Household Debt, Microcredit and the Death Trap

29 January 2015 by Sushovan Dhar


CC - anurag agnihotri

The years preceding the financial crisis was marked by incremental household debt in most of the advanced capitalist countries. William Pesek a columnist with the business media Bloomberg, warned us a few months back that Asia faces the risk of an explosion of house-hold debt. [1] He adds “several nations now have private-debt ratios of between 150% and 200 % of gross domestic product. They include the higher-income set — Australia, Hong Kong, South Korea and Taiwan — as well as China, Malaysia, Thailand and Vietnam. Even where debt levels are lower - Indonesia and the Philippines - the trajectory is troublesome. [2]

Another business analyst, Frederic Neumann, Co-Head of Asian Economic Research, HSBC warns us about the consumer debt increased relative to GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
between 2007 and 2013 in all major Asian economies except India [3]. Neumann also says “The optimists argue that’s unlikely to occur in Asia, where people tend to be more prudent and save more of their monthly income. Well, not necessarily. [4]


Indian Scenario

However, in spite of Neumann’s optimism about India and its insularity from the risks of household-debt, the current figures suggest otherwise. A recent survey by the National Sample Survey Organization (NSSO) [5] indicates that India is gradually on the path of being a heavily indebted country with the average amount owed by each family jumping a whopping seven times in urban areas and more than four times in the hinterland during the period 2002 and 2012. [6] The survey also notes that in 2012, as much as 22% of urban households were indebted and the average debt per family was Rupees (Rs) 84,625, up from Rs 11,771 in 2002, while in rural areas, 31% of households were indebted compared to 27% in 2002 with average debt rising to Rs 32,522 in 2012 from Rs 7,539 in 2002. As on 30.6.12, the ’debt-asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). ’ ratio at the all-India level was 3.7% for urban areas and 3.23% for rural areas. [7]

As a matter of fact, in 2013, the Economist magazine put India among the top 15 countries that are struggling to manage the rapid increase in household debt. [8]


Farmers Debt

The farmers are in the worst plight. Over 50% of agricultural households are in debt. And, what is even more dangerous is that 26% of them owe money to moneylenders and private usurers. These category of lenders lend money at extortionate interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
and threaten borrowers to pay back even using violent means and methods. Institutional sources like the banks, government and co-operative societies cover only 60% of the outstanding loans. Marginal farmers suffer the worst with only 15% of their credit from institutional sources. In three South Indian states the debt levels are abysmally high. Andhra Pradesh has 93% farm-households in debt, Telangana has 89% and Tamil Nadu has 82.5%.

With the introduction of the notorious Structural Adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
Programmes (SAP) the Indian farmers found themselves more and more at the mercy of the market. The governmen removed subsidies for agricultural inputs while opening up import barriers. The small farmers were thrust into the volatile global markets. The market lured (in essence coerced) farmers to take a lot of risks, switching over to cash crops and high-priced genetically modified seeds. This is even more complicated with erratic monsoon rainfalls with the global climate change. The result has been extremely disasterous with more and more small and marginal farmers outdone by “competition” locking them in an eternal debt trap which for many is a death trap as well. Surely, death works as the ultimate solution for many.


Micro- Credit Debt

A report submitted on December 19, 2014 titled ’Spate of Cases of Suicide by Farmers’ by the Intelligence Branch(IB) submitted to the Government of India reports “(...)an upward trend in cases of farmer suicides in Maharashtra, Telangana, Karnataka and Punjab recently, besides reporting of instances in Gujarat, Uttar Pradesh and Tamil Nadu [9] Reports indicate that a total of 296,438 farmers have committed suicide in India from 1995 till July, 2015. [10] A former World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

analyst, Sudhirendar Sharma who now heads the New Delhi-based Ecological Foundation thinks that microfinance is part of the problem. The rural suicides, he wrote, “cast a dark shadow on the fledging microfinance sector. [11] It is not unusual as exorbitant interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates of up to 40% and coecive loan recovery mechanisms intimidate the poor and make them more vulnerable. These practices and many other incidents have made micro-credit notorious and it has emerged as a veritable death trap for the poor. The former chief minister of the southern state of Andhra Pradesh, Y. S. Rajasekhara Reddy called it “worse than moneylenders”. [12]

Microcredit was once touted as the solution to global poverty. Yet, the experiences of many rural poor in India says that it has been one of the principal cause of a number of suicides in the country thereby earning the sobriquet of “death trap”. The situation is complicated by the fact that mainstream banks have very little operations in rural India. Even where banks are present, the application process is too difficult. Microfinance schemes filled up the void but with dismal consequences. There are reports that micro-credit agencies have charged exorbitantly upto 50% per annum.

Was it meant to be like this? When the United Nations pompously declared 2005 as the International Year of Microcredit, it proclaimed “Microcredit has been changing people’s lives and revitalizing communities since the beginning of trade. (...) The year of Microcredit 2005 calls for building inclusive financial sectors and strengthening the powerful, but often untapped, entrepreneurial spirit existing in communities around the world.” The next year, Muhammad Yunus, the Bangladeshi economist and his Grameen Bank were awarded the Nobel Peace Prize. He even boasted that microcredit could consign poverty to the museums.

However, within a few years the people who took micro-credit were fighting for survival. There were hundreds of suicides relating to micro-credit in India, Bangladesh and possibly in many other parts of the third world. It almost spread as an epidemic and resembled the 2008 subprime crisis in the United States. Observers comment that instead of helping those in need, making money was the thrust for micro-credit agencies.

The rural indebtedness which results from the two pronged attack – micro-credit & agricultural loans – are pauperising the bulk of marginal and small farmers. They are caught in a debt trap. Failure to pay loans lead them to mortgage Mortgage A loan made against property collateral. There are two sorts of mortgages:
1) the most common form where the property that the loan is used to purchase is used as the collateral;
2) a broader use of property to guarantee any loan: it is sufficient that the borrower possesses and engages the property as collateral.
their landed property to the money-lenders and usurers and finally lose it to the latter. Increasingly, it is being observed that, if the agricultural production is left to market forces only, small and marginal farmers would crush under the weight of speculators and middlemen. It is more and more being observed that small farmers are barely able to cover 70% of their cost of production. The catastrophe which started from the cash or commercial crops is spreading to food crops Food crops Crops destined to feed local populations (millet, manioc, etc.), as opposed to cash crops, destined for export (coffee, cocoa, tea, groundnuts, sugar, etc.) as well, with the recent reports of the plight of the rice farmers in the state of West Bengal. This is the beginning of a debt trap from which a handful are able to find a way out. For the majority, the consequences are immense. Joining the ranks of landless agricultural labourers, migrating to cities in search of jobs- most often in sub-human conditions with no minimum wage or any other legal protection, working as bonded- labourers (though it is officialy prohibited by law) to money-lenders or other propertied classes or finally commiting a suicide...




Footnotes

[2Ibid

[4ibid

[5Established in 1950, The National Sample Survey Organisation (NSSO), now known as National Sample Survey Office, is an organization under the Ministry of Statistics of the Government of India. It is the largest organisation in India conducting regular socio-economic surveys.

[6Situation Assessment Survey of Agricultural Households http://pib.nic.in/newsite/PrintRelease.aspx?relid=113796

[7ibid

[10P Sainath: How states fudge the data on declining farmer suicides http://www.rediff.com/news/column/p-sainath-how-states-fudge-the-data-on-farmer-suicides/20140801.htm

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