11/08/2016

AndhraPradeshMicrofinanceCrisis|

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InpartialagreementwithSKSonwhatcausedthe
IndianMicrofinanceCrash
March6,2013inAndhraPradeshMicrofinanceCrisis,Microfinance|Tags:andhrapradesh,bubble,debt,financialgovernance,india,SKS,
strategicchange|byphilmader|8comments

TheAndhraPradeshcrisishasbeensomethingofaturningpointinpublicassessmentofmicrofinance,witha
suicidewavecausedbywidespreadoverindebtednessbadlytarnishingthesectorsimageinIndiaaswellas
abroad.SomeIndianpoliticiansarenowbeginningtoidentifytheideaofalleviatingpovertywithmicrofinance
ascrap.

Source:MCRILMicrofinanceReview2012(vii)
MicrofinanceinIndiaremainsinprotracteddeclinesince2010(seegraph),althoughtalkofgreenshootsand
catharsisafterneardeathexperiencehasbeenaroundforsometime.Theindustrysstanceforthepasttwo
yearshasbeentodenyresponsibilityforanywrongdoings,downplayitsroleinprecipitatingthedozensof
suicides,andclaimthattheAPgovernmentsOctober2010legislationwasasurprisingandunjustcrackdown
onhealthypractices.Ihaveclaimedotherwise.
Yet,fairlysurprisingly,mynewpaperinvestigatingthecausesofthecrisis,andarecentinterviewwithSKS
Microfinanceseniormanagerscometosomesimilarconclusionsaboutthecauses.Inparticular,bothversions
seetheunregulatedhypercompetitivemarketasasignificantcauseofthetragedywhichledtomicrofinanciers
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troubles.Howcanthisbe?
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BordercrossingBooks:TheJourneyofIndianMicro
FinancebyRameshS.Arunachalam
October22,2011inAndhraPradeshMicrofinanceCrisis,BookReview|Tags:andhrapradesh,bordercrossingbooks,india,microcredit,
Microfinance,rameshsarunachalam|byphilmader|5comments

RameshS.Arunachalam,2011:TheJourneyofIndianMicroFinance:Lessonsforthe
Future.Chennai:AaptiPublications.
ThemicrofinancecrisisinIndiawhichbrokeoutinfall2010,firstimperilingnumerous
borrowersandthenanentireindustry,isthemostfundamentaleventintheworldof
microfinancesincetheNobelPeacePrizein2006.Inhindsight,itmayeventurnouttobethe
definingmomentofmicrofinancehistoryneverbeforehasthedarksideofmicrofinance,and
thevulnerabilityoftheindustry,beensobrutallyexposedtoaglobalaudience.
Naturally,theseeventshaveattractedahostofopinionsandanalysesrangingfromsimplyblamingtheAndhra
governmentforbringingdownahealthymicrofinanceindustry,toaccusingmicrofinanceofhavingbecome
worsethanloansharks.Andyet,sofar,weunderstandverylittleofwhyIndiasvastmicrofinancesectorwent
sofarastray.Thankfully,peoplelikeRameshS.Arunachalamareouttochangethis.
Arunachalamhasearnedtherespectofmanyareader(metoo)withhiscandidandincrediblywellresearched
bloggingontheIndianmicrofinancesector.Hepostsprolifically,butdespite(orperhapsbecauseof)hisover20
yearsofworkexperienceindevelopmentandruralfinance,hehasotherwisekeptalowprofile.Heisnotan
outspokencritic.
NowRameshArunachalamhasappliedhissharpanalyticalapproachandevidentknackforwritingto
publishingthefirstbookabouttheIndianmicrofinancecrisis.Theresultisameticulous,evidencebasedpiece
ofresearchwhichbringsclarityintowhatsofarhasmostlybeenaninterestdrivenandpolemicalbattleof
explanations.
InsomewayswhatArunachalamhasproducedis,infact,morethanabookitisadossierofevidenceand
analysisofhowtheIndianmicrofinancesectorfunctionsatthedeepestlevels,andwhereitserrorslie.Itisa
biographyofanindustryinidentitycrisis,andalsoahandbookonhowIndianmicrofinancemight(perhaps)
stillbesaved.Aboveall,asthebooks(wonderfullyillustrative)coverimplies,itisasearchfortheFaustian,
troubledsoulofIndianmicrofinance.Readtherestofthisentry

