Microfinance has grown significantly in India, with over 92 million borrowers and a gross loan portfolio of $65.2 billion. However, a microcredit crisis emerged in 2010 in the Indian state of Andhra Pradesh, where suicide incidents among microcredit users fueled allegations against microfinance institutions. Andhra Pradesh has a large government-backed self-help group program as well as many private microfinance institutions, leading to over-indebtedness among some borrowers from taking on multiple loans. In response, the Andhra Pradesh government halted microfinance operations through an ordinance, though experts argue this could restrict access to financing and push borrowers to more expensive moneylenders instead of solving over-indebtedness through measures

1. Microfinance at a Glance
 Total MFIs reporting data 1,900
 Gross loan portfolio USD 65.2 billion
 Deposits USD 26.9 billion
 Number of borrowers 92.4 million
 Average loan balance per borrower USD 522.4
 Of the world’s 2.5 billion poor (those who live on less than $2 a day), only 10 percent are
able to use formal financial services
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No Good Deed Goes Unpunished
The Micro Credit Crisis in India
T he crisis exploded in the Indian State of Andhra Pradesh in early October 2010 after tragic
casualties from suicides of micro credit users, hit the epicenter of microfinance in India and
has fueled allegations on microfinance across the country, and globally. As events continue to
unfold in Andhra Pradesh, there were important questions raised about the evolution of
microfinance markets more broadly.
Does micro credit lead to suicides? Is this the end of micro credit era? Does Microfinance
Institutions (MFI) s abuse the poor by exorbitant interest rates?
How fair is it to link these catastrophic suicide incidents to micro credit which has globally
92.4 million clients and hamper the right to access to finance of 2.5 billion poor globally?
The Background
India has a population of 1.2 billion, with less than one-quarter of adults having access to
basic formal financial services. Following independence in 1947, much of India’s financial
sector was nationalized. Part of the rationale was to ensure access to finance to a much
larger number of Indians. In the 1980s social entrepreneurs created the self-help group
(SHG)–bank linkage program, whereby commercial banks were encouraged to lend funds to
groups of 10 to 20 women. The SHG movement received considerable national policy support
led by the National Bank for Agricultural and Rural Development (NABARD). Today there are
4.5 million SHGs receiving credit nationwide, with 58 million members.
Microfinance Ascending
By the 1990s economic reforms in India opened up space for the private sector to play a
larger role in the banking system. Amid these reforms a new breed of private microfinance
provider emerged: microfinance institutions (MFIs). As of March 2010, ~27 million borrower
accounts served by Indian MFIs, Indian microfinance representing a significant sub-sector of
the financial system. It exceeds the number of borrower accounts served by the Regional
Rural Banks by as much as 50% and represents 40% of the total number of micro-borrower
accounts (of value less than Rs25,000, $555) in the entire Indian financial system.
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1MIX Market ™ is a global, web-based, microfinance information platform. It provides information to
sector actors and the public at large on microfinance institutions (MFIs) worldwide.

