes themselves to form District Organizations (Dos) or Zila Samakyas within their respective districts (Priyadarshee & Ghalib, 2011). Thus, the institutions increasingly got involved in the implementation and observing a variety of state projects ran through IKP. The network of the SHGs illustrated in the state is the largest and most inclusive among in whole of India. Besides, the system constitutes the most critical infrastructure necessary for smooth operations of microfinance activities comprising private sector Microfinance Institutions within the country.
According to Gupta (2012), there was a growth of 4.9% and 17.6% of SHG-Bank clients and MFI clients between 2010 and 2011 across India. Andhra Pradesh state alone accounts to 20% of the total number of SHG clients in India with over 14,000 Self-Help Groups out of the 69,000 groups in the country (Priyadarshee, & Ghalib, 2011). The state only accounts for about 7% of India's total population (Priyadarshee, & Ghalib, 2011). Due to the vast and rich infrastructure network, MFIs do not need to invest in raising awareness or organizing the marginalized in the state, unlike other areas. Microcredit as a lending technique plays a vital and inherent role bringing together the poor, who took the microloans, by reducing the costs of the transaction and through the principle of joint liability. As such, high transactional costs often discourage potential creditors, especially those from far-flung areas making it expensive and inefficient for MFIs to reach and sustain their lending operations (Shylendra, 2006). Organizing the poor has been proven to significantly reduce transactional cost by up to 40% for banks compared to direct lending (Kar, 2013). The success is attributed to the intermediation of NGOs and Self-Help Groups.
The link between the SHGs and NGOs is critical because it renders cheaper costs for lending, particularly among the poor by minimizing transactional expenses (Kumar & Sensarma, 2017). Consequently, this contributes to the overall sustainability and viability of credit to low- income earners. In regards to joint liability, Kar (2013) noted that prompt loan repayments are made possible by the team-based lending model, where members even though not jointly liable to pay each other’s loans are subjected to some social guidelines to encourage timely loan repayments. As Isserles (2003) observed, the closely-knit family ties and social fabric in Andhra Pradesh, as well as, the relationships between the borrowing members give way to internal pressure for loan repayment. Through such peer monitoring, group's performance regarding borrowing is significantly improved as members act as insurance.
The massive presence of MFIs and SHGs coupled with the abdication of the role to regulate the microfinance sector encouraged the explosion of microfinance institutions in India, particularly in the state of Andhra Pradesh (Mader, 2013). Therefore, as the households within the country benefited from accessing microcredit from government programs, other private microfinance institution flocked the state to leverage on the already established infrastructure in Andhra Pradesh. According to Bandyopadhyay & Shankar (2014), while to the private microfinance institution, it was easier to build and operate their business ventures leading to an oversupply of microcredit, to households within the state the move eventually led to unforetold crisis witnessed not long ago.
Andhra Pradesh Microfinance Crisis in Perspective
The Andhra Pradesh microcredit crisis and the widespread coverage by the global media, such as The Economist and The New York Times re-ignited discussions on the best microfinance strategy for alleviating poverty among the poor and low-income earners within a rural set-up (Taylor, 2011). Chief among the reasons for the international publicity surrounding in what was seen as a local problem was the extent of private MFIs, expansion in the state-run programs, and the integration of the private microcredit ventures with international caucus for capital. At the end of 2009 close to 12 billion US dollars in foreign capital inflows had trickled to the rural state of Andhra Pradesh (Kumar & Sensarma, 2017).
The development followed a threefold expansion witnessed since the year 2007, as microfinance investment became a trendy venture concerning venture capital, sovereign funds, and pension funds (Imai et al., 2010). However, Shylendra (2006) contend that the unprecedented growth and development of the microcredit sector could not efficiently resolve Andhra Prader's underlying socioeconomic challenges and tensions. Instead, it only amassed them into an unviable lending system which was unsustainable and temporary (Mader, 2013). At the end the borrowers mostly, the poor underwent untold suffering as most lost most of their properties to loan collectors, loss of loved ones through suicide, and civil unrests characterized their daily lives.
