AP plans suicide cover, wants MFIs to foot the bill
HYDERABAD: The Andhra Pradesh government is planning a legislation that would make it mandatory for microfinance companies to pay a compensation of Rs 5 lakh to families of borrowers who commit suicide because of debt burden.
This would raise the liabilities of microfinance companies and compound their problems which they already face in slowing loan repayments after curbs on loans and recovery.
"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." No final decision has been taken.
Andhra Pradesh, which accounts for nearly a third of the industry, triggered a debate on how microfinance has to be regulated when it enacted recovery and lending rules last October following suicides and unethical practices by lenders. The Reserve Bank of India appointed a committee under YH Malegam to suggest regulations, whose report was made public last week. The sector is on the verge of collapse due to wilful defaults, which the industry blames on the AP Act.
"As we think MFIs are responsible for these suicides, they need to compensate the families of victims," said Mr Rao. "The proposal is currently under the consideration of ministry of pensions, self-help groups & women development, child & disabled welfare and a final call will be taken on it soon."
The state government was under pressure from opposition parties to offer compensation to suicide victims. The latest proposal is expected to help it pass the buck without any pressure on the exchequer, which is already finding it difficult 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.
Individual companies declined comment on the plan.
"The proposal is under consideration and it will not be appropriate for us to respond to it now," said Alok Prasad , CEO of Microfinance Institutions Network - a self-regulatory lobby group of the industry.
This would raise the liabilities of microfinance companies and compound their problems which they already face in slowing loan repayments after curbs on loans and recovery.
"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." No final decision has been taken.
Andhra Pradesh, which accounts for nearly a third of the industry, triggered a debate on how microfinance has to be regulated when it enacted recovery and lending rules last October following suicides and unethical practices by lenders. The Reserve Bank of India appointed a committee under YH Malegam to suggest regulations, whose report was made public last week. The sector is on the verge of collapse due to wilful defaults, which the industry blames on the AP Act.
"As we think MFIs are responsible for these suicides, they need to compensate the families of victims," said Mr Rao. "The proposal is currently under the consideration of ministry of pensions, self-help groups & women development, child & disabled welfare and a final call will be taken on it soon."
The state government was under pressure from opposition parties to offer compensation to suicide victims. The latest proposal is expected to help it pass the buck without any pressure on the exchequer, which is already finding it difficult 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.
Individual companies declined comment on the plan.
"The proposal is under consideration and it will not be appropriate for us to respond to it now," said Alok Prasad , CEO of Microfinance Institutions Network - a self-regulatory lobby group of the industry.
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