The Andhra Pradesh Crisis: So What Next?

This MicroSave Focus Note examines consequences of the MFI crisis in India.

The microcredit industry in India is undergoing significant changes. MFIs are trying to reorganize their operations to comply with the ordinance in Andhra Pradesh. The note suggests that there is a pressing need to move to individual-based microfinance that leverages mobile banking platforms to offer a wide range of financial services. It predicts that:

• MFIs may end up as agents of banks in rural areas;
• Interest rate cap of 24 percent that is being pushed informally might lead to the demise of many smaller MFIs that do not have a large enough capital base to break even at that rate;
• Interest rate cap would also lead to large scale financial exclusion of the poor in cities as well as remote rural areas;
• MFIs would tend to focus on higher-ticket loans and the poor will have to fall back on informal sources of credit at much higher interest rates;
• In the worst case scenario, microfinance may continue its downward spiral;
• MFIs may default to banks, making it impossible for banks to lend them any further financial support;
• Lower fund flow into the sector will lead to decreased leveraging and the need for higher equity inflows.

In the long term, the current turmoil in Indian microfinance may lead to improved financial access for the poor. In the short run, however, poor people’s options would shrink significantly.