As the microfinance institutions uncontrollably sprouted, so did the appetite for loans of the poor residents of Andhra Pradesh. Taylor (2011) postulates that the proliferation of credit led to increased indebtedness since the households used multiple debt sources including informal lenders and microfinance institutions. Mader (2013) observed that there were demonstrations by the borrowers who demanded their title deeds which had been seized as collateral. Most of them did not understand the repercussions of critical borrowing. According to Kaur and Dey (2013), the growth of clients and loan portfolio in 2009 was 57% and 95% respectively. The huge debt to income proportion left many borrowers unable to continue repaying their loans leading to increased default rates (Agbola et al., 2017). As a result, many households faced challenges ranging from loss of property and in some severe case, mental pressure\ death as will be outlined below.
Cons of Microfinance
Majority of poor people in Andhra Pradesh, India, who form the largest population that borrows loans only manage to develop and mobilize resource for development gradually and over an extended period. Access to financial services can enable the poor to improve their livelihood (Taylor, 2011). However, it is vital to point out that the conventional banks and other financial institutions seldom advance loans down-market to serve the low-income families. The poor are often denied access to the loans for a variety of reasons, making interest rate or other terms of credit discussion irrelevant to them. As such, the underlying problem does not dwell much on unaffordability of the credits but the perceived benefits of the microfinance to the poor (Agbola, Acupan & Mahmood, 2017). Microfinance has been largely characterized by unsuccessful attempt to reach and target the community members who are in grave need of assistance (Agbola, Acupan & Mahmood, 2017). As illustrated in the case study of Andhra Pradesh, the expansion of microfinance has been associated with other cons including;
a) Rising Death Cases among Borrowers (Mental-Pressure)
During the microfinance crisis, India witnessed rising cases of suicides among loan defaulters (Saxena, 2014). The media swiftly turned their attention on Andhra Pradesh, because it represented the highest influx of microfinance institutions and programs, both private and state- sponsored, immediately, it was clear that most of the victims in the state were poor rural farmers (Mader, 2013). The media quickly connected the deaths with the poor farmers’ inability to repay their loans. The deaths represented the largest crisis ever witnessed in the fast-growing microfinance sector revealing the deep flaws in the thriving industry (Bandyopadhyay & Shankar, 2014). As a result, the crisis sparked myriad of into corruption claims in MFI activities and prompted studies to explore the viability of various microloan programs worldwide.
What is more painful, the families of the affected borrowers did not get a chance for justice. The Microfinance regulatory body sought the services of an independent consulting firm, to investigate the suicide cases (Mader, 2013). The consultant confirmed and ascertained that there was a strong link between the actions of the MFI staff and the suicide cases of the borrowers (Mader, 2013). However, the MFIs prevented the firm from publishing the report and went ahead seal the information from the public. Up to that point, the microfinance institutions operating in Andhra Pradesh neither admitted any wrongdoing nor pay any compensation (Mader, 2013).
Microfinance models have strived to fill the gap. Some of the approaches such as Self-Help Group bank linkages play a profound role. However, the outreach remains shy in regards to the extent of the number of poor homes served. A recent survey by Mader (2013) found that there exist relatively low participatory levels among the most impoverished household in India. Besides, most of the microfinance clients hail from only four of the southern states-Tamil, Nadu, Kerala, and Andhra Pradesh while the more expansive northern part is mostly underserved (Priyadarshee, & Ghalib, 2011). On the other hand, Shylendra (2006) is of the view that for microfinance to thrive in a large and diverse economy like India, it is imperative to include some microfinancing approaches. Therefore, private micro-financiers should incorporate professionalism to no small extent. According to Hohns (2008, p.13), “Microfinance institutions with their access to highly knowledgeable finance professionals, should not have any difficulty in assessing the business plans that underlie the loan requests.” The government on its part can help by laying the adequate infrastructure for MFIs to thrive, such as an enabling and flexible legal and regulatory policies.
