The “Why?” of Andhra Pradesh – An Interview with Malcolm Harper
By Philip Mader – Governance Across Borders
In this interview, Professor Malcolm Harper analyses some of the underlying causes and consequences of the microfinance crisis in Andhra Pradesh. Professor Harper is chairman of the microfinance rating agency M-CRIL and editor of the volume “What’s wrong with Microfinance?”. He has been Professor of Business Development at Cranfield Business School, and as the former chairman of BASIX, significantly pioneered microfinance in India.
Professor Harper, you recently returned from India. How bad is the situation for the microfinance sector there?
I was in Delhi at a very large meeting of microfinance people, where of course Andhra Pradesh was being talked about a lot. I then spent some time in Orissa, in a village three kilometres from the Andhra Pradesh border. I called in on the local office – which previously I didn’t even know existed – of BASIX. And the local staff said there had been no trace of any repayment difficulties, even though the Andhra Pradesh border was so close by. This surprised me, and even they were rather surprised. Repayments were at the normal high level.
But I was running a course nearby and my students were interviewing various traders in the local market, and a few of them mentioned that one or two of the microfinance institutions, from which they had taken loans, had stopped making disbursements. And that of course has the seeds of trouble, because one reason why people repay is because they’re going to get another loan.
So it seems that the MFIs are having trouble refinancing themselves now, raising capital for their lending activities.
That’s inevitable, I think, because when the banks are beginning to wonder about the quality of their loans to the MFIs, they’re not about to release further loans. And that, of course, contributes to the problem, because – as I said – people repay mainly because they’re going to get another loan.
Microfinance in India grew at an incredible rate over the past few years, nearly doubling its portfolio every year. Was growth itself the problem?
In part, yes. There was an enormous unsatisfied demand; and some well-managed, outstandingly-marketed, well-capitalised institutions got into the business. The field was pretty well prepared because people were used to borrowing through the Self-Help Groups, so the notion of institutional borrowing was not new to them. Although microfinance institutions were new, the Self-Help Groups, which are a very good government-promoted scheme, had been in place and were also growing. So most rural women in Andhra Pradesh particularly were members of such groups, some of them more than one. And therefore when microfinance institutions came along ten years or so ago, they recognised them as a new form of formal finance, and jumped in and borrowed heavily – too heavily of course for their own good. And that’s where the problem started.
Were the interest rates too high?
It depends on what you mean by too high. Microfinance interest rates in India are the lowest in the world. They are still well over what middle-class people would pay for mortgages and car loans, but they are at stated rates of around 24 percent, which in actual fact reach around the mid-30s when you add on the various fees; which by microfinance standards around the world is very low. Actually that is around half of what the same people would have to pay to a moneylender. But it’s sufficient for a journalist or a politician to pick on and wave a big stick.
Read the rest of the Interview on Governance Across Borders