Microfinance industry must speak in a collective voice in PIL before Madras HC

MFIs, banks, SIDBI and respective industry associations must be given a fair chance to implead themselves into the Public Interest Litigation filed at the Madurai Bench of the Madras High Court

A Public Interest Litigation (PIL) filed by Ms U Vasuki, (State General Secretary, All India Democratic Women's Association or AIDWA), in her personal capacity, has been admitted in the Madurai Bench of the Honourable Madras High Court and notice has been ordered to the respondents. The PIL petition seeks a direction to "the Reserve Bank of India (RBI) to investigate "unfair and illegal" practices of microfinance institutions (MFIs) which were allegedly demanding "usurious" interest from self-help groups (SHGs) in the State. A Division Bench comprising Honourable Justice P Jyothimani and Honourable Justice MM Sundresh ordered notice to the RBI as well as the State Government returnable by two weeks."

The petition lists some very serious charges and I reproduce some of these charges leveled against MFIs in the aforesaid PIL below. It is important that MFIs associations take urgent and serious note of this petition and also perhaps implead themselves into the PIL to ensure that all key stakeholders participate in the legal proceedings and provide their perspective (with evidence) on some of the serious charges leveled against MFIs.

Otherwise, it would become very difficult for MFIs to operate in Tamil Nadu and other parts of India, over time. Also, the principles of natural justice require that everyone gets a fair and equal opportunity to be heard and I do believe that, despite all that has gone wrong with many Indian MFIs in the last few years, they perhaps have their side of the story too which must be heard. And given that the SKS petition in the Honourable Supreme Court has been reverted back and the MFI asked to explore remedies available at the Honourable High Court level, this Tamil Nadu PIL assumes even greater significance. Therefore, it is imperative that MFIs, banks, SIDBI and MFI/banker/general industry associations (like IBA, FICCI, Sa-Dhan, INAFI and MFIN) with a strong interest in microfinance and financial inclusion, implead themselves into the case and provide their arguments with suitable facts and evidence. It is also an opportunity for a premier international microfinance research and policy body like CGAPii  to implead itself into the case, if that is possible.

While I am not commenting on the charges levelled because the matter is in court, I certainly will make available (in a separate article) a list of critical issues and legal questions that the Madurai Bench of the Honourable Madras High Court may want to look into while hearing the petition.

That said, some of the key statements mentioned in the PIL petition (filed by Ms Vasuki) are listed verbatim belowiii :
MFIs and Debt Trap: "I submit that this petition endears the attention of this Hon'ble Court to the plight and predicament of women of Self Help Groups (hereinafter called SHG) all over the state who were all caught in a death/debt - trap of the Shylockian profiteering companies under the collective banner of Microfinance Institutions (hereinafter called the MFl)."iv 

MFIs as Moneylenders and Suicides:
"The usurious rate of interest charged by the MFI from the SHG and the strong arm tactics for recovery, etc have led to (the) recent spate of suicides of women in various parts of Tamil Nadu. The malady that has infected our neighbouring State of Andhra Pradesh is infiltrating into our State also. I humbly submit that the lives of many women who are part of Self Help Groups in Tamil Nadu are in constant danger due to the harassment meted out to them by those illegal money lenders. We reliably learnt that more than 10 women had committed suicide due to the harassment in Vellore Area and some women in Gudiyatham had attempted suicide. We also received fax messages from a few victim women to save their lives immediately."

SHG Bank Linkage Ideal for Women: "I humbly submit that the SHG-Bank Linkage model is ideal for poor women because of its unique characteristics of not a high rate of interest especially on a diminishing scale, individual liability, flexible repayment mode. Therefore the role of Banks is pivotal in the proper functioning of the SHGs."

Banker Apathy to Low Income People: "I humbly submit that the Banks which originally played a primary role in the successful functioning of SHG(s) by their active participation slowly withered their interest to serve the poor as they deem it not cost worthy. They slowly started disbursing the loans through legally formed institutions in the form of NGOs instead lending directly to the SHGs. In this model, the banks got the same benefits, but at a lower operational cost and with a minimal risk. The Banks instead of giving loans to 500 SHGs of Rs2 lakhs each, the banks could give (Rs)10 crores to just one NGO. The NGOs in turn will lend to SHGs and thus making their profit in the buffer they create in the interest chargeable from the SHGs. Many of these NGOs are registered under the Societies Registration Act as they are only meant to carry out social welfare activities.

"I humbly submit that as years rolled on, a new manifestation in the field of microfinance to SHGs came into being. A new breed of moneylenders in the name of MFls started storming the market namely the SHGs. The "not for profit business model" all along adopted was sidelined and in response to the growing demand of microfinance, most of the NGOs have started private companies which become a non- banking financial company (NBFC). They mobilised capital from market sources through equity and other market oriented instruments and lent the same to SHGs with assured interest rates (which) varied from minimum of 30% to maximum of 60%. As days pass by these MFIs came out with IPO model and made huge profit. Shockingly some MFI(s) which came out with IPO started selling its stake in Wall Street."