IndianMicrofinance:TheStalemateis
becomingunstable
May17,2011inAndhraPradeshMicrofinanceCrisis|Tags:andhrapradesh,bailout,crisis,india,microcredit,Microfinance,SKS|by
https://governancexborders.com/category/andhrapradeshmicrofinancecrisis/

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philmader|2comments

MicrofinanceinIndiaisstillwhereitwasmonthsagoinastalematewiththegovernment.Thecrisisof
microcreditinthesouthernIndianstateofAndhraPradeshwhichbeganlastOctoberwitharashofclient
suicideswewerethefirsttoblogaboutthis,andfolloweditsdevelopmentthroughoutclimaxedina
standoffinlateOctoberbetweenthestatelegislatureandmicrofinanceinstitutions(MFIs).Mudwasthrownby
bothsidesinanintenseblamegame,whileactuallythecrisishadsystemiccausesrootedinweaklegislation
andahypercompetitivemarket.
Neithersidehasfoundawaytobreakout.Butthestalemateisbecomingunstable.Itisincreasinglyclearto
MFIsandtheirfundersthatmostloansinAndhraPradeshwillnotberecoverable,sincetrustintheMFIs
promiseofbeingheretostayisdwindling,andthenewlegislationhasrenderederstwhilecoerciverecovery
practicesimpossible.Ontheotherhand,theAndhragovernmentcannotstepdownfromitslegislatureissued
underthepromiseofprotectingthepoorwithoutlosingface,andtheIndianfederalgovernmenthaschosento
largelyignoretheissue.
TheEconomicTimesfromMumbairecentlyprovidedathoroughupdateonwhathappenedinthepastfew
months,whichImquotinghere.ThegrowingproblemisthattheMFIsinAndhraPradeshwillneednewFollow
capitalsooninordertoreplacetheloanstheyhavewrittenoff,orwillsoonbeforcedtowriteoff.Readtherest
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TheWhy?ofAndhraPradeshAnInterviewwith
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MalcolmHarper

December14,2010inAndhraPradeshMicrofinanceCrisis,Microfinance|Tags:andhrapradesh,crisis,india,malcolmharper,microcredit,
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Microfinance|byphilmader|5comments

Inthisinterview,ProfessorMalcolmHarperanalysessomeoftheunderlyingcausesandconsequencesofthe
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microfinancecrisisinAndhraPradesh.ProfessorHarperischairmanofthemicrofinanceratingagencyM
CRILandeditorofthevolumeWhatswrongwithMicrofinance?.HehasbeenProfessorofBusiness
DevelopmentatCranfieldBusinessSchool,andastheformerchairmanofBASIX,significantlypioneered
microfinanceinIndia.
ProfessorHarper,yourecentlyreturnedfromIndia.Howbadisthesituationforthemicrofinancesector
there?
IwasinDelhiataverylargemeetingofmicrofinancepeople,whereofcourseAndhra
Pradeshwasbeingtalkedaboutalot.IthenspentsometimeinOrissa,inavillagethree
kilometresfromtheAndhraPradeshborder.Icalledinonthelocalofficewhich
previouslyIdidntevenknowexistedofBASIX.Andthelocalstaffsaidtherehad
beennotraceofanyrepaymentdifficulties,eventhoughtheAndhraPradeshborder
wassocloseby.Thissurprisedme,andeventheywererathersurprised.Repayments
wereatthenormalhighlevel.
ButIwasrunningacoursenearbyandmystudentswereinterviewingvarioustradersin
thelocalmarket,andafewofthemmentionedthatoneortwoofthemicrofinanceinstitutions,fromwhichthey
hadtakenloans,hadstoppedmakingdisbursements.Andthatofcoursehastheseedsoftrouble,becauseone
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reasonwhypeoplerepayisbecausetheyregoingtogetanotherloan.
SoitseemsthattheMFIsarehavingtroublerefinancingthemselvesnow,raisingcapitalfortheirlending
activities.
Thatsinevitable,Ithink,becausewhenthebanksarebeginningtowonderaboutthequalityoftheirloanstothe
MFIs,theyrenotabouttoreleasefurtherloans.Andthat,ofcourse,contributestotheproblem,becauseasI
saidpeoplerepaymainlybecausetheyregoingtogetanotherloan.Readtherestofthisentry

