In Rural Bengal, Microfinance Loan Traps Are Created Out of Circumstance and Lack of Information

Scene 1

Sajal*, a man in his 30s parks his motorcycle in front of a dilapidated mud house. Stern expression, he walks straight into the house. Twenty-five-year-old Shibani* is sitting with a child on the veranda. Her frail body bears marks of long-term malnutrition, and the child in her care shows the same signs.

“You haven’t paid the instalment again this week. I won’t leave until I get the money,” Sajal says.

Head lowered, Shibani responds that she cannot. “Sir, his father has gone to Mumbai in search of work and hasn’t sent any money yet. I am here with my child and elderly mother-in-law. We are almost starving. There is no opportunity for me to earn here. As soon as my husband sends the money, I’ll pay the dues. I won’t leave any instalment unpaid," she says.

“I don’t want to hear excuses,” Sajal snaps. “Sell your goats, hens, pigs, cooking utensils, even your silver jewellery. Whatever you have. If you can’t do that, then go ahead and kill yourself. If you die, the loan will be waived," he adds.

As Shibani begins weeping, Sajal leaves the house. He sits under a tree, where this reporter catches up to him. Initially reticent, Sajal says that he works as a loan collector for Bandhan Financial Services Limited, a microfinance company that claims to empower women through small loans. Every week, he visits villages across the remote, forested and hilly regions encompassing Madhabpur, Jhilimili, Kanthaliya, Bansdiha, and Tilaboni in Bengal's Bankura district, to collect loan payments.

“If I fail to deposit the collected instalments, I’ll be terminated,” Sajal says.

Originally from a village in the Chhatna Block of the district, Sajal took up this job out of desperation. His father, who used to work in a rice mill in Jhantipahari (also in the Chhatna Block), lost his livelihood as the mill shut down. Despite having a Master's degree, Sajal earns Rs 11,000 per month as a field collector.

Shibani explained that she had borrowed Rs 25,000 from Bandhan Bank to repair her house. However, Rs 2,000 was deducted upfront as insurance. For the remaining Rs 23,000, she is required to pay Rs 400 per week for 96 weeks – amounting to Rs 38,400 in total. If the collector fails to gather and submit this money regularly, he risks losing his job. Borrower and collector are thus both trapped in a vicious microfinance cycle.

This silent anxiety has become widespread across Bengal, spanning villages and urban slums alike. 

In Nila Madhab Panda’s 2017 film Kadvi Hawa, a debt collector was referred to as "jamdoot," the god of death. In many parts of rural Bengal, such collectors are known as "sir" but the horror they invoke is similar.

Scene 2

On a Monday morning at around 10 am, Neha Khatun, Sultana Bibi, Mauda Bibi and others are gathered in front of Samina Bibi’s house in Kabardanga in ward number 11 of Bankura town. The women say they have left rice boiling on the stove – an expression to mean that they left in a hurry amidst housework. In their hands, they have loan books and cash to repay their weekly instalments.

“Sir will arrive at exactly 10:30. You can match it with the clock. He’s never late,” says Neha Khatun, who had borrowed Rs 50,000 to renovate her home.

But time passes and “Sir” is nowhere to be seen. About half an hour later, word comes in that the collector had arrived on time but is standing outside, reluctant to appear before the journalist present. Eventually, he comes forward and holds a brief meeting with the women borrowers. He agrees to speak to The Wire. “We provide loans to poor and marginalised women to help them become self-reliant. The repayment rate is good. They pay back 96 instalments at 22% interest," he says.

Neha Khatun, Samina Bibi and others with their microfinance loan collector. The children's faces have been blurred in accordance with Indian laws on minors. The loan collector's face has been blurred on request. Photo: Madhu Sudan Chatterjee.

However, all the women report being burdened by high-interest repayments.

“I took a Rs 1-lakh loan. My husband is an electrician and used the money to buy tools. After a Rs 5,000 deduction for insurance, I received Rs 95,000. I now pay Rs 1,500 per week – Rs 1,44,000 over 96 instalments. I don’t even know how much interest I’m paying,” says Samina Bibi.

Many borrowers note that they were never told of a fixed interest rate. Most go to microfinance companies as a last resort and are compelled to accept any and all conditions set by them.

Chandi Begum, a housewife from the School Danga area of Bankura town, says, “I run a small business selling plastic and glass bangles. No bank would have given me such a large loan without collateral, so I had no choice but to borrow from a microfinance company, even at a high interest rate.”

Chandni Begam, a resident of School Danga, Bankura, who started a plastic and glass bangles business by taking loan a microfinance loan. Photo: Madhu Sudan Chatterjee.

Ansura Begum, a manual scavenger employed by the Bankura Municipality, took a Rs 50,000 loan to support her family and pay for her daughter Muskan's college education.

