India’s booming microfinance industry is in crisis, as highlighted by BBC’s Newsnight (20 Jan) and The Guardian. Those most affected are the Dalits, who are among the world’s poorest people, making them even more vulnerable to human trafficking and slavery.

Pioneered in Bangladesh in the late 1970s, microfinance involves granting small loans to the very poor, allowing them to launch small-scale business enterprises. Around 30 million households in India have received £4bn in such loans over the last 15 years.

But this well-meant initiative has gone drastically wrong, devastating the lives of millions of desperately poor people. As a result of aggressive selling of loans to often illiterate villagers and aggressive debt collection, a significant number of borrowers cannot afford to repay their loans.

Some NGOs offering loans chose finance models specifically to attract funding. As a result much of the lending fell under the control of commercial companies leading to high interest rates. Banks attracted by high repayment rates invested heavily in what became a chaotic rush of reckless lending motivated by greed. Now state authorities and the central bank are taking action to cap interest rates and tighten lending guidelines. Consequently, a less profitable market has meant banks are beginning to refuse to fund microfinance companies.

Suicidal despair

Additionally, a lack of proper screening meant that individuals taking out loans used them to cover costs for items or needs that have no return, such as house improvements or medical costs. Despite the size of loans being relatively small, for the very poor, repayment and interest rates have been crippling. It has led to a number of well publicised suicides in the state of Andhra Pradesh, where half of all microfinance loans have been made.

Those most at risk are the very poor, particularly Dalits. This makes them particularly vulnerable to exploitation, to human trafficking and modern slavery, especially in the form of bonded labour.

A different approach

Dalit Freedom Network (DFN) is involved in microfinance projects in India, but with a very different approach and outcome. Firstly, DFN's partners and programmes follow a non-commercialised approach, with low operational costs and low interest rates, and no pressure from credit companies or shareholders.

Secondly, operational procedures of DFN programmes are different. The DFN approach applies a careful screening and selection process which looks at how the loan will be spent: it is crucial that the recipient has a realistic chance of repaying the loan. Thirdly, DFN programmes charge a low interest rate – less than 2% – compared with the 20% or more charged by microfinance companies.

Fourthly, and most crucially, microfinance is a minor part of the DFN economic development programme for Dalits. DFN prefers to use the approach of ‘Self-help Groups’ to support the financing of mini-enterprises that lift Dalits out of poverty. A group of up to 12 members, self-help groups raise money from among themselves, decide which member receives the first 'microloan', and then monitors the repayment. This approach leaves the responsibility and accountability for the loan firmly with the individuals lending and borrowing the money: it creates a community of trust. Over 1,700 self-help groups have been set up with over 23,000 members.

Vocational training and, increasingly, establishing businesses to employ Dalits, are other key elements in DFN’s economic development initiatives. These projects are just one part of a multi-disciplinary approach to community transformation. The aim is to help Dalits break free from the cycle of poverty and exploitation which makes them so vulnerable to trafficking.

For more information about DFN’s economic development projects click here.