Andnowthis:GrameenLeaks??
December5,2010inAndhraPradeshMicrofinanceCrisis,Microfinance|Tags:Accounting,andhrapradesh,Bangladesh,Grameen,india,
microcredit,Microfinance,WikiLeaks|byphilmader|2comments

Inthepastfewweeks,IvebeensilenthereaboutthemicrofinancecrisiseventsinIndia.Butwhynotletothers
dothetalking?Thisblogpublished(whatIthinkwas)thefirstanalysisoftheA.P.eventsrightafterthe
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crackdownordinancefollowingupwithatwopiecesearchfortheunderlyingcauses(1,2).Mostofthecauses
Ispeculatedaboutatthetimeareprettymuchturningouttobetrue:

FOL L O W

interestrateswerefartoohighandhavebeenrusheddown

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thesectorwasunder,orpracticallyun,regulated(especially,ifKaushikBasusaysso)

theborrowerswere/areoverindebted(farmorethantheMFIswereawareof,Iassume)Join 251 other followers

andtheprofitmotivecreatedperverseincentivesforMFIs.

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OnepredictionIwontmake,though,iswhethermicrofinanceinIndiawillpullthrough.Thatdependson
politicsinDelhi(bailoutornot?)asmuchasitdoesontheadaptiveness(nottheresilience,whichmeansno
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change)ofthesector.ButIwouldntbetmymoneyonanMFIinIndiaatthemoment,giventhepessimismof
VijayMahajan(Ifthissituationcontinues,therewillbenomicrofinancesectorin2011.)ortheSKS
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shareholders(sharesdownby52percent).
Therealsurprisestoryoftheweek,however,wereWikiLeaksdiploinslults.
Orreally,werethey?OnlytheAmericansarereallymakingabigdealoutoftheleakeddiplomaticcables.If
anything,thenowpublicsecretassesmentsofsundrypoliticiansshouldprovideafewgoodnaturedjokesat
upcominginternationalsummits.WouldbeIsraelnukesterAhmadinejadwillhardlybeinsultedbybeing
comparedwithHitler,andGermanChancellorAngelaMerkelandForeignMinisterGuidoWesterwelle
alreadyhadtheirshareoflaughsabouttheirleaks.
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Andnowallofasuddenitturnsout
November5,2010inAndhraPradeshMicrofinanceCrisis|Tags:andhrapradesh,economicsociology,economics,interestrates,
microcredit,Microfinance,regulation|byphilmader|7comments

thatlowerinterestrateswerepossibleallalong!
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Indiasembattledmicrofinanceindustryhasagreedtocapinterestratesonits
loansinsouthernAndhraPradeshstateat24percent,asitseekstocounter
anintensepoliticalbacklashagainstthesector.
Previously,theindustryinsisteditshighinterestrateswereneededtocover
thecostofoutreachtosomanysmallborrowers.However,ithasdecidedto
captheratesinabidtoreduceantagonismfromIndianpolicymakers,who
areincreasinglyuncomfortablewiththelargeprofitsandpersonalfortunes
beingamassedinanindustryostensiblydedicatedtoalleviatingpoverty.
(ft.com)
AndinTheHindu:

Wevemadeseveralconcessionsbecausewereunderduressandnot
becausewewantto.Itisagainstourmodel,butwewantthesectortosurvive.
MrGopalancompletelyunderstandsoursituation,buthehasnotletusoffthe
FOL L O W
hook,saidMrVijayMahajan,President,MFIN.
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Thesearchforreasons&solutions:Acompendiumof
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voicesontheAPmicrofinancecrisis
November3,2010inAndhraPradeshMicrofinanceCrisis|Tags:andhrapradesh,civilsociety,crisis,media,microcredit,Microfinance,
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MilfordBateman,suicide|byphilmader|3comments

AsIndiacelebratesDiwalithisweek,thedebateabouthowtodealwithmicrofinancehascalmedabit.But
sinceIwroteupmyanalysisoftherootcausesAndhraPradeshshowdown(part1,part2),thenewshastaken
fewfurthertwists.Heresanupdate:
VijayMahajan,ChairmanofBASIXandspeakerfortheMFINindustryorganisation,statedonTV:Alotofthe
reasonsforinvokingtheordinancewerethecreationofthemicrofinancesectoritself.Therehasbeenacertain
degreeofwrongdoingbyoursector.Andasthepresident[ofMFIN]Iamthefirstonetoacceptit,Iwanttodo
itonrecord.

