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Debt Swap For Debt Trap

Poverty has many dimensions and stems from several factors – economic, social and cultural.   Although lack of opportunities for livelihood (economic) and denial of opportunities (social) are largely seen as a major causal factor for poverty, indebtedness is considered as important manifestation of household poverty in India.  Related to this are issues of economic growth, socio-economic equity, access to and control over productive resources, gainful employment and income, and lack of implementation of labour standards.  Indebtedness impacts differently on various classes of household and also has a bearing on intra household differences.  Given the varied inter linkages between indebtedness and other socio-economic welfare dimensions, it has come to be seen as a crucial variable that must be addressed by policy makers.  Despite a multitude of measures taken in this regard, chronic indebtedness and a structural inability to overcome bondage continues to plague poor households in rural India.  Indebtedness has clearly become a way of life but over a certain threshold of debt repayment/income, it prevents families to access basic amenities and has an important disempowering effect on them.   It is accentuated in the Indian context by lack of access to affordable credit and has now been recognised as another significant contributory factor. 

The poor like the proverbial Indian farmer is born with debt, lives with and dies with debt.  It is not so much debt per se, but the price paid for the debt, which makes them poorer.  The predatory lending practices of indigenous moneylenders charging usurious rate of interest have been perpetuating the legacy of poor’s debt bondage.

The issue of usury has been before us for long.  This continues to remain as a significant causal factor in compounding the problem of poverty.  The present scenario continues to be one of grave concern, as the issue seems to be intractable.  Thanks to microfinance intervention there are encouraging and positive signs of addressing this problem.

The poor on account of this high cost of debt face a life long risk of helplessness with virtual mortgage of life itself.  The approach to address the poverty, now, is increasingly focused on enhancing the access to credit. In this context, the micro finance has emerged as an effective instrument to address this age-old problem of poor keeping in view, adequacy affordability and timeliness

Interestingly, Governments and Corporates talk about reducing the debt burden by restructuring through retirement of high cost debts and many corporates/state Governments have already done so.  The question is, now, who will talk about for those who need it most.  The issue is not new but we need to revisit, renew and reinvigorate our approaches.  

Micro Finance and Debt Swap

Microfinance interventions need to reckon in larger measure usurious debts and the first flushes of micro finance operations are addressing the problems of debt bondage.  The interest outgo, being quite exorbitant, gives rise to negative cash flow.  Arresting this drain by the micro finance intervention itself is resulting in poor becoming less poor, if not coming out of poverty altogether.

There are quite a few empirical evidences to show that microfinance has been instrumental in bringing about substantial reduction of highly accumulated indebtedness due to usury.  These are but a few and the challenge is to enlarge this impact across the wider area covering greater multitude of poor.   Little research / study has been done on this issue of  over indebtedness of poor families in India. It is generally expected and perceived that microfinance programmes reduce the market for exploitative moneylenders and ultimately bring clients out of the informal market.  However, the following is observed:

  1. Clients contract loans from MFIs for specific purposes and remain indebted to money lenders for some others (e.g.) a family would benefit from an MFI’s income generation loan but would still rely on the moneylenders for other consumption loans used for ceremonies or emergencies)

  2. Multi indebtedness and loan overlapping is a reality in India where MFIs are concentrated in the same areas.  It will become an increasing problem as more microfinance markets become competitive.

  3. Loans on the informal sector may be interlinked with other markets, especially the labour market.  As a consequence, loans may not be disbursed hoping for future repayments but with the hope of securing a certain resource at below market price on another market.

Over-indebtedness in India calls for alternative approach that requires substantive innovations and careful experimentation.  INAFI India is keen on addressing the challenge of the burden of legacy liabilities of poor through debt swap process.

 
 

Workshop on Microfinance and Debt Swap for Poor