By Veena Mankar
Veena Mankar is co-founder and managing director of Swadhaar FileServe. She has over 30 years of experience in development and commercial banking. Below is her response to Beth Rhyne’s Huffington Post blog article, “Who’s to blame for the Andhra Pradesh crisis?
I would like to add a dimension to Beth Rhyne’s perspective on “Who’s to blame for the Andhra Pradesh crisis?“
The two main contentious issues in the crisis are unaffordable interest rates and collection practices, which have led to a comparison with the notorious moneylender. To my mind, both these issues, to a certain degree, trace their roots to the lack of comprehensive financial services for the poor.
MFIs have successfully extended loans to the poor, but not other financial services. It is accepted that the poor have entrepreneurial opportunities that provide returns of 20-30% per month, which can, therefore, absorb the very high-interest rates on loans that arise from high transaction costs.
However, the interest rate becomes unaffordable when the loan is used not for income generation or cash-flow smoothing, but rather for other purposes. Low-income households with easy access to credit are using loans as substitutes for other financial products. For example, in a situation without life or accident insurance for the main income-earner, a loan could be taken out to cope with the financial “emergency” resulting from death or disability. This is also the case in a medical “emergency” requiring hospitalization of a family member.
Read the rest on Center for Financial Inclusion Blog