Backlash against the booming microfinance industry that has thrown Andhra Pradesh into crisis may be spreading to the Mecca of Microlending: Bangladesh.
The south Asian nation's Microcredit Regulatory Authority is planning to slap new restrictions on the industry which gives tiny loans to mini entrepreneurs.
The government regulator wants to cap interest rates on the loans at 27% and also dictate the maximum fees microlenders are allowed to charge, according to local reports.
The new rules, set to start from next July, would also force microlenders to give borrowers a 15-day grace period on loan repayments and make lenders drop requirements that borrowers put part of their loans in savings.
"About 40 million people in Bangladesh have availed of loans from microfinance organizations whose interest rates can be anywhere between 20-40%. There are some micro financers who also charge interest rates of more than 50%," Said Khandakar Muzharul Haque, the executive vice chairman of Micro Credit Regulatory Authority. "We want to structure and regulate this interest rate."
The success of the tiny loan industry in Bangladesh at helping the poor sparked a global microlending revolution. Muhammad Yunus of Grameen Bank in Bangladesh, won the Nobel Peace Prize in 2006 for pioneering the system.
The industry, however, is struggling this month in India. In the southern state of Andhra Pradesh politicians and bureaucrats have accused lenders of abusing the poor through high interest rates and harassment. Some have told borrowers they don't need to pay off their loans. In some cases, officials have arrested lending agents. Local politicians have even blamed dozens of suicides on microlenders.
Millions of borrowers have now stopped paying lenders in the state even though they have the money, the lenders say.
The state government has begun ratcheting up restrictions on the industry, making them register with multiple government offices and dictating when and where they can collect money.
Microlenders say they are not guilty of harassing or over-charging the poor. They say that more than 95% of their borrowers were meeting their weekly payments before the government started to interfere. They say if the backlash continues, many microfinance institutions may go out of business because Andhra Pradesh makes up around 30% of their revenues.
"I think the noises in government about our interest rates have become louder after the problems reported about in the microfinance industry in Andhra Pradesh," said Mohammed Abdul Awal, executive director of the Credit & Development Forum, a microfinance industry group in Bangladesh. "Politicians are always against microfinance and they need a chance to further that cause."
Grameen Bank has not responded to requests to comment on the situation in India.
Grameen's Mr. Yunus has, however, repeatedly said in the past that turning the industry into a high-profit, high growth business was opening Pandora's box and could end up hurting the poor as it spawns microlending companies that only care about making money and don't worry about whether their loans are hurting their impoverished customers.
"I feel very sorry that the concept of microcredit is being blatantly abused," he told the Wall Street Journal earlier this year. "Now any traditional loan shark anywhere can easily claim that they are the promoters of microcredit. What we created to fight loan sharks now is being used to give loan sharks a respectable identity."
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