2. The Boiler Room of Microfinance: Andhra Pradesh
Andhra Pradesh in southeast India is the
fifth most populous of India’s 28 states,
with 75 million inhabitants. Andhra
Pradesh has also undertaken a series of
large-scale projects to fight poverty, the
most prominent being the Society to
Eliminate Rural Poverty (SERP). SERP is a
service delivery program under the Rural
Development arm of the state government
that offers far reaching livelihood promotion
programs, including employment
generation, vocational training, and access
to savings and credit through SHGs. SHGs
have a long and important history in Andhra
Pradesh and have deeper penetration there
than in any other state, with a total of 1.47
million SHGs reaching 17.1 million clients.
In the late 1990s some of India’s
first MFIs got their start in Andhra Pradesh. Today, five of India’s largest NBFC MFIs are
headquartered in Andhra Pradesh making it the epicenter of the microfinance industry in
India. Over the last five years MFIs in Andhra Pradesh were among the first to attract
significant investment from specialized MIVs as well as mainstream private equity players.
These capital injections have provided the equity capital for growth but they have also created
strong incentives for continued levels of high growth and profitability to drive higher
valuations. All of this has fostered a perception of MFIs as being primarily profit-oriented
organizations. While most MFIs have acted responsibly, a few have generated unusually high
returns on assets, compensated executives lavishly, and remained nontransparent in ways
that only furthered a negative stereotype of MFIs.
The Deadly Competition
The Rivalry between State –Backed SHG Programme and Private MFIs.
The combined presence of the large and well-funded state-backed SHG program and five of
India’s largest and fastest growing MFIs has resulted in a rapid proliferation of credit across
Andhra Pradesh and wide use of multiple loans by borrowers. In Andhra Pradesh, the average
debt outstanding per household is Rs. 65,000 as compared to a national average of Rs. 7,700
of outstanding microfinance debt per poor household.
Indeed, the poor often use microloans to pay off far more expensive loans from village
moneylenders. This suggests that restricting people’s access to microcredit could have the
perverse effect of driving more poor people into the arms of village loan-sharks, who still
provide the bulk of rural credit in poor countries. (In rural AP, 82% of households have such
informal loans, whereas only 11% have loans from MFIs.) That would be good news for these
moneylenders, but is surely not the outcome that policymakers want.
The Supposedly ‘’Resolution’’
On October 14 the government AP issued an Ordinance requiring MFIs to immediately halt
operations, to register, and to await processing of their registrations by an obviously
unfriendly government before resuming operations. The implications of such drastic
interventions by the government for the long term future of microfinance is difficult to predict.
At best it will result in a decline in capital available for microfinance, thereby slowing down its
increasingly significant effect on financial inclusion; at worst it could destroy microfinance
altogether, resulting in throwing low income families back into the not-so-benevolent arms of
moneylenders. The rush to impose restrictions on MFIs also betrays a fundamental
misunderstanding about how the poor use credit. Many politicians cite the existence of clients

3. with loans from several MFIs at once to argue that the poor are over-indebted. This ignores
the fact that most microcredit loans are tiny, so that several are needed to meet the needs of
even a small business. Indeed, the poor often use microloans to pay off far more expensive
loans from village moneylenders.
As complex this may look all of those could be prevented by simply taking necessary measure
to prevent overindebtedness of micro credit customers. Best way of which would be to
promote establishment of a credit bureau and providing access of information to MFI
managers. Indeed an association of Indian MFIs is trying to set up a credit bureau which
would allow them to track clients’ overall indebtedness and credit histories, thus guarding
them against lending a person more than she is able to handle. This would be helped
enormously if the government speeded up its efforts to give all Indians a universal
identification number. The Indian government should also allow MFIs to take deposits, which
they are currently prevented from doing: this would make them less dependent on capital
markets for funding. All rather complicated things, unlikely to stir up populism. And all a lot
more useful for the poor than an interest-rate cap. Pressing them to reduce rates further
would jeopardise their ability to attract private capital, inhibiting their growth. Slower growth
would in turn hamper their ability to harness economies of scale in order to lower transaction
costs and cut rates of their own accord, as many—including the biggest for-profit MFIs—have
done in the past. Forcing down rates would also deter new entrants and reduce competition.
India is a country which invests heavily into information technologies and furthermore
receives substantial funds on this particular area. Why have not the regulators taken this
particular action to prevent this deadly depth track the answers lies in the conscience of
Indian policy makers.
One apparent fact is the government in India is an unfair referee as being both a player and a
referee which easily leads them to make micro credit as the scapegoat.
References: CGAP , Economist Intelligence Unit
Burcu Guvenek Araslı M.A.
Senior Development Finance Expert
Kelebek Sokak 24/8 G.O.P. 06700 Ankara/Turkey
GSM: +90 533 618 3183

4. Skype: burcu.arasli
Academic Staff
Microfinance Instructor
Middle East Technical University (METU)
Faculty of Economic and Administrative Sciences
Department of Business Administration
e-mail: arasli@metu.edu.tr
Tel: + (90) 312 210-2005
Fax: +(90) 312 210-7962
http://www.feas.metu.edu.tr/