The huge burden of small loans Premium

Plight of microfinance loan defaulters in rural Karnataka highlights distress caused by aggressive recovery methods and policy changes.

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.

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.

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.