Twenty-five-year-old Madhuri L., mother of a baby barely two months old, taking shelter under the stairs of a private building in the dry winter month of January at Tarihal village in Belagavi in north Karnataka became one of the defining images of the plight of those who borrowed from microfinance institutions (MFIs) and defaulted on repayment. By extension, it also reflected distress in rural Karnataka.
Madhuri’s father Ganapathi Lohar, 60, a farmer, who had availed a home loan of ₹5 lakhs from an MFI, defaulted on payment for nine months. “I paid most of the instalments earlier, but could not pay in the last nine months. I suspect the banking correspondent misused the instalment amount I had paid,” he said.
The Lohars, whose default ran into about ₹2 lakhs, stayed under the stairs until Minister for Women and Child Development Laxmi Hebbalkar intervened and moved Madhuri to an anganwadi and negotiated with the company for a settlement. “The company has now allowed two months to repay the outstanding amount. I will have to take another loan from some private money lender to repay the old loan,” said the father.
Similar cases of loan defaulters of MFIs facing harassment have been reported across the State since late August last year. Cases of coercive methods of recovery and gross violations of guidelines laid down by the Reserve Bank of India (RBI) in the recovery process have been reported as defaults have increased. There are also reports of nearly a dozen borrowers ending their lives unable to repay loan, though there is no verified data on this.
Chief Minister Siddaramaiah holding a meeting on implementing the Ordinance on microfinance institutions in Bengaluru on February 15, 2025.
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Post-COVID-19 scenario
Over the past few years, especially post-COVID-19, rural indebtedness increased as income fell or stagnated, inflation increased and individuals tried to meet aspirations or emergencies through loans from MFIs. As the lending increased with policy changes, the industry grew at 32 % in 2023-2024 over the previous financial year in Karnataka and the total outstanding loans in the microfinance sector involving 28 MFIs governed by RBI has been currently pegged at ₹60,597 crores in 1.11 crores outstanding accounts in Karnataka.
The distress in microfinance lending is not new in the country, but it was a first in Karnataka on such a scale that has gained visibility. States like Andhra Pradesh, Assam, Punjab and others have already witnessed stress in loan repayment in the past.
Enticement into fresh loans
The problem, according to industry insiders, blew up as defaults increased over repayment of multiple loans availed over time. “The industry lent, overlooking the borrowers’ repayment capacity, enticing them into fresh loans that naturally came at a higher interest rate. They were offered as top-ups. For the MFIs, these are high volume loans of low value, and also fall under priority sector lending,” an industry source pointed out.
Twenty-four-year-old Amulya, a transgender woman from Kalaburagi in the Kalyana Karnataka (earlier Hyderabad-Karnataka) region, along with her sister-in-law, availed loans of ₹50,000, ₹35,000, and ₹30,000 from three MFIs a year ago for a family wedding. Though they paid some instalments, they could not keep up as their incomes dwindled, says Amulya, adding that she is not aware of the dues remaining, as recovery agents have been opaque.
“The recovery agents, accompanied by a dozen women, would come to my house daily and abuse me. As a transgender, I face constant discrimination and struggle to find employment. I beg, relying on the small amounts shopkeepers offer. When even survival is a daily battle, repaying the debt became an impossible task,” she said. The harassment became so unbearable that her brother left for Bengaluru in search of work, but the agents continued to torment her.
Absence of credit score
Many vulnerable borrowers like Amulya went to MFIs either to refinance a loan taken from a local money lender or because they did not have access to institutional lending. They do not qualify for institutional loans in the absence of a credit score or have almost nothing as collateral. “A large number of defaults in individual lending were in this category. The rate of delinquency in Karnataka has increased from 3.6% to 6.8% currently. It is also a national phenomenon,” said the industry insider.
As repayment became a problem and aggressive recovery agents persisted, several women in the Haveri district in north Karnataka resorted to couriering their Mangalasutra to the Chief Minister, seeking protection from the harassment of loan recovery agents. “Our husbands have left home after receiving threatening calls. We are appealing to the Chief Minister to save us,” said Ranebennur native Savithramma, in her mid-40s, who led the protest.
Besides the increased financial distress of borrowers, what are the changes in institutional mechanisms that have led to this crisis situation, is a key question.
Collateral-free loan
The recent changes in the policy of lending by non-banking financial companies (NBFCs) and MFIs of the RBI are seen as a significant factor.
The cap on the collateral-free loan amount to an individual was raised to ₹3 lakhs in 2022 from the ₹1.25 lakh cap introduced in 2019. “The RBI directive in 2011 capped the loan amount or total indebtedness of the borrowers to ₹50,000. In 2022, the RBI increased the limit to ₹3 lakhs. Has the income grown six times in this period? What was the wisdom in fixing ₹50,000 then and the wisdom to enhance the limit to ₹3 lakhs now?” asked a leading expert on microfinance.
“In a system that pumps loans to vulnerable people, regulation should be more stringent. MFIs have been found to violate RBI norms in their quest for growth. Here, the RBI does not regulate much on NBFCs, and it has been outsourced to self-regulatory organisations MFIN and Sa-Dhan,” he added.
2-plus-1 scheme
With the enhancement of the borrowing limit, individual borrowers were enticed through a “2-plus-1” scheme by the lending institutions, which meant an individual having taken an unsecured loan of ₹2 lakh received an additional ₹1 lakh as a top-up. Along with this, a “Micro LAP”, another product for loans against properties, were offered to these individuals with property documents as collateral. Micro LAP is a cross sale offered to the customer, who is repaying his micro finance loan regularly.
