Microfinance Institutions in Andhra Pradesh: Crisis and Diagnosis
District authorities in Andhra Pradesh (AP) recently closed down 50 branches of two major microfinance institutions (MFIs) in the state following allegation that they were charging usurious interest rates and indulging in forced loan practices.
This article argues that this crisis for MFIs was a conflict between state and civil society organizations vying to capture space on one hand, and the structural problems of MFIs on the other.
The article examines the nature of the crisis and its causes. It describes:
- The various allegations against MFIs;
- Evidence that justified these allegations.
The article discusses some of the causes that led to the crisis. These include:
- State-civil society conflict: The conflict between MFIs that civil society initiatives promote and the Self-Help-Groups (SHGs) Bank Linkage program that the government supports;
- High interest rates charged by MFIs;
- Limitations of on-lending;
- Continued rural distress and competitive popular politics that made sustainable interest rates unsustainable.
The paper concludes that the crisis does not lessen the importance that MFIs play in helping the poor access financial services.
As a way forward, it recommends that MFIs:
- Emerge as supplementary channels;
- Overcome structural problems;
- Get adequate refinance;
- Adopt a voluntary code of conduct;
- Strike a balance between developmental goals and business interests.
It also recommends the creation of a flexible, layered legal and regulatory framework for MFIs.
