Microfinance in India: A Crisis at the Bottom of the Pyramid

This paper criticizes the actions of the government of Andhra Pradesh (AP), India, in the context of the crisis in Indian microfinance.

The AP government passed legislation in October 2010, which effectively shut down all private sector MFIs operating in the state. The paper states that:

• AP government’s actions have damaged private sector microfinance and put 450 million of India’s rural poor at risk;
• MFI disbursements in AP have diminished from $1.13 billion to $1.9 million since the AP Act was adopted, creating a severe shortage of finance to the rural poor;
• AP Act aims to protect an uncompetitive government backed program.

The paper stresses that private sector MFIs are the most scalable and sustainable way of helping the Indian government meet its policy of financial inclusion of the unbanked poor. It recommends that Reserve Bank of India and central government should supersede the AP Act and introduce legislation that allows the private sector to grow, Malegam Committee’s recommendations must be revisited to avoid deleterious consequences that could permanently impact private sector MFIs and that MFIs must be given the time to undo the damage inflicted by the AP Act and to recover the loans from borrowers.