Loan sharks are circling for poor Indian debtors failed by microfinance.

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A growing body of research suggests that micro-credit, the darling of international development, costs borrowers dear.

Critics say repayment terms on microfinance payments are unrealistic and old-fashioned, too inflexible to meet the investment needs of poor borrowers. Photograph: Alamy
▼ It’s still a week or so until Diwali, but the market in Thol, a village in northern India, is already bustling with shoppers perusing cheap Chinese-made electronics, sweets, presents and decorations.
“Diwali shopping season seems to start earlier every year,” says Rashmi, 36, who opened a small sweet shop last year with a loan from a local microfinance institution that is repayable in weekly instalments. A recent increase of her existing loan allowed her stock up ahead of Diwali.
It sounds like a success story: a poor woman is able to take a microfinance loan to grow her small business to match seasonal demand. But Rashmi’s debt is making her stressed, as she worries about the future of her shop, the wellbeing of her family and her reputation.
Modern microfinance began with economist Muhammad Yunuswho in 1976 lent $27 (£21) to 42 women in Bangladesh. Each of the women used the money to develop their small businesses and repaid Yunus in full. The experiment paved the way for expansion of microfinance, which became a darling of international development, backed by Bill  Gates, Bono, and Hillary Clinton. The UN declared 2005 the year of microcredit, and Yunus and the Grameen Bank won the 2006 Nobel peace prize. Over the last decade, microfinance has boomed – by 2015 several thousand micro-organisations had around 200 million clients, with loans amounting to $100bn.
But now there is a growing body of research suggesting that microfinance doesn’t work for  some communities– apart from generating income for lenders. It may have worked well in Bangladesh in the 70s, but it has failed to keep up with the changing needs and behaviours of business owners. One reason, say critics, is that repayment terms are unrealistic and old-fashioned. Inflexible contracts fail to meet the investment needs of poor borrowers such as Rashmi, whose income fluctuates over the year: “It can be extremely busy around the festival, and, then afterwards, there are some weeks when I can’t sell a piece of barfi [traditional Indian cake],” she says.
Even though Rashmi’s income is irregular, the microfinance institution demands fixed weekly repayments starting immediately after the loan disbursement. This means she cannot use all the money to give her supplier a downpayment for her order of Diwali sweets. She needs to retain 15% to make sure she can meet the repayments before she generates income. “It will take weeks to sell enough sweets to make a profit – weeks in which I still have to make regular repayments on the loan. This adds to the borrowing costs,” she says.
It’s a cashflow disconnect. Rashmi has had to sell stock below retail cost just to meet the repayment deadlines and pay rent for the shop. Poor borrowers also describe skipping meals, falling behind on other bills, and going without household necessities, as well as describing classic symptoms of stress. “Finding money for the repayment every week causes me real worry and stress. Until I have money for the instalment, I feel anxious and agitated all the time,” says Rashmi.
In the past, some loaners have resorted to coercion and high-pressure tactics, and in India, d ebt stress has reportedly led to some suicides. “Defaulting a loan is not an option, it doesn’t just mean being barred from future loans but also barred from society through humiliation, hostility, shame and harassment,” says another borrower from Rashmi’s village. (▪ ▪ ▪)

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