Microfinance Reports

Microfinance in India – A crisis at the bottom of the pyramid

Legatum Ventures , a private investment group has released a report on the microfinance crisis in the state of Andhra Pradesh in India.

The report analyses the source and impact of the Andhra Pradesh Microfinance Institutions (Regulation of Moneylending) Act, 2010 on MFI’s in India. The report also comments on the recommendations made by  the Malegam Committee.

microfinance report legatum ventures

Microfinance in India – A crisis at the bottom of the pyramid

How the Government of Andhra Pradesh has severely damaged private sector microfinance and put 450 million of India’s rural poor at risk.

Download the report at the link below

Microfinance Crisis in India Report – Legatum Ventures -PDF-11-pages-2MB

Executive summary

  • The direct effect of the enactment of the AP Act has been to deny millions of India’s poorest citizens access to basic financial services. The impact of the AP Act has the potential to affect 450 million people. Since the AP Act was adopted, MFI disbursements in AP alone have diminished from Rs 5,000 crore ($1.13 billion) to a mere Rs 8.5 crore($1.9 million), creating a severe shortage of much needed finance to the rural poor, India’s most vulnerable citizens.
  • The rationale for the AP Act is not to protect the poor, but to protect the uncompetitive government-backed Self-Help Group (“SHG”) program run by the Society for the Elimination of Rural Poverty (“SERP”).
  • The AP government’s claims that private sector MFIs are exploiting India’s poor by charging usurious interest rates and practicing coercive recovery techniques cannot be substantiated and, based on numbers from SERP, it appears that the suicide rates amongst MFI borrowers are dramatically lower than the statistical average in the entire state of Andhra Pradesh.
  • Private sector MFIs have demonstrated to be the most scalable and sustainable way of helping the Indian government meet its stated policy of encouraging “financial inclusion” for the 450 million people in India who are currently “unbanked”, i.e., with no access to basic finance.
  • If the World Bank provides the much discussed $1 billion in funding to the government-backed SHG program in AP, it will be complicit in snuffing out the private sector from Indian microfinance.
  • The Reserve Bank of India (“RBI”) and central government must take immediate and decisive action to supersede, suspend or repeal the AP Act and introduce sensible legislation on a federal level which allows the private sector to grow and flourish.
  • The Malegam Committee’s recommendations and their broad acceptance by the RBI give rise to a number of concerns, and the constraints proposed around loan limits, interest rates, provisioning norms and capital requirements must be revisited to avoid unintended and deleterious consequences that could permanently impact private sector MFIs.
  • MFIs represent the only viable way for lenders to recover their loans to MFIs, given their relationship with the end customers. MFIs must be given the time to undo the damage inflicted by the AP Act and to recover the loans from borrowers.
2 Comments

2 Comments

  1. Milford Bateman

    May 13, 2011 at 1:18 pm

    I think this report counts as probably the worst piece of self-serving garbage I’ve seen written about the AP crisis.

  2. Ed

    May 21, 2011 at 10:40 pm

    Agree…

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