`Oh, things that happened the week after next,’ the Queen replied in a careless tone. `For instance, now,’ she went on, sticking a large piece of plaster on her finger as she spoke, `there’s the King’s Messenger. He’s in prison now, being punished: and the trial doesn’t even begin till next Wednesday: and of course the crime comes last of all.’

`Suppose he never commits the crime?’ said Alice.

`That would be all the better wouldn’t it?’ the Queen said, as she bound the plaster round her finger with a bit of ribbon.

Alice felt there was no denying that. `Of course it would be all the better,’ she said: `but it wouldn’t be all the better his being punished.’

`You’re wrong there, at any rate,’ said the Queen: `were you ever punished?’

`Only for faults,’ said Alice.

`And you were all the better for it, I know!’ the Queen said triumphantly.

`Yes, but then I had done the things I was punished for,’ said Alice: `that makes all the difference.’

`But if you hadn’t done them,’ the Queen said, `that would have been better still; better, and better, and better!’ Her voice went higher with each `better,’ till it got quite to a squeak at last.

– Lewis Carrol, Through the Looking Glass

I had a conversation with Swaminathan S. Anlesaria Aiyer, famed economist and columnist a couple of years ago which reminds me of this one. We were discussing farmer suicides in Andhra Pradesh. He declaimed that people commit suicide for all sorts of reasons that need not have anything to do with financial insolvency. To support this he gave the example of his brother who committed suicide despite not being insolvent. Therefore to link the farmer suicides to insolvency would be inaccurate if not ridiculous.

Some of us may find the last word in that sentence self-referential.

The current upheaval in Andhra Pradesh has been caused by the report that 30 people have committed suicide within a period of 45 days allegedly to escape the coercive methods of microfinance agents. One report suggested that some agents may have have encouraged borrowers to commit suicide in order to claim insurance. 17 of the borrowers were SKS clients, and as a result, the CEO was sacked, the media got their collective knickers in a twist and Vikram Akula issued a statement which said that none of these 17 had defaulted on their payments. I imagine Mr. Aiyer would nod approvingly at this point given his post on the 24th http://swaminomics.org/?p=1907, but what is going on?

Something is obviously rotten in the state of Denmark, and the governements’ decision to curb interest rates is unlikely to solve the latent problems. There are vested interests here, as the growth of private microfinance has challenged the success of the state-backed SHG lending model. I have come across situations where women in self-help groups have been actively dissuaded from borrowing from private players while conducting research in rural Andhra Pradesh. The self-interested nature of the governements’ response is hard to deny.

What of for-profit MFIs? Somehow the garb of victimhood seems ill-fitting. If we are to take Akula’s statement at face value, then 17 of the 30 suicides were caused by factors other than micro-credit debt. What of the 13 others? Let’s lay this question aside for a moment and look at the way that the microfinance model works. The essense lies in the concept of group liability, the beauty and some might say deviousness of the scheme is breathtaking. With any credit scheme, the hardest part is screening and monitoring clients. When you lend to a group, the group is jointly liable, and thereby takes on the responsibility of monitoring the loans internally. This utilises the spy-on-your-neighbour brand of social capital. Highly effective, which explains the high rates of repayment despite the fact that close to 70%(estimated) of loans are used for consumption, or non-productive purposes. That then begs the question, what can the microfinance agent do to drive you to suicide that your friends and neighbours can’t or won’t do? Money-lenders have long been the boogie-man in the rural economy, but mass suicide has not been their forte, their means have been subtler. Interlinked markets and a position of authority have allowed them the ability to extract payment in kind. According to the data we collected in 6 villages across three districts in 2006, the average family had about 3 active loans at any given time, with 20% of the sample reporting upto 5. In 30% of these cases, the households did not believe they would ever be able to repay the entire principal owed. Debt is not a new phenomenon. So how does one explain these wasteful deaths?

The farmer suicides in Andhra Pradesh (2004) were linked to a drastic fall in the prices of agricultural commodities, particularly edible oil. Ground-nut farmers were badly affected by the state governments’ decision to import cheap palm oil as a substitute, after offering sops to farmers in order to get them to switch to ground-nut cultivation. The decision to end one’s life comes presumably when all hope is lost, and if nothing else these deaths signify a desperation that is hard to fathom. The learned Mr Aiyer dismisses isolvency as a possible cause. Perhaps we can lay it down to coincidence.

The curbing of private microfinance is not necessarily a bad thing, given that many observers have expressed concern over the future impact of large-scale indiscriminate lending. A ceiling on interest rates may benefit borrowers in the short-term. However the larger questions surrounding the efficacy of Microfinance as a poverty alleviation measure, and its long term impact remain unexplored.