Microfinancing was seen as the newest solution to poverty eradication owing to an extensive list of people who have overcome poverty through the micro-lending (Hohns, 2008). More importantly, the facility has helped underline the significance of access to credit for marginalized sections of the society including women in the lending process. Microfinance proponents believe women empowerment economically and socially as the gateway to poverty alleviation. Kumar and Sensarma (2017) however, believe that microfinance successes might be exaggerated, there is no doubt that some transformations have been realized by the people who have accessed the service. Notably, women from repressive surroundings, micro-lending has enabled them to obtain necessary training and skills in literacy levels, health, and nutrition. Isserles (2003) notes that contraception use and child immunization have tremendously improved not only among borrowing women members but also among non-borrowing women members hailing from areas where microfinance programs exist.
The expansion of microfinance institutions in Andhra Pradesh has been sustained for the past two decades (Taylor, 2011). However, concerns emerged over the way these institutions have represented the poor as ‘entrepreneurial subjects.’ Most of the borrowers have been made to believe that formalized financial systems will foresee their way out of poverty (Taylor, 2011). According to many politicians and many decision-makers, the vice of using the poor is mainly due to the rise of profit-making ventures that proliferated and dominated the sector that was once a reserve of the NGOs (Mader, 2013). Recent development in regards to MFIs in Andhra Pradesh in which the sector was seen as exploiting the poor by some media stations and some residents from Andhra Pradesh. MFIs ceased to be seen as a solution to most poverty-related problems but as an exploitative avenue for the already impoverished folks.
As Priyadarshee & Ghalib (2011) observed, the MFIs operating in Andhra Pradesh state in a bid to maximize returns, oversupplied the poor folk’s credit which they could not resist. As a result, a phenomenon referred to as aspiration paradox occurred- a situation where the poor household in Andhra Pradesh could not sufficiently gage their loan repayment abilities. The condition was further compounded by some of the MFIs advancing credits in the form of consumables, for example, television sets- which is not income generating thus worsening the indebtedness level of the poor (Bateman & Chang, 2009). Therefore, the poor who had borrowed loans from the MFIs began defaulting on the loan repayments. Consequently, the micro-lending resorted to various coercive techniques to recover their monies. The developments led many borrowers to take extreme actions such as taking their own lives, a situation that drew greater global attention as to the extent of the crisis.
b) Making the Poor even Poorer
Bateman & Chang (2009), support the view that the microcredit institutions have particularly ignored the basic economical aspect of scale in agriculture. Interestingly, microfinance terms and conditions do not support the objective of sustainable agriculture. Most MFI interventions result in the proliferation of overly unsustainable agricultural entities, and subsequently the decline of the sector. According to Mader (2013), most of the largest commercial banks in India in 1969 focused their lending strategies on the agricultural sector. The share of the banks in the agricultural sector and rural credit rose from three percent to fifteen percent. Consequently, as Mader noted, there was “a growth of non-agricultural output in rural areas and an expansion of small business activity.” (2013, p.48). The performance of the agricultural sector in the rural areas greatly reduced since most of the farmers transformed their agricultural activities into business. The phenomenon also saw the collapse of the informal credit sector which was dominated by the landlords, traders, and lenders, whose household debt shares reduced by almost a half during the 1970s (Mader, 2013). The Indian agricultural sector employs about a half of the labor force of the country. However, the credit expansion from the MFIs led to the farmers’ crisis making the agricultural sector to generate approximately eighteen percent of the gross income despite being the biggest employer (Mader, 2013).
Taylor (2011) observed that a considerable percentage of monetary resources are often channeled through highly efficient financial institutions- the new generation microcredit institutions, but into extremely inefficient microbusiness. The microcredit-induced selection process is at the moment increasingly viewed as contributing negatively to the sustainable development and growth in the Indian state of Andhra Pradesh. As Priyadarshee & Ghalib (2011) report, the absence of the scale of economies in the Andhra Pradesh’s microfinance model seriously damaged both local economy and national economy. Consequently, an average Indian firm is far much smaller compared to most businesses located in other emerging economies. A continued emphasis on microfinance institutions to creating microenterprises only compounds the problem further.
