A story in the Wall Street Jour­nal today chal­lenges a claim made many micro­cre­dit advocates.

Before micro­cre­dit began, money­len­ders would charge unfair inter­est rates to to the poor, rates so high that they were impos­si­ble to pay off. Instead, micro­cre­dit charged fairer inter­est rates, and also used peer groups and coun­selors to insure that the bor­row­ers paid back their loans.

Instead, the money­len­ders have flour­ished in India. Some money­len­ders have even adopted the prac­tices of micro-credit lenders, blur­ring the dif­fer­ences to the would be bor­rower. A few bor­row­ers have even used the money­len­ders to help pay of their micro­cre­dit loans.

From the Wall Street Jour­nal, writer Ketaki Gpkhale gives us a cou­ple of exam­ples and a counter point from microcredit.

Here in Mahabub­na­gar, a city of migrant work­ers that has one of the high­est con­cen­tra­tions of micro­fi­nance in Andhra Pradesh — and one of the high­est con­cen­tra­tions of money­len­ders — M. Murlid­har owns a tra­di­tional money­lend­ing busi­ness. He says peo­ple are “repay­ing their loans faster,” and that the “over­all rota­tion of money in soci­ety has been increased” by the advent of micro­fi­nance and gov­ern­ment lend­ing programs.

The city has 50 reg­is­tered money­len­ders, and an unknown num­ber of unreg­is­tered lenders. On the town’s main drag stand promi­nent offices for vir­tu­ally every kind of lender from money­len­ders and micro­fi­nance com­pa­nies to chit funds, a sort of sav­ings club that auc­tions its funds to the high­est bid­der. Locals say lend­ing is so frothy that it is pos­si­ble to get day loans in the veg­etable mar­ket that pro­vide 100 rupees in the morn­ing that have to be repaid with 10 rupees inter­est by dusk. More than 80% of reg­is­tered money­len­ders in Jad­cherla, the nearby lend­ing cen­ter for the dis­trict, launched their busi­nesses after 2000, when the num­ber of micro­fi­nance lenders began to skyrocket.

One lender, who wished to remain anony­mous because his busi­ness is unreg­is­tered, gives bor­row­ers short-term, collateral-free loans “as quickly as an ATM gives money,” he boasts. Inter­est some­times has to be paid on a daily basis and works out to an annual rate of 48%.

The poor use his loans as a stop­gap when they can’t make their weekly micro­fi­nance repay­ments because their income was less than expected, he says.

In Hanu­man Nagar, a slum nes­tled under a high­way, the money­len­ders are vir­tu­ally indis­tin­guish­able from the microlen­ders. They dis­trib­ute knock-off ver­sions of the microlen­ders’ pass­books. Some use the same weekly repay­ment struc­ture and door-to-door ser­vice as the microlen­ders do.

The dif­fer­ence, how­ever, is that the money­len­ders give loans faster, with­out ask­ing the women to form groups and serve as each other’s guar­an­tors, as micro­fi­nance lenders do in order to ensure a higher repay­ment rate. They also charge sig­nif­i­cantly more than the four microlen­ders serv­ing the neighborhood.

Balesh­wari, 23 years old, and her sis­ter Bala­mani, 40, started tak­ing micro­cre­dit two years ago when their father, the sole bread­win­ner, died. Between the two of them, they have taken loans from four dif­fer­ent microlen­ders and owe pay­ments total­ing 4,430 rupees, about $95, each month. Dur­ing the mon­soons, when their com­bined monthly income, drawn from sell­ing bam­boo bas­kets and cater­ing food, dips to about $65, they turn to the local pawn bro­ker for short-term loans to cover their micro­fi­nance debt. The inter­est rates she pays to pawn bro­kers range from 36% to 48%, she says, and she had to put up gold jew­elry as col­lat­eral. Her micro­fi­nance loans have inter­est rates of 18% and 24%.

“Group pres­sure makes us go to money­len­ders” to cover their micro­fi­nance loans, says Balesh­wari, who goes by only one name, as does her sis­ter. “We get small loans for 15 days to fill the gaps when we can’t pay. If you lag behind, the rest of the group mem­bers can’t get new loans.”

This dynamic is why some ana­lysts believe the vil­lage money­len­ders are actu­ally float­ing the micro­fi­nance lenders.

Microlen­ders dis­agree. They say the boom in tra­di­tional money­lend­ing has been fueled by an increase in demand for credit, and that the share of debt owed to money­len­ders is up because micro­fi­nance has yet to hit max­i­mum pen­e­tra­tion. Some doubt that micro­fi­nance is spurring money­len­der growth. Although “micro­fi­nance insti­tu­tions and money­len­ders offer dif­fer­ent prod­ucts, and it would be quite pos­si­ble for them to work side-by-side,” it doesn’t imply a causal rela­tion­ship, says Rachel Glen­ner­ster, exec­u­tive direc­tor of the Poverty Action Lab. She sug­gested some bor­row­ers may not be pay­ing one loan with another, but using addi­tional funds to expand businesses.

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