Dulali Bauri, a resident of Belghoria in the North 24 Parganas district has been taking loans from IndusInd Microfinance for the past 10 years just to meet her daily expenses. Her son is a daily wage labourer. Recently, she borrowed Rs 80,000, which she must repay at Rs 1,470 per week, totalling Rs 1,41,120.

Dulali Bauri at Lalbazar showing her loan book. The child's face has been blurred in accordance with Indian laws on minors. Photo: Madhu Sudan Chatterjee.

“What choice do we have?” she says with despair. “We need money for house repairs, medical treatment, and basic survival. My son Sridam and I work three times harder just to repay the loan.”

With the same story playing out across Bengal it might be worth it to look at what the original purpose of microfinance is and what it has become.

Purpose

Microfinance, as a formal financial tool, began taking root in Bengal during the late 1990s and early 2000s. Its primary objective was to promote financial inclusion by offering small-scale financial services, such as loans and savings, to low-income individuals who lacked access to traditional banking systems. Microfinance institutions (MFIs) aimed to serve as a bridge between formal banking infrastructure and marginalised communities, particularly in rural areas and urban slums.

MFIs played a pivotal role by providing not only credit but also financial literacy and saving options. Women, in particular, were among key beneficiaries, as they often face significant socio-economic barriers in accessing formal credit or entrepreneurial opportunities.

A study by the Association of Microfinance Institutions West Bengal has shown that financial independence among women led to increased participation in household financial decisions, improved access to healthcare and education, and a measurable reduction in gender disparities.

“The major reason behind this economic and social transformation among marginalised women was the establishment of self-help groups (SHGs) during the Left Front government in the late 1990s,” said Tarubala Biswas, former chairperson of the Bankura Zilla Parishad.

The Wire spoke to the former chairperson of the Purulia Zilla Parishad, Bilasibala Shahis, and the former chairperson of undivided Medinipur, Pulin Bihari Baske, on the same issue. Both Shahis and Baske credit SHGs, like Biswas.

“Women received low-interest loans and were trained to manufacture useful items like bags, shirts, chairs, footballs, and imitation jewellery. Though microfinance institutions were present, most women relied heavily on government-sponsored SHGs during that time," Baske said.

In the early 2000s, institutions such as Village Financial Services (VFS) began formalising microfinance operations in Bengal. This was followed by the rise of Bandhan, which later became Bandhan Bank, a major player in the sector.

However, post-2011, after a change in the state government, there was a decline in the effectiveness of state-sponsored SHG initiatives. Though SHGs still exist on paper, their practical reach has been steadily shrinking.

“Allegations of corruption in SHGs have surfaced in regions such as Sonamukhi, Jhilimili and Joypur in Bankura, Memari and Galsi in Purba Bardhaman, and Kultali in the South 24 Parganas,” says Sudipa Banerjee, assistant secretary of the All India Democratic Women’s Association, West Bengal.

“In this vacuum, microfinance companies have mushroomed across the state and women are being forced to depend on them," she adds.

The microfinance landscape in Bengal

Data given to this reporter by a microfinance company employee shows that as many as 23.8 lakh women borrowers are currently engaged with microfinance companies across West Bengal. The total loan amount disbursed stands at approximately Rs 33,181 crore.

Top 3 districts with the highest microfinance penetration are Murshidabad – Rs 3,991 crore (total amount of loans), North 24 Parganas – Rs 3,090 crore, and South 24 Parganas – Rs 2,096 crore.

Bottom 3 districts are Kalimpong – Rs 63 crore, Jhargram – Rs 287 crore and Purulia – Rs 435 crore.

The statewide average indebtedness is 1.47%, though some districts report significantly higher distress like Jhargram (8.22%), Purulia (2.70%) and Paschim Medinipur (2.44%).

Districts with the lowest indebtedness are Kalimpong – 0.55%, North Dinajpur – 0.56% and Cooch Behar – 0.80%.

In terms of outstanding default amounts, Birbhum leads with Rs 23.71 crore, Bankura with Rs 15.81 crore and Dakshin Dinajpur with Rs 15.69 crore.

Currently, 26 microfinance companies are operating across the state, including:

• Bandhan Financial Services Ltd (the largest lender)
• VFS Capital Ltd
• Satya Micro Capital Ltd
• Asirvad Financial Services
• IndusInd Bank Microfinance
• Muthoot Microfinance
• Bharat Financial Inclusion Ltd
• Aasha Microfinance
• Gramin Shakti Microfinance Services Ltd

Distress

The State Level Bankers' Committee (SLBC) recently painted a grim picture of Bengal’s rural economy. In a quarterly review meeting held in April (attended by senior government officials, RBI, NABARD, and leading banks), the following insights emerged:

Between March 31 and December 31, 2024, rural customers deposited Rs 17,576.21 crore, averaging just Rs 279 per person per month. In contrast, during the same period, banks disbursed only Rs 133.46 crore in loans – just Rs19 per person.