Moreover, the highly-growing profit-driven microcredit to subsistence farms which did not have proper access to finances heightened in Andhra Pradesh in 2006 (Taylor, 2011). Indeed, it is true that most of the state's subsistence farmers required external financial support, though it should not have been in the form of microfinance. The prevailing and expected financial gains from the microenterprises were extremely little to warrant engaging in commercial microfinancing (Taylor, 2011). Notwithstanding the concerns raised by various stakeholders, the commercial MFI’s pushed their way furthering their activities in the state, thereby entrapping thousands to a vicious dependency circle amid growing debts. The situation drove many farmers to a condition of despair as the state experienced a circumstance whereby those who borrowed became enslaved by the microfinance institutions, a clear indication of the project’s catastrophic failure.
c) Charging Extremely High-Interest Rates
The exorbitant interest rates, reported as high as 60%, leveled by MFIs in Andhra Pradesh attracted myriad of criticism within India and beyond (Kaur & Dey, 2013). Microfinance proponents characteristically situate their interest rates capping in ways aimed at comparing affordability of their loans in regards to money lenders, in a way to be seen as somewhat fair in an absolute sense. However, still, the interest rates remain high compared with the major commercial banks. The state government of Andhra Pradesh had close down fifty MFIs due to usurious interest rates charged to the borrowers (Taylor, 2011).
MFIs manage to conceal the actual cost of their loans by providing limited disclosure information to their poor, illiterate and unsuspecting women clients (Priyadarshee & Ghalib, 2011). The widespread criticism of the high rates of interest charged by various MFIs in Andhra Pradesh state triggered a widespread revolt among disgruntled borrowers who were about to lose all their possessions to the microcredit institutions. As a result, in March 2006, the district authorities shut down more than 50 branches belonging to two major microcredit institutions operating in the district of Krishna, Andhra Pradesh (Shylendra, 2006). Some of the borrowers voiced their complaints to the authorities claiming usurious rates of interest from the poor and use forced measures in recovering loans.
The media particularly carried out many stories highly critical of MFI's roles in alleviating poverty (Shylendra, 2006). Besides, the issue came forth before the Committee of State Bankers held in 17th March 2006 (Shylendra, 2006). Andhra Pradesh's Chief Minister who steered the meeting took a tough stance towards MFIs when he alleged them as highly exploitive by charging extremely high interest rates and using unethical ways to recover their loans. The chief minister expressed worries that the microcredit institutions had turned out to be worse than the local money lenders by leveling interest rates exceeding 20% (Shylendra, 2006). Further to the happenings, it was alleged that more than ten microcredit borrowers in Krishna had committed suicide due to their inability to repay their loans. Shylendra (2006) contends that three essential allegations were evident during the Krishna crisis. First, exorbitant interest rates coupled unethical practices such as forced savings, utilizing flat rate interest calculation method, adding unnecessary services charges surpassing annual interest rates made the loans look incredibly costly (Kaur & Dey, 2013). As a result, the overall cost of borrowing surged immensely for the poor. Additionally, the institutions lacked transparency about the interest rates charged thus helping them transfer different costs to unsuspecting clients.
Second, the MFIs resorted to unethical methods of loan recovery methods, which involved title deeds confiscation, use of abusive language and intimidation, and incorporating many products such as insurance, savings, and loans to enable prompt recovery. Lastly, the MFI actively engaged in acts of poaching members from other banks and government self-help groups. As Mader & Sabrow (2015) asserted, the MFIs lured members of from government schemes by liberally advancing them loans: thus, leading to many borrowing, further locking members in a vicious cycle of poverty and debt. Lewison stated, "Given the shameful reality that the "poor pay more," perhaps scholars of business ethics need to look into the practical possibility of applying the usury-free model in such a way to assist the financially disenfranchised who suffer from abnormally high-interest rates." (1999, p.327).
d) In-dignifying the Borrowers
Hohns (2008) argues that although the technique of group collateralization fostered by the MFIs contributed to faster loan repayment, it is a dehumanizing act to the borrowing poor folks. In his argument, Hohns (2008) believe that the technique serves only the profit motive to the lenders at the expense of the poor farmers. Traditionally, the technique has been fronted by various proponents of micro-financing as the most efficient way to ensure timely loan repayments by a group considered as not endowed with tangible assets.
