Burden Off The Shoulders

A story of how an old debt repayment turned out to be transformational for a rural household

Pana Ram* felt vulnerable and trapped. His only son was terribly ill since the last 5 months. Multiple visits to faith healers, local Bangali doctors (quacks) and even a few clinics in Udaipur did not yield any favourable results. Helpless, he convinced himself to visit a new doctor, but with looming stress of his finances. At the end of this 5 month period, he had an accumulated debt of INR 40,000 taken from two local money lenders at 10 percent interest per month. Not just that, his agricultural land worth INR 1 Lakh was also mortgaged with one of the moneylenders given Pana Ram’s unfavourable creditworthiness.

Ram Lal*, a mason by profession, faced a similar situation when he had to bear unexpected social expenses due to his mother passing away. At that moment, borrowing from a local money lender was the only option. However, during the lockdown, when work was not available, he had accumulated monthly interest payments on the loan. Now, his total debt amounted to INR 26,000 including the interest payments of the last 6 months at the rate of 5 percent per month. With work situation still not stable, his repayment capacity has reduced making it challenging for him to pay the monthly interest. The moneylender has now asked him to mortgage 500 grams of silver to secure the loan.

These are not one off instances for rural households with migrant workers. If you talk to any migrant worker who has taken such a loan, you would be able to perceive a sense of normalcy around borrowing at such expensive and exploitative terms. Unfortunately, such households take an average of 5 informal loans of this kind in their lifetime. 

While on the outside this may seem ordinary for a household, there are several economic, psychological, social and well-being related costs related to such transactions. Firstly, due to the extremely high rate of interest, the burden of repayment is sometimes as high as 40-50 percent of a household’s monthly income. This makes the household susceptible to taking additional borrowings from friends and relatives, leading to multiple debt traps and increased vulnerability of falling back into poverty. 

The expensive debt repayment schedules force the household to neglect other priorities such as nutrition, children’s education, healthcare for the ill members, etc. Difficulty in spending for some of these primal aspects leads to deterioration of overall well being of the household, in addition to financial stress.

Inability to repay the monthly instalments invites harassment and exploitation from the moneylenders. It often leads to mortgaging of assets such as agricultural land, silver and livestock. An asset accumulated over the years is sometimes lost in a matter of minutes. This, coupled with mental harassment and intimidation by the moneylender erodes the household’s social capital which is extremely important in a small and close-knit rural community.  

All these factors together, make it impossible for a household to carry on with their life and work as usual. The interesting thing here is that most financial service providers are unable to come up with a solution for these households. As a result, a lot of such families fall between the cracks. A straightforward, more dignified and affordable financing option to repay the old debt is a simple yet powerful tool for poverty reduction and prevention. While borrowing to pay off the debt may seem counterproductive, it can be an effective solution when:

1. The number of lenders is reduced, making it easier and streamlined to manage the debt, repayment schedules, cost of borrowings, etc.
2. It can help free up the assets that have been mortgaged, the value of which is often higher than the total debt taken
3. The cost of the new debt is lower than the old debts and repayment schedule matches the household’s repayment capacity

Not only can such a solution prove to be more affordable for the households, but also prevent many of the invisible costs of over indebtedness. It also helps improve the other aspects of overall well-being, ensures flexibility for decision making and prioritisation of family’s goals. Additionally, it provides a cushion for experimenting with and following different occupations or entrepreneurial pursuits.

It is therefore important for financial service providers, especially micro-finance institutions to address the needs of low-income rural communities beyond enterprise or asset creation as the only or the most significant effort.

While these are great tools to promote rapid income generation, it can prove transformational to design products and services keeping the structural aspects of a community at the forefront.

*Names changed to maintain confidentiality