By Bernd Balkenhol, Director, ILO’s Social Finance Programme
The microfinance industry suffered a serious crisis in the Indian state of Andra Pradesh in recent months, resulting from a combination of factors, including overindebtedness among low-income households and massive growth of microfinance institutions (MFIs). The success of the MFIs has attracted more players, both formal and informal, to lend to poor households, with few checks and balances in place. Consequently, some operators engaged in aggressive debt collection practices that have attracted significant media and political attention.
What does this mean for microinsurance? There is good and bad news. On the good side, this crisis creates an opportunity to raise the profile of insurance. Since this situation has emerged in part due to the vulnerability of the target group, insurance would be an appropriate means for them to manage some of their risks. Similarly from the supply side, the crisis exposed the shortcomings of a microfinance business model that only delivers a single rigid product. Low-income households need more than just credit.
Microinsurance also doesn’t have the same issues regarding collection practices that microcredit faces because the risk relationship is reversed. With a microenterprise loan, the lender is taking a risk that the borrower will not repay; whereas with insurance, by paying a premium up front, the policyholder is taking the risk that the insurer may not fulfill its side of the bargain.
As microinsurance is evolving to be distributed by a range of delivery channels, it is becoming less dependent on MFIs to extend insurance to low-income households.
But MFIs remain an important distribution channel, which is where the bad news begins to kick in. As they both involve the provision of financial services to the poor, microinsurance will always be associated with microfinance, and therefore any negative perceptions of the lending practices will tarnish insurance as well.
The crisis in Andhra Pradesh highlights the need for more controls within MFIs and by the regulatory bodies. Microinsurance can help the industry recover from the crisis and evolve to better meet the needs of lowincome households by providing a greater diversity of available financial products and protecting households in times of crisis. But insurers would be wise to thoroughly assess prospective delivery channels to ensure that their partners’ good reputations are well deserved.