Debt trap turns tragic for Andhra MFI chiefs

Last Updated: Mon, Jun 04, 2012 20:13 hrs

Life seems to have turned a full circle for some professionals in the microfinance industry of Andhra Pradesh, but with tragic consequences.

About a year and a half back, microfinance institutions in the state were accused of coercive recovery practices that forced many poor borrowers to commit suicide. Following a regulatory crackdown, the situation appears to have reversed, with chief executives of at least two small to medium sized microfinance companies committing suicide in recent months. Only this time they were at the receiving end of alleged coercion after a rising debt burden made their operations go deep in the red.

Last week, A Prathap Reddy, chief executive officer of SEWA MACTS Federation, a Hyderabad-based micro-lender, ended his life. Industry players claim he was stressed, as the microfinance company was not in a position to repay its debts.

“Prathap Reddy had over three decades of experience in the microfinance sector. He committed suicide as he was not able to repay the bank loans. It is very sad and we express our condolences,” V Prabhudas, secretary of the Andhra Pradesh Small Micro Finance Institutions Network, told Business Standard.

SEWA, which operates in 8-10 districts of Andhra Pradesh, has around Rs 25 crore loans outstanding with banks. It is a member of the Andhra Pradesh Small Micro Finance Institutions Network.

K Satya Lingam, station house officer of Balkonda police station in Nizamabad district, confirmed the death of Reddy. While the police initially registered a case of suspicious death, they subsequently concluded Reddy had committed suicide. They found his body on May 28.

Reddy’s son, Vinay, confirmed the death of his father but declined to detail further.

According to police sources, financial losses are believed to be the primary reason behind Reddy’s suicide. Apart from losses in the microfinance business, Reddy also made some investments in real estate, which probably were not successful. “We are in the process of establishing the cause of his suicide and this is what we have come to know through our investigations so far,” said a police official.

Industry associations of micro-lenders said it was not the first instance of a chief executive in the microfinance industry committing suicide. About a couple of months back, the chief executive of another Andhra Pradesh-based microfinance firm ended his life as he was not able to repay loans, they said.

Business Standard could not independently verify that claim.

The Andhra Pradesh government had imposed restrictions on the micro-lending business of private companies in October 2010, following allegations that microfinance companies were charging poor borrowers high interest and using coercive methods to recover the money.

The restrictions had impacted private microfinance firms' profitability, as their loan recovery rate fell to 10 per cent from 90 per cent earlier. Most microfinance companies have failed to repay their loans outstanding with banks.

Banks have so far agreed to restructure loans of large and mid-sized micro-lenders. The Corporate Debt Restructuring cell has admitted loan recast proposals of only seven microfinance companies till now.

Industry players said banks were not willing to restructure loans of small microfinance companies, as they were not confident about the revival of these firms.

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