NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, December 14, 2011

A new report on India’s microfinance industry says that the troubles in Andhra Pradesh have been “one of the best things that could have happened to the sector.”

Really? Looking back at a year of microfinance in India, words like “crisis,” “collapse” and “catastrophe” seem more fitting – and it all started in Andhra Pradesh, a state that used to be India’s microfinance hub. The decision by the local government to clamp down on collection practices last year spiraled into a crisis that the industry is struggling to recover from. Microfinance firms were criticized for their aggressive loan recovery methods and for overcharging costumers, sparking a nationwide backlash against the industry. The move in Andhra also choked their access to credit.

A “near-death experience” is how Alok Prasad, the head of Microfinance Institution Network, a leading industry body, described it. He was speaking in New Delhi earlier this week at a two-day annual summit on microfinance – an event at which the report was also released.

So where exactly is the good news? N. Srinivasan, the report’s author, says it’s bad – but not all bad. The troubles in Andhra served as the trigger the sector needed to grow more responsibly, he said in an interview on the sidelines of the event. The main lesson from the Andhra experience for microfinance institutions is that customers should come first, explained Mr. Srinivasan, who has been tracking the industry for several years.

While he criticized the Andhra government for imposing restrictions he described as excessive and politically-motivated, he said regulating the sector in the interest of borrowers was necessary, and welcomed the decision of India’s central bank to step in. While he doesn’t see the sector booming anytime soon, he is confident it will grow moderately. But to do this, the industry may have to change dramatically.