Despite 4,350 rural bank branches, of which 2,148 belong to nationalised banks, financial access remains dismal.

“Banks hesitate to issue small business loans as they fear defaults,” says Subhash Dutta, marketing manager of the lead bank in Bankura.

A senior bank officer in Kolkata adds anonymously, “Most loans are granted to salaried, affluent individuals with proper income tax documentation. Marginalised people often lack both stable jobs and credit access.”

A woman sets down her papers and money on a piece of tarp, in front of a loan collector. Her details have been blured. Photo: Madhu Sudan Chatterjee.

Rural banking and the rise of microfinance

Previously, rural banks like Bangiya Gramin Bank were trusted institutions for the poor.

“After the Narasimham Committee recommended consolidation in the 1990s, the number of rural banks in India dropped from 196 to 43. In Bengal, the number fell from 9 to 3,” said Tusarkanti Hazra, who recently retired from the Bangiya Gramin Bank.

“Rural banks were meant to protect people from predatory moneylenders, not chase profits. Today, they operate like corporations. Farmers now have to place fixed deposits equal to their loan amount, an impossible requirement for the truly needy,” he said.

In this vacuum, microfinance companies are expanding rapidly.

“Over the last decade, the central government has indiscriminately licensed new microfinance companies. There’s serious doubt whether these companies are being properly regulated,” said Uday Shankar Adhurya, State President, Gramin Bank Retirees’ Association.

Another major blow to rural livelihood has been the halt of MGNREGA work in Bengal for the past three years. With nearly 7 crore people living in rural areas, in 2021–22, 51,13,336 women were employed under the scheme in the state. Each woman earned approximately Rs 15,000 per year. The Union government was responsible for disbursing Rs 3,500 crore in wages to women alone.

The union government suspended funds, citing corruption in Bengal’s MGNREGA implementation.

“If the scheme were active, this money would be circulating in the rural economy,” said an official from the state’s rural development department.

Business

Microfinance companies typically operate in low-income neighborhoods through the use of local brokers or field agents. Their first step is to form a group of at least 10 married women, as loans are only offered to married women.

A field collector from Asha Microfinance explained the rationale: “It’s easier to recover loans from women. They repay the installments no matter what, because of their self-respect. They often take on extra work to ensure repayment. They also don’t stay outside their homes for long, so they are easy to trace.”

Once a group is formed, each member is typically granted a loan of Rs 20,000 within a few days. However, borrowers are immediately warned about the strict repayment system.

“They told us very clearly that installments must be paid on a specific date. And if we miss even one payment, they said they would show no mercy,” say Uma Sutradhar and Pramila Ghose, homemakers of the Bigna village, Bankura.

Uma Sutradhar, Pramila Ghose, Sukuntala Malla and another woman at a meeting on microfinance loans at Uma Sutradhar's house at Bikna village, Bankura. Photo: Madhu Sudan Chatterjee.

Microfinance institutions (MFIs) often use women from within the same group to pressure others into repaying.

Group members are told that if one person defaults, the loans of all others in the group may be terminated. This form of peer pressure creates a climate of fear and social tension within these small communities.

Traps

Another commonly used tactic by MFIs is to entrap women in a cycle of continuous borrowing. After a borrower has paid five to seven instalments, she is told she is now eligible for a new loan. However, instead of receiving the full amount, the outstanding balance from the previous loan is deducted, additional charges for insurance are applied, and as a result, the woman receives very little money in hand but now owes a larger loan amount with higher interest.

“It is a fact that many women are then forced to borrow money from private moneylenders at even higher interest rates. Since MFIs refuse to provide additional loans to women already struggling with repayments, it appears there is a tacit understanding among MFIs to avoid supporting such borrowers,” said professor Pratip Mukherjee, former Head of the Department of Economics, Bankura Sammilani College.

Additionally, information about insurance deductions is rarely shared, and loan documents are not transparent. Women are often unaware of how much is being deducted in the name of insurance. The identities of collection agents are kept confidential. Notably, none of the collectors are locals, making accountability difficult.

Statements from industry representatives

Sujit De, manager at Bharat Finance and resident of Galsi, Purba Bardhaman, defended the company’s actions, saying: “We are working to make women self-reliant.”

On the other hand, Shobhon Samanta, manager at Bandhan Finance, Bankura, claimed: “Interest must be paid as per the fixed rate. That is the rule of Bandhan Finance.” Bandhan’s interest rate currently stands at 22.95%.

In March 2022, the Reserve Bank of India (RBI) granted MFIs the freedom to fix their own interest rates, with the stipulation that rates should not be usurious or exploitative. However, field-level reports suggest that many MFIs do not comply with this condition, and interest rates remain high, often without clear disclosure to the borrowers.

*Names changed on request.

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