Moneylenders back in AP with jumbo lending rates

Micro-borrowers pay as much as 225% interest

Moneylenders are back in the villages of Andhra Pradesh, grabbing the space vacated by microfinance institutions following the state government’s decision to curb the micro-lending business of private players.

Since the catchment area is huge — over 80 per cent of borrowers in the rural areas of the state rely on informal sources for timely credit — moneylenders, pawn brokers and middlemen are charging as high as 225 per cent interest rate per annum.

According to a survey by MicroSave, a global consulting firm in the field of microfinance, traditional moneylenders, who only lend to people with whom they have a long-term credit relationship, are charging interest at 36-120 per cent per annum. The rate is much steeper, 160-225 per cent per annum, for weekly moneylenders, who are outsiders and visit villages to lend money.

MONEYLENDERS: Traditional moneylenders who lend only to people with whom they have a long-term credit relationship
Amount: Up to Rs 2 lakh
Interest rate: 36-120% per annum

WEEKLY MONEYLENDERS: These lenders come from outside the village and do business there
Amount: Rs 2,000-10,000
Interest rate: 160-225% per annum

MIDDLEMEN: Traders of farm products who provide agriculture inputs to farmers and buy their harvest
Amount: Rs 5,000-30,000 (sometimes credit is in kind, like seeds, fertilisers, pesticides, etc)
Interest rate: 48-75% per annum

PAWN BROKERS: Local jewellers who lend money against gold securities
Amount: Varies with value of gold pledged
Interest rate: 30-36 % per annum

Source: MicroSave

Pawn brokers or local jewellers who lend money against gold offer credit at 30-36 per cent per annum, while middlemen, who provide agricultural inputs to farmers and buy their harvest, charge interest at 48-75 per cent per annum, the study shows.

“Whenever formal channels are not available, informal channels take over,” said Manoj Sharma, director at MicroSave in India. Industry bodies and micro-lenders blame the state government for the situation. The state was once the largest microfinance market in the country. “The borrowers are under stress. Banks and self-help groups are not able to meet their funding needs. The Andhra Pradesh Microfinance Act of October 2010 has become a boon for these moneylenders,” said Alok Prasad, chief executive of Micro Finance Institutions Network, the industry body for micro-lenders in India.

In October 2010, the Andhra Pradesh government had passed legislation to restrict micro-lending by private players. It mandated compulsory registration of microfinance companies and loan collection near local government premises, and banned weekly recovery of loans. “It affected the poor borrowers the most. They are now turning to moneylenders and borrowing at a very high rate of interest,” said S Dilliraj, chief financial officer of SKS Microfinance.