After the Microfinance Crisis: Assessing the Role of Government-led Microcredit Alternatives

This paper analyzes the performance of 72 primary agricultural credit cooperatives (PACS) using survey data collected in 2007 from three districts in Andhra Pradesh (AP) India, in the light of the microfinance crisis in AP.

Government-run institutions in general and PACS in particular, may play a larger role in the provision of financial services to the poor, in light of the recent microfinance crisis in South India. Findings include:

• Management of PACS lack training;
• PACS tend to be used as political instruments;
• Borrowers prioritize debt obligations from MFIs and informal lenders before repaying their PACS loans.

The paper suggests that a larger government role in the supply of credit may undermine the culture of repayment if the performance of PACS does not improve. Governments can make a more valuable contribution by securing an adequate environment for private credit institutions to flourish. They can also work to improve institutional mechanisms that further the availability of credit to poor individuals. They can provide good institutions, such as fair and speedy courts and credit registries.