On Microfinance: Who's to Blame for the Crisis in Andhra Pradesh?

> Posted by Michelle Romeu
Beth Rhyne’s latest Huffington Blog post brings a fresh perspective to the crisis unfolding in Andhra Pradesh.  In looking at who is to blame, she discusses the supporting role played by policymakers. She also examines how, as a result of India’s history and politics, current policies aimed at supporting microfinance growth may also be at the heart of this crisis.  Is there a hidden opportunity here to realign policy incentives so that they nurture a sound and healthy path to financial inclusion? 

When a story on microfinance appears in major media outlets, the effect on the public image of the sector can be dramatic. That’s why last Friday’s article in the Wall Street Journal, “India’s Major Crisis in Microlending,” requires a response.

The story covers a microfinance crisis in the southern Indian state of Andhra Pradesh, triggered by sensationalized newspaper accounts of suicides among over-indebted clients of some of India’s biggest microfinance institutions (MFIs): SKS Microfinance, Spandana, Share, and others. These cases underscore rising debt stress among possibly tens of thousands of clients, brought on by explosive growth of microfinance organizations in southern India. In the quest to meet their growth targets, loan officers often sell loans to clients already indebted to other organizations. The reports offered an opening for the state government, which runs a rival self-help group (SHG) program, to pass a restrictive ordinance severely curtailing the MFIs. The crisis threatens microfinance not only in Andhra Pradesh, but nationwide, as the Reserve Bank of India moves toward removing the priority sector designation that has fueled the sector’s growth (by making it advantageous for banks to lend to MFIs).

The blame for this unfortunate situation falls most squarely on the MFIs that failed to restrain aggressive growth even as the market became increasingly saturated. Investors must also swallow a big spoonful of blame. Becausethey paid dearly for shares in the MFIs, they need fast growth to make their investments pay off.

The divvying up of blame doesn’t stop there, however…Read more >