Unfortunately the 30 individuals who commited suicide over the last couple of months probably didn’t consider life a philosphical choice, but they did make a choice. I haven’t come across anything in media reports that provides a satisfactory explaination of the combination of factors that may have led them all to make this choice. I plan to dig deeper, but I did first want to share with you some statistics published by the National Crime Records Bureau.
125,017 cases of suicide were recorded in 2008. This represents about a 2% rise in the rate of suicide since the previous year. The number of suicides has risen by 20% in the last decade. 125017 suicides in a year means that an average of 342 people commit suicide in India every day, 8 of these are attributed to poverty and 8 to bankruptcy or a sudden change in economic status. It is this latter category that interests me. A sudden change in economis status implies either a loss in the stock of wealth held by an individual or the drying up of an income stream. The former could occur through the unscrupulous actions of family, friends and strangers or through a bad business or investement decision. Below is a pie chart depicting the statewise distribution of suicidal deaths.
As you can see, West Bengal, Maharashtra and Andhra Pradesh lead the pack, but they are also amongst the most populous states. Interestingly 661 cases of suicide in Andhra Pradesh and 808 cases in Maharashtra were attributed to a sudden change in economic status in 2008. The corresponding figure for West Bengal, the state with the highest number of suicides is only 79.
It doesn’t require a great deal of thought to reach the conclusion that something is badly wrong in these two states. 1491 suicides due to bankruptcy (Andhra Pradesh – 661, Maharshtra – 808) . That is almost exactly 50% of all suicides due to bankruptcy reported in 2008 for the entire country (2970).
The figures for 2007 similarly are 1631 for these two states (Andhra Pradesh- 842, Maharashtra – 883) versus a countrywide total suicides linked to bankruptcy of 3298. Again close to half. An optimist might point out that the figure has come down, but the metaphor clutching at straws comes to mind.
If we see bankruptcy-linked suicides as indicative of the level of economic distress in a state, then Maharashtra and Andhra Pradesh are clearly the worst affected. It is interesting that Andhra Pradesh happens to be the state in which Microfinance penetration is greatest.
The siginificance of this is undermined by the fact that Maharashtra, which has the highest rate of suicides due to bankruptcy is 7th on the list as far as MFI penetration is concerned. On the other hand Tamil Nadu and Kerala figure quite high on both lists. Kerala reported 539 bankruptcy-linked suicides in 2008, and while the figure for Tamil Nadu is lower (220) it is still is the fourth largest. Obviously the causal link between the spread of microfinance and bankruptcy-linked suicide rate is somewhat tenuous, but the recent media blitz blaming Microfinance for deaths in Andhra Pradesh prompts one to linger a bit longer than one otherwise would.
Let us assume that harassment by unscrupulous agents is the exception rather than the rule. If one were to explore alternative explainations that might link suicides with the spread of microfinance, here is one theory. Make of it what you will. Bankruptcy implies that the borrower has invested money in an activity that did not succeed, or paid out less than she had anticipated. Activities like agriculture that in India are subject to the inconstant laws of nature, can and do result in crop failure quite regularly either because the monsoon was poor, or too plentiful. However all economic activities by and large have associated risks, a vegetable vendor may not be able to sell enough of her perishable stock, a sari-weaver may find that tastes and preferences of the consumer have changed drastically, and a potter may discover that people prefer to use plastic to carry water in.
Credit in any form gives you present capital against future payment. It extends your ability to invest, thereby allowing you the possibility of a wealthier tomorrow. However if the activity fails, you may end up worse off than when you started, because you still have to pay back the loan along with interest. Micro-credit is no different. However traditional forms of credit use a screening process to select for individuals who are most likely to pay the loan back. They also usually evaluate the specific project that the borrower has proposed in order to judge the likelihood of success. In Microfinance there is no formal screening process, which is essentially why people who woudn’t otherwise get loans, get micro-credit loans. This is the point of financial inclusion. However if you look at this another way, a lot of people who should not get loans, for purposes that may have a low chance of success, get access to credit.
In the case of an entrepreneur with a college degree and some savings in the bank, the failure of a business venture could mean a loss of face and the necessity to start from scratch. For a micro-entrepreneur failure could mean not having enough to feed her family. In many cases the lure of a loan that might take care of present consumption needs far outweighs the future cost of repaying the loan. There are no bankruptcy laws to protect the micro-entrepreneur and liability is unlimited.
I am not saying the micro-credit is a bad idea, and this argument applies both to state-run prorammes and private micro-financiers. I am suggesting that as with any credit product there is a danger in lending indiscriminately, both for the lender and for the borrower. The spread of micro-finance has been rapid, but most institutions offer credit, savings and insurance products have not enjoyed the same success. It is important that entrepreeurs at any level have access to ways in which they can mitigate risk, and for the micro-entreprenuer it may serve as a life-line.
Micro-finance is almost certainly not to blame for the high rate of bankruptcy-linked suicides in Andhra Pradesh. However for an industry that is coming of age, it is important to make responsible choices. In a state where financial distress has caused close to 3500 deaths in the last five years, caution and diligence may be good principles to adopt. Reviewing best practices and stringent quality control as far as programmes and personnel are concerned, would be a good start. There is more to this business than just the bottom line.
Nice post, Nikhilesh, but I worry about going too far in trying to rein in the excesses of microcredit and inadvertently undoing some of the real progress that the microfinance movement has made in the lives of the poor. Indiscriminate extension of credit to anyone may not be a good thing, as you argue, but, as I understand it, prior to the MFIs moving in, the poor in areas such as rural AP had next to no options for institutional credit. From what I know, one of the reasons for this was that it was (and is) prohibitively expensive to properly screen poor borrowers in rural areas. The joint liability models used by MFIs presented a solution to this problem.
Do you think it's possible to require a level of screening of borrowers without going back to the pre-MFI status quo with few institutional credit options for the rural poor?