Today I listened to this Global Prosperity Wonkcast with David Roodman:

A crisis is unfolding in India’s microcredit sector that– beyond its immediate effects on borrowers and lenders– will greatly affect the future of financial services for the poor. I’m joined by David Roodman, senior fellow here at the Center for Global Development and author of the forthcoming book Due Diligence: A Guide to Microfinance (which he has shared step by step on his Open Book Blog). David recently traveled to Andhra Pradesh, the epicenter of the crisis. On the Wonkcast, he leads me through the story of the explosive growth of Indian microcredit– and its sudden fall from grace. [more]

The microfinance crisis in Andhra Pradesh has been compared to the situation in Nicaragua, which I wrote about for MyKRO last year. I haven’t been following the news all that closely, and the podcast gives a fascinating overview. I found the following points particularly thought-provoking:

  • Entrepreneurial journalists found out that as many as 30 microfinance borrowers had committed suicide in the state of Andhra Pradesh. This put the dark side of microfinance into the spotlight, and made it a political issue.
  • When compared with other personal finance options in India, microfinance is a mass production with low-quality service. Microfinance Institutions (MFIs) are more aggressive about repayment, unlike moneylenders (who charge higher interest rates but are like “parasitic organisms… who don’t want to kill the host.”)
  • Investors might be part of the problem, and not just part of the solution. The “bottom of the pyramid” gospel says that microfinance should commercialize, so it can scale and provide more opportunities to more people. The “social investors” promoting this gospel have good intentions, but their drive for scale might have lowered the service standards for these organizations.

That’s a photo of microfinance borrowers in Andhra Pradesh, from this Indian news website.

Andhra Pradesh : Micro Finance becomes ‘Macro Curse’ for people The past few years have seen the entire microfinance sector grow exponentially. As with any other boom, suspicion always exists on whether a bust is just around the corner. This is especially true in the current international setting; with a major financial bust that humbled Alan Greenspan to admit he was “in a state of shocked disbelief”.

In hindsight, it might seem obvious that the years of heady growth directly resulted in the sub-prime crisis and credit crunch. This heightens the sense of unease over the rapid growth of the microfinance industry and one is often seized of whether we are sitting on a bubble waiting to burst.In the case of microfinance, a bubble will be created if a significant number of members are funded beyond their repayment capability.

The atrocities of the Micro finance men on the consumers is increasing day by day. Already two people have committed suicides in the Srikakulam and Warangal districts and some suicide attempts.Since past two days the people have attacked the offices of microfinance and destroyed the infrastructure.

Read the rest here.

Overall, I think that the situation in Andhra Pradesh is devastating and tragic, but should not be interpreted as a blanket statement that microfinance is harmful.

I think that the key issues in microfinance are education and customer service. It is absolutely crucial that borrowers know how to use their loans, and that the MFIs provide real service. I think education and customer service should take precedent over commercial scale.

What do you think?

  • Pingback: What’s Happening with Microfinance in Andhra Pradesh? « Beyond China's Single Story()

  • Pingback: Videos Detailing the Microfinance Crisis in India | myKRO()

  • Peter van Dijk

    Since the late 19th century, building an inclusive formal financial sector is a priority for the Indian Government (Postbank, Finance Ministry’s savings mobilisation program).
    Over the last decades only a quarter of Indian adult citizens have access to formal financial services. Only such formal services offer quality and legal assurances.

    The foreign social community that passionately supports Micro-lending undertaken principally by (local and foreign) NGOs and Self-Help Groups express, with their support decision, to explicitly avoid that poor citizens have more rights and, first and foremost, a better understanding on how they can better manage the little money they have (for survival, asset strengthening and advancement). Only a basic transaction account with a regulated financial institution can function as a financial services tool for better money management Such a basic transaction account is being promoted in the USA, but US supporters in India (and elsewhere) seem that it is a better idea to inject the debt-addiction into the poor.

    The bankruptcy of Chicago-based SouthShore Bank could have been another signal for the misjudgment of many people who express their commitment to contribute to poverty alleviation. Do they intentionally chose to have poor people eternally indebted to them as a sort of purgatory, redemption?

    Best wishes for the season, Peter

  • Thanks Peter for your comment! Thanks for giving some background on the history of financial services in India.

    I agree with you that savings programs might be more effective than microloans in alleviating poverty over time, especially for people who have no opportunity to store money in a way they can trust.

    I also think that microloans might seem more attractive in the short-term, for donors, investors, and the clients themselves, since receiving a loan could be an immediate benefit, while opening a savings account is a more long-term process that requires building trust and educating clients over a longer period of time.

    I find the last line of your comment, “Do they intentionally chose to have poor people eternally indebted to them as a sort of purgatory, redemption?” quite thought-provoking. I don’t think “they,” the microfinanciers of the world, have “purgatory” and “redemption” as their main goals. I think that “helping people” and/or “making money” seem more plausible.

    That said, this is not the first time I’ve seen religious language invoked in a microfinance debate.

    In a smart comment on my post here about the “No Pago!” crisis in Nicaragua, Alex Nading wrote this:

    behind the opposition to microfinance is also a religious opposition to “usury.” “Zero Usury” is the program Ortega started to , (overtly) crack down on informal loans, and to (covertly) encourage people to choose Caruna over other microlenders. The program is very popular, and it has been delivered with a definite religious twist. It would make fascinating social science research.

    Thus, the arguments both for and against microfinance (and for and against certain forms of microfinance) can be expressed in religious terms.

    I’m curious to hear what other people think about this too.

    Happy Holidays to you too!