Microfinance

The 2010 Andhra Pradesh Microfinance Crisis Revisited – A Factual Account

By Ramesh S Arunachalam , Rural Finance Practitioner

There has been a lot said about the role of the Andhra Government by many experts, especially from the international micro-finance and the larger development field. While their view points are appreciated, I would also like to set the record straight as a neutral observer…as some one who has closely followed the Krishna crisis as well as the present Andhra Pradesh micro-finance crisis…We need to set the record straight because some crucial lessons exist for all stakeholders and they have, thus far, been ignored…

At the outset, let me clarify that I am not in favour of the ordinance and/or bill that were promulgated/passed by the Andhra Pradesh government as I feel that micro-finance is micro-banking and its regulation (framing of rules) and supervision (ensuring adherence to these rules) should come under the purview of the Government of India and especially, The Reserve Bank of India. I have already strongly put forth this view in my previous posts. The fact that the NBFC MFI model is the dominant one in Indian micro-finance as of today, lends considerable credence to the above argument…and I hope that all policy stakeholders recognise the above basic fact.

Let me now state things, as I have seen them unfold over the last few years…backed by relevant data where available…

The Precursor – The NABARD High Level Policy Conference:

Much of the problems evident in the 2005/6 Krishna crisis were articulated by Dr Thorat (Then Managing Director, NABARD) and this writer, in a paper, presented at the NABARD High Level Policy Conference in New Delhi in May 2005. A Senior Joint Secretary, Ministry of Finance chaired the panel that discussed the above paper, and the discussions (with people at the plenary) were rather animated, as the paper and its presentation appeared to have ruffled a few feathers. That the paper provoked a lot of people, especially the proponents of the MFI model, was evident from the fact that the presenters for the next session, devoted to products and innovations, focussed almost entirely on issues raised in the above paper – rather than making their own presentations.

Senior MF industry stalwarts said (on record) that MFIs have good systems and governance and are not engaging in any kind of bad practices. I left the conference with an uneasy feeling – that somehow, the issues mentioned in the paper were going to prove critical to the survival of the micro-finance industry and yet, the micro-finance industry was dismissing the issues raised as either mere aberrations – whereas I knew for a fact that the malaise was indeed spreading fast like cancer…

So, when the Krishna crisis suddenly came up, I was not at all surpised…

The Krishna Microfinance Crisis:

The Krishna crisis of 2005/2006 was preceded by large-scale growth (large scale for the context that existed then). The Krishna crisis effectively started in March 2005, when the late Dr Rajasekhar Reddy, then Chief Minister of Andhra Pradesh, visited Guntur/Krishna Districts in the last week of march 2005 (I recall the date as March 29th, 2005) and asked the then collector, Mr Naveen Mittal (IAS) to enquire into the allegations against some MFIs, made by the then sitting MLA Mr Venkat Rao and others. A huge consequence of the Krishna crisis was that the partnership model of ICICI was done away with…and at least 50 branches of some MFIs were closed…to be reopened later…after assurances by the MFIs and key stakeholders…

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