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How much will the AP govt tweak MFI norms?

TheinterestratedisclosurerequirementunderthenewmicrofinanceordinanceinAPhasuncoveredinterest
ratesfarhigherthanpreviouslyreportedupto60.5percent.IwishIwassurprisedbutMFIsusuallyneglect
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tofactorcompulsorysavings,fees,etc.,intotheirpubliclyquotedrates.
TheAPgovernmenthaspublishedthecompletelistofcomplaintsofmalpracticeandsuicidelaunchedagainst
FOL L O W
theMFIsseeithere.
AmassiveborrowerdatabaseinAPwillgoonlineinJanuary,inanefforttoclearupthemess.
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Meanwhile,Indiasvibrantmediaandcivilsocietyhavebeengrapplingwiththeissue,asaresomeAmerican
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media.Therestofthispostisadigestofthemostprovocative,insightfulandintelligentcommentaryIveseen
onthesubject.
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AndhraPradeshsAnimalFarm:Debttraps,life
insuranceanddeathbonuses

October25,2010inAndhraPradeshMicrofinanceCrisis,FinancialMarketRegulation|Tags:andhrapradesh,Development,financial
crisis,india,microcredit,Microfinance,suicide|byphilmader|5comments

ThisisthesecondhalfofmysearchforthecausesofthemicrofinancecrisisandsuicidetragedyinAndhra
Pradesh.Inmylastposting,IoutlinedthemacrocausesasIsawthem.IfoundevidencethatMFIswere
chargingborrowersinterestratesoverandabovewhattheyactuallycouldhavechargedthem.Ialsofoundthat
thegovernmentfailedtoregulatedespiteanevidentlackofselfregulationthatis,untilAndhraPradesh
clampeddowntwoweeksago.InthispostingIsearchformicrolevelcauses.
Sincemylastpost,SKSonSaturdaypostedprofitsupby116percentyoy(read:morethandoubled),andalso
apparentlyheldasecretboardmeetingovertheweekend.YoudontneedtobeaMarxisttofindasteeprisein
profitsdisturbingforabankwhichlostatleast17ofitsclientstodebtdrivensuicideinthesamequarter.Yet
thecrisisinAPisfarbiggerthanSKS,andthefivebiggestMFIshaverealisedthisandcollectivelyannounced
lastFridaytorestructuredistressedloans.Finally.Ittooknearlytwomonthsofsuicides,aheavyhanded
regulatoryclampdownandamediabacklashtodriveenoughsenseintotheMFIs.ThewomensSelfHelp
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Groupmovementisalsopushingforbetterregulation.Howdidwegethereinthefirstplace?
Thepoorarepronetodebttraps
Themediahavecaughtontosomeofthemacroissues,buthereIwillidentifiydriversfortheheavydebt
burdensandsuicideswhichoperateatthemicrolevel.WemustbeawarethatsuicideinIndiaisalready
shockinglycommonamongfarmers.Butmany,ifnotmostvictimsinAPweresmalltraders,notsubsistence
farmers,soweredealingwithanewphenomenonhere.
ItisnosurprisethathighlyindebtedmicrofinanceborrowerscanbedrivenintodebtspiralstowardsMFIsunder
conditionsofheavymarketing,misinformation,socialpressuretojoinselfhelpgroups,andthevagariesof
economiclifeatthebottomofthesocialorder.Ifonethinggoeswrong(anillness,acroploss),anapparently
sensiblyinvestedloansuddenlyturnsintoaninsurmountabledebtburden(seethesemediareportsfor
illustrationsofmicrofinancefundeddebttraps).Inreality,IndiaShiningishometosomeofthepoorest
peopleintheworld.Aswesawlastweek,somemicrofinanciersareapparentlyoutoftouchwiththisreality.
AtulTakleofSKSwentontherecordtellingtheAssociatedPress,Ipersonallydontthinkapersonwould
takeherlifefor225rupees($5.08)aweek.ButfouroutoffivepeopleinIndialiveonlessthan20Rupeesa
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day(2007latestfigureIcouldfind).

