Chapter 7 of Poor Economics was about lending money to the poor, I found it very interesting. The authors caught my attention at the beginning of the chapter when they presented the statistic that the interest payment in Chennai, India is 4.69% per day. After a year, this absurd interest rate results in a borrower owning 1,843,459,409 rupees, which is $93.5 million USD (pg 158). This really makes you wonder about how anyone who finds themselves in poverty in an economy like this can rebuild their life. It also makes you wonder who would actually agree to take out a loan with that high of an interest rate. But then again, if someone is in a desperate situation, they might do just about anything for a temporary solution.
They point out that the main reason for high interest rates are the expenses that lenders incur by keeping track of the borrowers. They present a statistic that in Udaipur, India, two-thirds of the poor had a loan, but only 6.4% of those people had a loan from a formal source (pg 159). This is because it is less expensive to borrow from someone who knows the borrower well, because the lender won’t have to charge such a high interest rate to cover the expenses to keep track of/acquire information on the borrower. This also explains why people borrow from dangerous lenders who have the ability to seriously hurt the borrower if the loan is not paid back. These lenders do not feel the need to spend much money on getting to know their borrower, because they know that people would pay them back, considering the consequences.
Another reason for high interest rates that is presented in the chapter is that high interest rates reflect a higher chance of the borrower defaulting. The authors present the statistic that in Pakistan, the median rate of default across moneylenders is 2% and the average interest rate is 78% (pg 162). They also discuss the option of a borrower providing a down payment for the loan. This leads into the concept that people tend to only loan money to the rich, because the rich can afford a larger down payment and, therefore, a larger loan. I thought an interesting fact the authors presented was about the Indian branch of Citibank using local hooligans to threaten their borrowers who did not repay their vehicle loans. It was shocking to read something like that about a bank that many people use in the United States, I feel like people don’t commonly associate well-established banks with sketchy activity like that.
Another shocking statistic the authors present is that the Andhra Pradesh government blamed SKS for the suicide of 57 farmers who were put under too much pressure by the officers in charge of their loans. I think such a high number of suicides really illustrates how serious these situations get. I like the concept that the MFIs have started of creating groups whose members can support one another in times of difficulty. I think it is a much more productive way of helping poor people build up savings and hopefully they can continue improving upon the strategy. I would be curious to know what kinds of initiatives they are taking to help out people who are in need of emergency funds though.