Many of the small and petty businessmen, especially the small village-level provision stores or small seed sellers, availed of this loan, all of which came beyond their means to repay. This was, for instance, the case with the Lohar family. Though the collateral in the Micro LAP came under the purview of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 for default, the norms had not been followed as coercive measures were deployed to recover the properties.
In other cases, the joint liability groups (JLGs), comprising women, received unsecured loans, the success of which depended upon the prompt payment of all the members in the group. If one defaulted payment, the group payment could get into default.
Delinquency rates among women
Women have been found vulnerable to both enticements to take loans and threats during the recovery process. Though delinquency rates among women are believed to be lower as the group works on a kind of “social guarantee or a collateral” for repayment of loan, many of the JLBs have faltered on payment.
Kumari, who works as a domestic help in Hassan in the Old Mysore region, borrowed ₹1 lakh for the treatment of her husband and to meet the expenses of her daughter’s marriage and must pay ₹1,200 every Thursday. If she missed an instalment, members of her group call her. “Sometimes, they come to visit me at my workplace, leaving me in embarrassing situations,” she says.
An expert on microfinance borrowings observed, “Women have been found to use the loan for income generation activities initially, but they slowly get into purchase of white goods or consumer products.”
Role of guarantees
The Congress government in Karnataka introduced guarantee schemes, especially two aimed at women — Gruha Lakshmi which provides monthly financial assistance of ₹2,000 and Shakti which allows women to travel for free across the State in State-run public transport corporation buses — with an aim to give them greater agency, to be mobile, seek employment or meet emergency household needs.
Asked if there was an underlying rural distress despite these interventions, Gowda said, “Earnings do not remain in the hands of the working class and poor due to inflation. There is stagnation of income, and income in real terms is declining. There is distress at the lower level of pyramid that the Centre is not even acknowledging, but pandering to only the wealthy.”
Role of intermediaries
The role of intermediaries and banking correspondents in creating a crisis situation has also come under the scanner.
For example, Yallavva Bannibag, the founder of the Rani Channamma Rural Micro Finance Company in Halabhavi village in Belagavi taluk, who promoted micro societies and self-help groups of women across Karnataka and Maharashtra, is now under investigation for large-scale financial irregularities. Bannibag and her team face charges of swindling crores of rupees from over 6,000 women in Belagavi and surrounding areas.
“Yallavva encouraged women to form SHGs to start saving small amounts of ₹50 – ₹100 per week. Then, she would strongly urge them to take loans from MFIs, saying they should be treated as JLGs. But once they took the loans, she would lie to them that she was the intermediary of a government agency that was offering a 50% subsidy on their loans. She convinced the groups not to repay the loans. She also convinced them to part with half of their loan amount, telling them that she would repay the full amount using the subsidy,” a police official said.
Investigators have traced documents that reveal Yallavva had got over 50 MFIs to lend to women. However, there is no proof of her working as an intermediary for any of them.
Allowing on-lending
According to former General Secretary of All India Bank Officers Federation Thomas Franco, RBI, which earlier discouraged on-lending, has now allowed on-lending by scheduled commercial banks. The RBI has also relaxed the lending rate, and NBFCs are charging up to 36% or even more in addition to the processing charge and others on which the cap has been removed. “People are going to NBFCs because banks are shutting down branches in rural areas, and the staff strength in public sector banks is down from 8.6 lakh to 7.4 lakh now.”
With the crisis assuming a larger proportion, the State government came under pressure to act against the illegal and inhuman ways of loan recovery. After much deliberation and over half a dozen drafts, the government came up with the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025, to curb the menace of harsh recovery procedures adopted by the middlemen. It brought all microfinance businesses of cooperative societies, NGOs, SHGs and trusts besides private money lenders who are not under the purview of the RBI under the new state legislation.
These organisations together have been estimated to have lent about ₹40,000 crores in the State and have a substantial network in rural areas. The Ordinance was brought in as the existing legislations, the Karnataka Pawn Brokers Act, 1961, the Karnataka Prohibition of Charging Exorbitant Interest Act, 2004, and the Karnataka Money Lenders Act, 1961, were found to be lacking teeth. After initial reluctance, Governor Thaawarchand Gehlot cleared it and the Ordinance was promulgated on February 12.
Not strong enough
However, experts believe that the Ordinance is not strong enough as it exempts the NBFCs, MFIs and small banks that are registered with the RBI and have a bigger share in the market. Questions on the ability of the vulnerable borrower to complain against the money lender/organisations, who most often receive political patronage, have been raised. “Though it is a welcome step, it is not addressing all the problems,” said Franco. The Ordinance, experts say, does not provide for an administrative mechanism to register the lending agencies, collect data and follow up on the lines of RBI.
Krishna Byre Gowda, however, argued that nothing prevents the State government from acting against the coercive measures of any RBI-registered company too. Criminal provisions could be invoked against them, he said, adding that the Centre also had a role to play in addressing the problem. He pointed that after the Ordinance was promulgated, complaints have come down drastically.
Meanwhile, the MFIs are expected to go slow on lending during the remaining part of the financial year and revisit their credit policy during the next fiscal.
(With additional inputs by Rishikesh Bahadur Desai, Kumar Buradikatti, Girish Pattanashetti, G.T. Sathish and Raghava M.)
Published – February 28, 2025 06:48 am IST
