A crisis at the bottom of the pyramid

The microfinance industry in India is in the midst of the most severe crisis in its 25 year history. The genesis of the crisis lies with the actions taken by the government of the southern state of Andhra Pradesh in October 2010, when it passed legislation effectively shutting down all private sector microfinance institutions (“MFIs”) operating in the state. In the first half of FY2011, MFIs in Andhra Pradesh disbursed Rs 5,000 crore ($1.13 billion) to borrowers; in the second half of FY2011, these same MFIs could only disburse Rs 8.5 crore ($1.9 million). The Andhra Pradesh Government's stated aim was to protect the poor and yet its actions have resulted in financing to the very poorest of India’s citizens shrinking by 600%. This should make everyone pause. The rural poor depend on access to consistent and dependable finance to help smooth patchy income streams and avert financial crises. The AP government’s actions have effectively shut off finance to these most vulnerable of India’s citizens. Indeed, as this paper discusses, the very premise of the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act, 2010 (the “AP Act”) was fundamentally flawed. Quite apart from protecting the poor, the AP Act does just the opposite and risks creating a near term financial and human crisis amongst the rural poor in Andhra Pradesh, while also potentially jeopardizing the Indian government’s broader financial inclusion agenda.

 

Download the white paper here:

Indian Microfinance - A crisis at the bottom of the pyramid.pdf