FOL L O W
This(selfdrafted,nonexhaustive)listoutlinesindividualcausesforthepoortakingonunsustainabledebt.It
showsthattherearemulitplereasonsforthepoorfallingintomicrofinancedebttraps,andthatmostareoutside
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Milkingthecowforwhatitsworth:Regulatoryfailure
andperverseincentivesinAndhraPradesh Sign me up
October22,2010inAndhraPradeshMicrofinanceCrisis,Microfinance|Tags:andhrapradesh,finance,india,microcredit,Microfinance,
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regulation,suicide|byphilmader|9comments

MaybeitstooearlytoseekrealexplanationsforthemicrofinancetragedyinAP.Thedusthasntsettledyet,but
Imstrugglingtocometogripswiththebigwhy?.(ForasummaryofeventsuntilTuesday,seehere.)My
usualblogsourcesofallcoloursforallthingsdevelopmentaresilent,sofar.ButtheIndianmediaarebuzzing
withcoverageandanoccasionalpieceofanalysis.FromwhatIcantellfromthesereports,thecrisiswascaused
byafailuretoregulateandasetofultraperverseincentivesformicrofinanciersandtheiremployees.
Whathappened?Inthepast6weeksorso,some30to60microcreditborrowersinAndhraPradesh(according
todifferentsources)committedsuicideovertheirloans.Individualstorieshadsurfacedincreasinglythroughout
earlyandmidOctoberaboutborrowerssufferingunderheavydebtburdensandmassivepressurefromagents
withmeasuresapparentlyevenincludingchildabductionaspunishmentforloandefaultandagentsurging
borrowerstotaketheirlivestoreapcreditlifeinsurance.Protestsensued,andlastweek,theAPgovernment
issuedanordinanceimposingrulesofconductandcompulsoryregistrationonMFIs(microfinanceinstitutions).
AconsortiumofMFIs(MFIN)claimedthishadhaltedtheirbusinesscompletely,andthisweektheMFIs
submittedapetitionattheAPHighCourtaskingtoquashthegovernmentsordinance.

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Micronance companies under lens as suicides...

ThisIndiannewsvideoconciselytellsthehorrificstory.
TheHighCourttodayofficiallypermittedMFIstocontinuetheirbusinessactivities,whileupholdingtheterms
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oftheordinancethatMFIsmaynotengageincoercivepracticesandmustproceedwithregistration.
FOL L O W
Meanwhile,employeesofSKSMicrofinanceandSpandanahavebeenarrestedforharassingborrowers.SKS
shareshavedroppedbyoveronefifth,indicatingthatinvestorsareworriedaboutprofitability(rightlyso).An
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Indianapexorganisationhasproposedforallitsmemberstocutinterestratesmoreaboutthatbelow.Readthe
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Microfinanceemployeespushingclientsto
commitsuicide?

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October21,2010inAndhraPradeshMicrofinanceCrisis|Tags:andhrapradesh,crisis,india,microcredit,Microfinance,microinsurance,
suicide|byphilmader|3comments

ThisismoreshockingnewsfromAndhraPradesh.Obligatorylifeinsurancesoldwithmicrofinanceloansmay
beincentivisingoverindebtedborrowerstocommitsuicide.Worseyet,itappearsthatloanofficershavebeen
pushingdebtorstocommitsuicideasawayoutofdebt.
HeresthegistofaTimesofIndiaarticlebyJinkaNagarajupublishedearlertoday:

AgovernmentstudyhasfoundthatsomeMFIagentsthemselvesare
encouragingthedebtorstocommitsuicidesothattheirloansarerepaid.This
happensbecausetheborrowersarecoveredbyinsurance.
Tillnow,therehavebeenatleast45suicidesreportedinthestateinthelast
oneandahalfmonthsallegedlyduetothecoercivepracticesemployedby
theMFIsinrecoveringtheloans.
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