In this photo provided by Singing River International Ministries, Shobha Chothe of Ahmednagar, India, poses next to a new cab she purchased after applying for a small business loan from Singing River Internaional Ministries (FILE).
In this photo provided by Singing River International Ministries, Shobha Chothe of Ahmednagar, India, poses next to a new cab she purchased after applying for a small business loan from Singing River Internaional Ministries (FILE).

Micro-credit lending, which involves making small loans to poor people to start businesses, has improved millions of lives in recent decades. But authorities in southern India say the practice is becoming a corrupt and occasionally deadly business.

Officials in India's Andhra Pradesh state are investigating a string of suicides that have had suspicious similarities in the past two months. Reddi Subrahmanyam is the state's principal secretary for rural development.

"The feeling from the community is that many of these deaths have occurred immediately after the recovery agents of the microfinance institutions have either visited the house or have done something insulting," says Subrahmanyam.

In one case, he says, debt collectors visited a borrower's home and allegedly made sexual advances toward a girl who was staying there alone.

"Because of which, unfortunately, I think she committed suicide after these people have left," he says. "Some of these cases are very, very disturbing. And the government has had to act very strongly in all these cases."

The state has passed emergency measures banning loan collectors from making house calls and requiring all microfinance institutions to register with the government.

Subrahmanyam says the measures are aimed at stopping exorbitant fees and interest rates that can reach 40 percent, and preventing debt collectors from using aggressive tactics.

The stories are a far cry from the social development plan that won Bangladeshi economist Muhammad Yunus the Nobel Peace Prize in 2006. Yunus, the founder of Grameen Bank, pioneered the use of so-called micro-loans to lift people out of poverty.

Chuck Waterfield, the CEO of the U.S.-based says the questionable practices in Andhra Pradesh are affecting only a small percentage of India's 50 million microfinance clients. But he says these loan-shark tactics are a byproduct of the increasing competition among microfinance lenders.

"Now you put yourself in the shoes of a client," says Waterfield. "And okay, I've already got a loan from one institution. And another institution comes by and knocks on my door and says, 'Hey, would you like a loan?' That sounds pretty good. One loan is good, maybe two loans is better."

Waterfield says clients start using one loan to pay off another, and then fall "into the trap of not being able to make all those loan payments."

The same pattern of delinquency drove Bolivia into a microfinance crisis a decade ago. At the time, debtors held hunger strikes and seized control of government buildings to demand forgiveness from their microfinance institutions, or MFIs.

"Now whose fault is that? No one MFI gave too much money. But the client took advantage or the temptation of taking on too much debt," says Waterfield. "And on the MFIs, the MFI's should have reviewed and determined whether that client already had two loans and say, 'Well, if you've already got two loans, we're not going to get you a third.'"

Waterfield's organization works with microfinance groups around the world to establish transparent pricing.  One of his clients is the Microfinance Institutions Network, which represents 44 of India's biggest MFIs.

The network of lenders is challenging the new Andhra Pradesh regulations in court. CEO Alok Prasad says the ordinance is unconstitutional.

"It is our view that regulation of financial institutions is something that only the central government and the central bank are under the constitution and power to do," says Prasad.

India's central government is considering microfinance legislation. But until that is completed, Prasad warns state-level restrictions could just drive the poor back to unscrupulous moneylenders.

In Andhra Pradesh, authorities insist they are trying to fill any lending gaps through state-sponsored self-help community groups that borrow money from traditional banks and share it with members in need.

Jonathan Morduch, a professor of public policy and economics at New York University's Wagner Graduate School, says there is room for both lending approaches. But he says new rules are needed to ensure an equal playing field.

"To support these non-bank financial companies," he says. "To regulate them in a prudent way and to open up the playing field so that self-help groups don't have so much preferential treatment."

Morduch says globally, the microcredit industry has grown faster than the institutions that help it run efficiently, such as credit bureaus. But he says reactionary measures, like putting very tight caps on interest rates, will only serve to demolish an essential industry.  

"And if that happens, you're going to have millions and millions and millions of people who are left without quality financial services," he says. "And who are left really to be victims of money lenders."

Morduch says the microcredit field is still young and it could take another decade to resolve major problems. Until then, authorities in Andhra Pradesh say they are doing what they can to not just improve lives, but to save them as well. The state government plans to release the results of its investigation into the suicides later this week.