MFIs Charge Usurious Interest rates and Use Strong Arm Tactics For Recovery: "I humbly submit that these MFIs charge exorbitant rate of interest and also indulge in harassment and strong arm tactics for recovery. They will provide loans at the doorsteps. Initially they will coax women to borrow from them by assuring them with lower rates of interest without any security. Later they will get their ration cards, NREGA cards, etc. as securities. Later they indulge in forceful collections. The staff will come to the home and humiliate the person and/or her family by abusing them in an obscene language. Difficulties arose when these new avatars of MFI pauperized the poor with the sole intention of enriching their kitty and thus the original concept of microfinance waxed and waned."

Lack of Regulatory Mechanism is Major Cause for Microfinance Crisis: "The lack of any legal mechanism fuelled their avaricious appetite to suck the hard earned wages of the poverty stricken class. These poor women were not able to meet the stringent conditions imposed by the MFIs, and the caustic remarks made by the collection agents on their characters. When their honour was at stake, they were driven to (the) nadir of desperation and deem it better to terminate their life or running away from their village leaving their family in (the) lurch."

Aggressive Lending and Collection by MFIs: "I humbly submit that the heart of this financial social disaster is the central state of AP where the past 5 years have seen the aggressive selling of loans to illiterate villagers followed by equally aggressive debt collection. When certain MFIs in Guntur and Krishna Districts have coerced the women to repay loans by resorting to very cruel methods, they started committing suicide. Statistics reveal that over the past few months, around 30 people have been forced to take their lives as they were unable to meet the demands of MFls. Multiple lending, over-indebtedness, coercive recovery practices and unseemly enrichment by promoters led to the situation."

Impact of AP Ordinance on Tamil Nadu Microfinance: "Due to the impact of the ordinance, those MFIs who are unable to do their money lending business in Andhra infiltrated into Tamil Nadu and engaged in their illegal activities. When our organisation heard about the suicide of one Ms Lakshmi, mother of 7 children in Vellore due to the coercive recovery (tactics) adopted by some MFls, our representatives immediately visited the area and collected information. We found that the particular MFI even tried to hush up the matter by forcing Lakshmi's daughter to say some other reason for the death. Another SHG member by name Sumathi self-immolated herself due to the harassment. The MFIs went to the extent of using the deceased's insurance amount to cover the defaults she allegedly made. In one case, the wife was taken as a hostage by an MFI and her husband attempted suicide because of this. Overall some 5 deaths happened in Vellore because of the harassment of MFIs and some 10 women attempted suicide. One Ms Jeyalakshmi even consumed poison in front of the Sattuvacheri Police Station as the police has not taken any action against her complaints on MFIs. The police in some cases even refused to issue receipts and copy of the FIR to the complainants.

"I received specific complaints from SHGs of Musiri Taluk, Kulithalai Taluk of Tiruchirappalli District who are being harassed and abused by some MFIs. We conducted a public hearing on 26.2.2011 in which hundreds of affected women participated and shared their woes with tears. We found that the MFI agents will come for collection since early morning. They won't allow women to do any other work till they make their repayment. If anyone of the member fails to pay, all other women will be confined in the meeting place. In some cases, the MFIs promised group leaders incentives like gold coins if they ensure 100% loan recovery. This leads to the group leaders taking up the role of MFI agents."{break}
Coercive Weekly Repayment, Velocity of Money, Greening of Loans and Usury are Critical Issues: "I humbly submit that we heard from the affected women that the MFls insist on weekly repayment. It is relevant to point this out here because the velocity of money plays a major role in generating profits. This also increases the borrowers' risk of vulnerability to local power groups. A borrower may not get the weekly wages for some reason or she may not get any job due to rain. Therefore she may not be in a position to pay the instalment. MFIs reported to have stated "panthai kattu (pay the money) or paduthukkattu (go to bed with someone and pay)." Sometimes when women beg them saying, "they have nothing to sell, MFI agents will retort, "Why, you have your body." They will tell husbands, "Do business in buying and selling women." At one stage, the borrower will indulge in multiple borrowing—from other MFIs to settle the debt of (an) existing MFI. Sometimes, the same MFI float(s) another company which will provide loans on usurious rate of interest viz., the interest (rates) that are classified as exorbitant in Act 38/2003."

SHGs Converted to JLGs (joint Liability) Enhances Harassment: "These MFIs for their own benefit convert the SHGs as JLGs (Joint Liability Groups). Thereby all members of the SHG are jointly liable even if one commits default. Therefore the very fundamental concept of collectivism, howsoever marginal that has been generated by the SHGs in all these years, are systematically destroyed in this process… I humbly submit that the very purpose of formation of SHGs, namely relieving the women from the clutches of traditional usurious moneylenders has been defeated and in contrast SHGs have become a potential market for profit-making MFIs. The Microfinance Institutions Regulation Bill is still under the initial stage. Therefore there is an absence of Legislation in this area which further strengthens the illegal activities of those MFls. The phlegmatic attitude of the respondents costs the lives of poor women. They fail to realise that every minute of their inaction will terminate their lives."

