Indian microfinance institutions may soon have to pay borrower families compensation of more than $10,000 if a borrower is found to have commit suicide due to high debt. While still under consideration by the Andhra Pradesh government, the potential of this regulation to pass could cause more complications for MFIs, following the crisis in the state and sector over the past few months. Hyderabad: The Andhra Pradesh government has a legislation on its mind that would make it compulsory for the Microfinance companies to pay a compensation of $10,966.39 to families of borrowers who commit suicide because of debt burden. This step has added to the increase in the already present liabilities of the Microfinance Companies. They also face slow loan repayment problems.
“A proposal to this effect is currently under consideration,” said D Manikya Vara Prasada Rao, Rural Development Minister.”Our estimates suggest that about 35-40 people committed suicides due to the coercive practices adopted by MFIs. Now villagers are asking for compensation as they need money to repay their debt as borrowing was not made under a single individual’s name. It’s a household borrowing and the existing members of the family will have to cough up the money.” A final decision is still pending on this issue.
A debate had been triggered by Andhra Pradesh regarding the disciplined regulation of Microfinance while the recovery and lending rules stated the October figure of suicides and unethical practices by lenders. RBI also made a move to appoint a committee under YH Malegam to suggest regulations but their report became public only last week.
“As we think MFIs are responsible for these suicides, they need to compensate the families of victims,” said Rao. “The proposal is currently under the consideration of ministry of pensions, self-help groups and women development, child and disabled welfare and a final call will be taken on it soon.”
In order to provide compensation to suicide victims, the opposition parties had pressurized the state government. The trial of making available the compensation without any pressure on the government is in process but is difficult and tedious to finance various welfare schemes.
“The government’s move will affect the entire sector and its goodwill,” said Anurag Agarwal,Vice-President, Intellecap. “It will give an impression that the sector was responsible for forcing people to commit suicide, which is a crime. This kind of a perceived notion will make investors wary of investing in the sector and in the long run can affect fund capital raising plans of MFIs,” he added.