Crisis in India

December 10, 2010

The microfinance crisis in the Indian State of Andhra Pradesh is a topic I've avoided writing about these last few months. This is been intentional, as my perch here in the U.S. makes it difficult to really get a handle on the situation. And, frankly, there are a great many experts who are closer to and more knowledgeable than I who have been writing about and astutely analyzing the situation.

Folks like the experts at CGAP (the Consultative Group to Assist the Poor). The global microfinance body released a paper this week that analyzes the ongoing situation in Andhra Pradesh and discusses lessons to be learned from the situation - lessons that can help move microfinance forward globally.

Recent developments in Andhra Pradesh shine a spotlight on issues that have emerged in other high-growth microfinance markets, the CGAP report notes. And rapid growth, CGAP warns, can undermine credit discipline, driving unhealthy rises in loan amounts, cutting corners in underwriting and excessive credit supplies.

"In places where there is high penetration of microcredit - such as Andhra Pradesh - we see evidence of the strains caused by rapid growth," said CGAP's CEO, Tilman Ehrbeck. "As local markets mature, the microfinance delivery model must evolve to support healthy outreach and the development of abroad range of products that poor people need."

The paper -Andhra Pradesh 2010: Global Implications of the Crisis in Indian Microfinance - points out the unusually high penetration of microfinance in Andhra Pradesh way outpaces what's happening inother states, and that high household debt there comes from numerous sources, not just MFIs.

"As local markets mature, the microfinance delivery model must evolve to support healthy outreach and the development of a broad range of products that poor people need," Ehrbeck said.

Andhra Pradesh 2010: Global Implications of the Crisis in Indian Microfinance drives home the need for appropriate controls is microfinance is to grow and really promote financial inclusion.

At the institutional level, there needs to be a robust business model that includes effective incentives for training at all levels, to encourage sound underwriting and customer care, the paper said.

At the industry level, there needs to be more information sharing and/or credit bureaus, it continued.

And regulation needs to encourage pricing transparency in an environment in which poor people are well informed about how to use financial services and available avenues of recourse.

Copies of Andhra Pradesh 2010: Global Implications of the Crisis in Indian Microfinance are available for downloading at the CGAP Web site.

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