New Acronym for MFIs: "I therefore submit that the acronym MFIs is turning into Muscle Flexing Institutions and the same function just to rob the peace and prosperity of the poor. Under such circumstances, we sent a memorandum to the 1st respondent to immediately intervene and save the women from the clutches of the MFIs. We have not received any reply but a project officer of the 6th respondent visited our office and collected some information, but we could not see any visible action in rescuing the affected women from the end of the respondents. Therefore we file this writ petition to drive the respondents to initiate immediate action with a foresight and in order to avoid a catastrophe in the lives of women in our State on the following amongst other grounds."

Among others, the petition lists the following grounds:

a.    The unfair trade practices of the MFIs which led to the suicides of innocent hapless women are a definite breach of their Constitutionally guaranteed right under Art. 21.
b.    Abusing women in filthy language that too in a public place is an affront to their right to live with dignity.
c.    The strong arm tactics of MFIs for recovery of loan amount namely unlawful confinement, abuse, abduction, kidnapping, etc. of the members of SHG or their family members is an unpardonable offence against the whole society.
d.    Section 35A of the Banking Regulations Act, 1949 empowers the 3rd Respondent to enquire into these nature of issues and give suitable directions in this regard to prevent the illegalities committed in banking transactions. But the 3rd Respondent has failed to take cognizance into the present crisis.
e.    The rate of interest charged by the MFIs is hit by the provisions of The TN Prohibition of Charging Exorbitant Interest Act, 2003. (Hereinafter called the Act 38/2003). Thereby the business model practiced by the MFIs are prima facie illegal. In spite of innumerable complaints from the affected women, the respondents are turning a Nelson's eye.
f.    The guidelines/fair practices code established by the 3rd Respondent is being flouted by the MFIs and the same is also echoed by the RBI in their own circular and yet no effective mechanism is formed to regulate the same.
g.    The major objective of nationalisation of Banks since Independence was to improve the flow of institutional credit into the rural household. This concept of forming SHG(s) and empowering them economically through bank loans is the endeavour of the State to put into practice the vision formulated in Art 39 of Part IV, Constitution of India. But the illegal activities of the MFIs negate such vision.
h.    The 3rd Respondent with an avowed object earmarked 40% of advances by commercial banks for the priority sectors. The MFIs who got loans from Banks under the category of priority sector lending at a lower rate of interest charge exorbitant rate of interest while lending it to poor women who should be the real beneficiaries of priority sector lending.
i.    The State which should strengthen the Bank-SHG linkage and also ensure proper implementation of poverty alleviation programmes among the poor and vulnerable has become a silent spectator of the exploitation of SHG women at the hands of the profit making MFIs.
j.    For the emancipation of women in every field, economic independence is of paramount importance. The formation of SHG(s) which is claimed to be a step towards achieving the same has made the women completely dependent on the unscrupulous money lenders. The respondents who owe a public duty to set it right have not acted as expected by the statutory provisions.
k.    Article.14 of the Convention on the Elimination of All Forms Of Discrimination Against Women adopted by the UN General Assembly declares 'State Parties shall take into account the particular problems faced by rural women and the significant roles which rural women play in the economic survival of their families, including their work in the non-monetised sectors of the economy, and shall take all appropriate measures to ensure the application of the provisions of the present Convention to women in rural areas.' "

The petition prays for:

"It's therefore prayed that this Honourable Court may be pleased to issue a direction or an order or a writ in the nature of Mandamus directing the 3rd Respondent to take immediate appropriate action as per Section 35A of the Banking Regulations Act, 1949, investigate into the unfair and illegal practices of the MFIs in Tamil Nadu and evolve a redressal mechanism in order to enable the affected women members of SHGs all over the State to get Justice, and pass any other appropriate orders as this Honourable Court may deem fit and proper and thus render Justice."

When I first came across the petition about 2 days ago, sent by a microfinance industry (MFI) practitioner, I was stunned by the language used and also, the seriousness of the charges leveled. I found that while the state government (various departments) and RBI were listed as respondents, there were notable omissions—with MFIs, banks, SIDBI (Small Industries Development Bank of India) and MFI/Banker/general industry associations (with interest in microfinance) being the most important ones. While I have the highest regard and respect for the Hon Courts, I sincerely hope that MFIs and banker associations (do not waste time and) implead themselves into the PIL so that their side of the story is also heard - as only then would a fair and objective analysis be completely possible and principles of natural justice prevail.

 i http://www.thehindu.com/todays-paper/tp-national/tp-tamilnadu/article2402461.ece?css=print
  iiConsultative Group to Assist The Poor, www.cgap.org 
  iiiAll Paragraphs within Double Quotes " " are reproduced exactly from the aforementioned PIL.
  ivQuoted from PIL by Ms Vasuki at Madurai Bench of the Honourable Madras High Court.

(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments).

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