Caps, Drugs and Microfinance

(as posted on YourStory.in)

Of all the arguments I have heard in support of rapidly scaling microfinance the one I have heard the most is that there is huge demand for money among the poor. Of course there is huge demand. The less you have of it, the more desperately you need it – to tide over the pain and struggle of every day. The next meal, school fees, doctor fees, a pair of shoes, a movie to escape from reality, a drink or two to forget. It’s a painkiller.

When you’re in severe pain, you need a painkiller. What you care about is relieving the pain now. Today. When you are in desperate need of money you don’t have, and it is dangled in front of you, you will take it. But painkillers are insidious.

A friend of mine in the USA once began taking the painkiller Vicodin for severe chronic back pain. Having had a small back problem myself once, I know the pain can be paralyzing and nothing else matters but getting rid of it right then. He took only what the doctor had prescribed for him and for a few weeks it worked. But over time, the effects began to wear off sooner. So he began taking his next dose a little sooner. Before he knew it, he had used up his entire prescription a few weeks too soon. His doctor refused to give him a new one so he went to another doctor. And then another. Then to anyone else who might have a supply. When he didn’t have it he was unable to sleep. He had night sweats, his heart rate often went up, he had episodes of trembling and he went into depression. It was unbearable. He was fortunate to get help. Some painkiller addicts commit suicide. Overdose is also common and can lead to death. In the United States, there are over 400 documented deaths a year resulting from painkiller overdose.

Addiction is not the norm though. The people who are likely to get addicted to painkillers are those that have prolonged and severe pain. Not those with a short lived problem. There are also certain personality types that are more prone to addiction and irresponsible behaviour. So also for microfinance. The people who are poorer need it more desperately and borrowed money goes in just tiding over day to day expenses. Once spent, it is harder to pay back on time. Moreover, once you have a brief alleviation of pain – being able to pay for a doctor when your child is sick, or even being able to buy a tasty sweet to add to your meal - it is hard to go back. There is no alternative but to get more money by taking more debt. When you have mounting debt burdens that mean higher repayments and when you can’t get the next dose of debt soon enough to tide you over, the withdrawal can be almost the same as withdrawal from painkillers – insomnia, trembling, elevated heart rate and depression. Sometimes suicide.

So who’s to blame for the suicides? The microfinance lenders? The desperate or sometimes irresponsible borrowers? What is the right balance between justifiable borrower need and abuse? Like pain level which is highly subjective and can only be judged by what the patient reports, the need for money and ability to make use of it productively is also based on highly subjective self reported information. Who’s to know for sure? How do you dose appropriately?

The Malegam Panel report is just out with a host of recommendations for how to regulate the microfinance industry to put an end to practices of abuse and misuse. Cap the maximum spread so that profits are limited, cap the maximum interest rate, cap the maximum loan amount that can be given to any individual, cap the number of microfinance institutions that can lend to any individual, cap the fraction of loans that can be given for any particular purpose. But is capping the answer? What about a commitment to patient education? A requirement for lenders to provide not just complete and transparent information on the dosing (here the effective interest rates and costs) but also the risks presented in an easy to understand way? A public awareness campaign to communicate the risks and benefits of borrowing? An investment in financial management counseling for borrowers?

Instead of caps that curtail the abuse but also the benefits, what about finding ways to give the power to the people.