Isserles (2003) is of a similar opinion that the idea of joint liability among the group members does not hold together the group borrowers self-development way but places them in a situation with multiple oppositions amongst themselves. During the microcredit crisis in Andhra Pradesh, the borrowers, particularly the women, faced the challenges of gender inequalities, a problem that has existed for a long while in the Indian society. The agricultural labor force was increasingly feminized while the men got paid high pages for agricultural work. According to Taylor (2011), the agrarian distress in the state was an indicator of the existence of gender inequality even before the micro-finance crisis. The women were forced to venture into the microfinance-inspired entrepreneurial activities as a way of responding to underpaid waged work in the household fields and agricultural sector (Taylor, 2011). The gendered effect of the agrarian distress led to the rise of group collateralization which operated by grouping borrowers into a unit comprising approximately five women, and each member representing a single household (Hohns, 2008). Even though each loan is advanced to members individually, the women can only continue enjoying the loans as long as all the group members maintain service their loans. Microfinance proponents argue that the practice not only make the members answerable to the financial institution but also promote unity within the village. Hohns (2008) contends that MFIs have outsourced the loan collection and monitoring function, which is normally a reserve of a financial institution to unrelated borrowers in a village: thus, creating pitying members against each other creating a strange relationship.
When any single member forfeits in loan repayment within the group to the MFI, the other women within the group are effectively denied access to any financing till the other member pays her dues in full (Hohns, 2008). As a result, the other non-defaulting women become both the borrower and the loan collectors or repo-man, thereby forced to resort to actions that can be judged as abhorrent by any moral standards (Hohns, 2008). The defaulters are often subjected to extreme pressure by fellow village members to pay their loans (Hohns, 2008). Therefore, the majority of the women attempt to raise the finances through desperate ways, and if unsuccessful take additional money from the money lenders available at the village at even greater interest rates. In situations where the defaulting party is unable or fails to repay her loan, other members use coercive means, such as intimidation (Palmer, 2011). Financial discipline was also compelled through shame and social stigma. Keen interest was paid in enforcing repayment and self-policing (Taylor, 2011).
The primary concern lies on the environment in which the loans are advanced to these poor women. Interestingly, large amounts of money are introduced into these ‘sleepy villages,’ which lack major road connectivity or any other traditional form of communicating with the world beyond (Kar, 2013). The poor women, oblivious of the socio-cultural backgrounds the MFI’s present in some developed nations revolving around the practice of borrowing. The women are informed to police each other without any overall oversight from the micro-financing institution (Taylor, 2011). If one fails to repay the loan, all of them are denied the sources of additional liquidity they have grown used to the loans. Consequently, the women members direct their grievances towards the defaulting member.
However, when the surprisingly high rates of loan recovery within the microfinance sector are read out in this light, the results may be confused as worthy of praise than sickening (Priyadarshee & Ghalib, 2011). The question many critics struggle to answer is whether microcredit has contributed destruction and violence on unsuspecting borrowers. Isserles (2003) opines that the women gambled their dignities and homes over small credit that was intended to see them through to financial independence. Instead, the microloans entrenched and supported the already underlying gender inequalities within the rural communities in Andhra Pradesh; Thus, turning the MFIs to a supporting wing to the rural communities’ gender inequalities within the area of the crisis. It is worthwhile to note that in many developed nations, multiple institutions have been established to elaborate and contextualize the contentious issues surrounding lending (Hohns, 2008). Such aspects include credit scores and bankruptcy courts, disclosure requirement, and a raft of legal protects guarding against over-zealous credit collection practices (Hohns, 2008).
In rural setups such as Andhra Pradesh, such systems to protect borrowers do not exist. Therefore, well-intentioned strategies developed based on the paradigm based on western consumers credit lending failed tremendously, leading to a variety of intolerable and unanticipated outcomes (Taylor, 2011). Bateman and Chang (2009) noted that group collateralization can in some instance be an effective way to promote cohesiveness and spur growth within a community. In rare cases such as in Peru and Guatemala, group collateralization was explicitly cited worthwhile (Bateman & Chang, 2009). However, the difference regarding the methodology of the lending technique played a critical role in determining the differences in the outcomes between the different locations (Hudon, 2009). The success of group collateral lending in Peru and Guatemala is credited to a technique in which borrowers are not assembled into small teams and each member individually responsible for loan repayment to ensure others access loans. Instead, a given amount of capital is advanced to a community and lend out amongst themselves, thus turning the community into a bank i.e. Community lending or Banking.
