Microfinance crisis in Andhra Pradesh — An inconvenient truth!

January 31, 2011
By Rang De Team

The recent microfinance crisis in Andhra Pradesh is a grim reminder that scale minus thought leadership combined with knee jerk reactions can be disastrous. The result being that a phenomenon that could positively impact the lives of many low income households across India has come to a screeching halt in the state.

A summary of how the crisis unfolded follows (with inputs from our field partner):

In October 2010, keeping in view a series of suicides of borrowers of microcredit, the state government of Andhra Pradesh passed an Ordinance to regulate working of microfinance institutions. The ordinance was passed to stop alleged abusive practices like higher interest rates and unlawful collection mechanism undertaken by a few microfinance institutions.

The ordinance itself was passed within no time which was a knee jerk reaction by the government. However no microfinance institution was allowed to carry out its operations until they registered with the government. As all operations came to a stand still, precious time was lost. Borrowers began to lose their discipline and even took advantage of the situation — many refusing to repay the loan.

Many were also instigated by local politicians to refuse repayments. With this becoming a phenomenon across the state, default rates soared for the first time ever. The obvious result of it was a reduction in cash flow and fresh capital from financial institutions drying up.

Who did it impact?

The very people for whom microfinance was actually meant. While many microfinance institutions have suffered losses and continue to face uncertainty, the real people who will be impacted are none other than the borrowers. There is a real danger that, borrowers, especially in Andhra Pradesh may face a hard time in getting access to credit for years to come.

The outcome of the crisis

Even though there were instances of borrower suicides in the past, it had never been taken up seriously by the government. However, after the recent crisis in Andhra Pradesh, a committe was set up to bring out recommendations for the microfinance industry. The committee came up with recommendations, which we believe is not too different from our mandate for our field partners. Here is a summary of the report by Y.H Malegam Committee.

How does this impact Rang De and its social investors?

Our operations in Andhra Pradesh were limited but we have had to write off Rs.4.82 Lakhs contributed by 278 well meaning social investors. We deeply regret this and have some lessons to learn as well. We are now working with all our field partners to introduce financial literacy and educate all the borrowers about the loans they are borrowing. Even though this was part of our mandate, we will ensure that this is enforced by all field partners.

Our stand has been very clear from the beginning. If at all there is need for organisations like Rang De, it is because of our mission to lower the cost of microcredit. We are looking at an exciting partnership in Andhra Pradesh and we hope to make a beginning again in the state.

Read the most accurate coverage so far on the crisis in Andhra Pradesh.

You can also read our previous blog posts on what we are trying to do differently at Rang De.

Please feel free to write to us at smita@rangde.org and share your thoughts.

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