They were part of the force to protect the poor from usurious money-lenders. But now they have turned money-lenders themselves.

This is the virtual unintended consequence of the halt of microfinance operations for the last six months in Andhra Pradesh , the country's biggest MFI market.

This new class has mostly risen from the ranks of field staff of many MFIs, either retrenched by their employers or those without full-time work.

“Some of the former/existing employees of MFIs are now offering us small loans up to Rs 2,000. Some members are also accepting the loans,” Ms Yadamma, a self-help group member from Tandoor in Ranga Reddy district told Business Line .

Social collateral

The loan-giving is simple: No collateral, no paper work. The loans are just given after involving the group members as social collateral. Also, the duration is not one year, as those offered by MFIs. “We are being asked to repay in a month. They are deducting Rs 100 interest for every Rs 1,000 loan at the time of giving the money,” she said. This works to an interest of 120 per cent a year. Some others are said to be charging as high as 256 per cent a year.

With no new loans extended since October 2010, many were feeling the need for funds, she added. This has negated the very purpose of the AP MFI (Regulation) Act, which aimed at protecting the poor from indiscriminate lending among others.

Knowing the system

According to Ms Padmaja Reddy, Managing Director, Spandana Spoorthy Innovative Financial Services, the ‘knowhow' of MFI operations is a big advantage to the former staff to take advantage of the present crisis the industry was going through.

“Over a period, the field staff have also come to know their clients and their needs well. In a way, the entire system is known to them,” she said.

However, some are also refusing the loan offers from the money lenders. “We know them as agents of MFIs. We are telling them that we don't want to take any loans from them,” Ms Shoba Rani, from Jawahar Nagar in the suburbs of Warangal, said.

When contacted, Mr Reddy Subrahmanyam, Principal Secretary, Department of Rural Development, Government of AP, said strict action would be taken against those involved in unauthorised money-lending. “The District Collector and other Revenue officials are empowered to take action against unregistered money-lenders.”

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