The strategy of using the community as a bank can be effected, I argue, through the self- help group model. The model requires the creation of autonomous communities save money and goes to an extent of lending the savings to the community members. These communities are mostly linked to MFIs or banks which offer additional loan capital (Ritchie, 2007). Community banking has been extensively tested by the World Bank in Andhra Pradesh through the funds issued to the communities’ and groups’ federations for on-lending to members (Ritchie, 2007). Ritchie (2007) noted that in Tamil Nadu, the bank-financed programs provide organized communities with seed capital, although the members exercise their independence in making decisions pertaining to lending policy and savings. Moreover, the SHGs and organized communities obtain other services such as training, audit, and procurement, therefore enabling them to further play the role of bank beside lending and saving money for members.
The community lending is preceded by seminars and educational forums spanning weeks concerning the how to efficiently develop and transform microfinance institutions. The amount of money advanced start smaller and gradually increases with time as villagers select and decide together viable utilization of the funds (Bateman & Chang, 2009). As such the village MFIs can inject additional funds for liquidity for the viable business ventures, thus allowing members to excel to greater heights: rather than using the destabilizing technique involving small and non- monitored group lending. In this case, the communal qua group collateralization format is seen as closely resembling the past credit and savings association than the small group lending system (Hohns, 2008). The striking resemblance stems from the notion of a shared sense of communal ownership of capital, and everyone must work to preserve the hard-earned liquidity.
e) Overall Decline in the Community Cohesiveness
MFIs have continually championed individualism as the primary ingredient for entrepreneurial success. As a result, the shared experiences and the bonds previously held by communities are gradually undermined (Bateman & Chang, 2009). More specifically, by recasting communal poverty reduction activities and development as commercial ventures, which is the central operating principle of microcredit models. Thus, dramatically increasing the chances for a reduction in interpersonal communication, local solidarity, trust-based networking, volunteerism, and goodwill. Coincidentally, many MFI proponents erroneously portray the "solidarity circles" of the Grameen Bank as evidence of its establishment and building social cohesion in the communities in Bangladesh (Bateman & Chang, 2009). What is not known, however, is that Grameen bank did, in fact, infiltrate into the existing social togetherness to successfully ensure high loan repayment rates. In contrast, as Isserles (2003) opines the technique was increasingly recognized as the ingredient for the surging social tensions and the occurrence of violence and the routine shaming of female loan defaulters: ultimately, destroying the existing social and capital solidarity in the communities.
Additionally, the association existing between the MFIs and the sharp rise in informal businesses has undeniably resulted in de-legitimization of local legal processes (Hohns, 2008). Consequently, undermining the respect for the taxation regulations, environmental regulations and casual approach in regards to health and employee safety, thus, undermining the authority of democratically instituted government agencies to control the sharp rise in business vices. Increasingly, businesses either have to journey through the unhealthy business practices to survive or collapse (Mader, 2013). In this sense, solidarity is ultimately destructed upon the proliferation of the business morals and ethos into other commercial and non-commercial ventures such as governments, NGOs and across diverse levels in the society.
In summary, it can be argued that the MFIs caused a huge burden to the poor borrowers of Andhra Pradesh, particularly the women whose only problem was to trust a system that gave a promise of delivering them from the chains of poverty. The primary reason for the persistent downfall of MFIs has been attributed the institution losing sight of the objective of the establishment of microcredit: which is advancing loans to the poor who could not access credit from mainstream financial institutions, therefore, could not borrow at cheaper interest rates (Shylendra, 2006). As a result, most of the poor resorted to borrowing from money lenders who charge exorbitant rates. As the microfinance sector expanded, the institutions gradually evolved from non-profit to profit-making ventures which seem lucrative. As a result, the industry gradually began to focus on profit, thus operating like loan-sharks, hence contradicting the primary objective of MFIs of ensuring financial inclusivity and not profit making. Therefore, future financial interventions aimed at spurring economic growth should follow a community-based approach similar to the successful intervention technique adopted in Peru and Guatemala that focuses on allocating credit based on the jointly evaluated viable business venture.
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