By Justin Oliver
This post kicks off a special blog series on the microfinance crisis in Andhra Pradesh, India. Over the coming weeks we’ll be featuring a variety of voices on the issues raised by this crisis and what it means for the future direction of microfinance. We welcome your participation in this discussion through comments.
Fresh Data from IFMR’s Study Reveals a Complex Situation
The crackdown by the Andhra Pradesh state government on microfinance institutions was based on a number of assumptions about what’s happening with microfinance here in India.
[In case you haven’t been following what’s happened over the last month, check out a good overview of what’s happened by David Roodman here, and other analysis by N. Srinivasan, Vineet Rai, Beth Rhyne, and the Wall Street Journal. A sampling of articles in the Hyderabad press that helped precipitate the backlash is here:
Times of India September 29, 2010, Times of India October 18, 2010, Times of India October 26, 2010, Times of India October 28, 2010]
For those not familiar with Indian microfinance, an important distinction to make is that the controversy now is about one type of microfinance institution in India, which makes up about half of the microfinance market. These are what I’m calling “MFIs” here – institutions (both for-profit and not) that make loans to groups of five women in “joint-liability groups,” mostly following the original model of the Grameen Bank in Bangladesh. MFIs give loans directly to these groups of women, but are not allowed to accept deposits.
The other half of the microfinance market in India are “Self-Help Groups,” or SHGs. This model has been promoted by the Indian government, and involves larger groups of roughly 10-25 women, who save amongst themselves and distribute their pooled savings as credit amongst the group. Since the late 1980’s, these groups have been increasingly “linked” to commercial banks – meaning the bank gives a loan to the group, the group distributes credit to its members as needed (which is a lot more money than if they only lent out their pooled savings), and the group is responsible for repaying the bank loan, sometimes directly to the bank, sometimes through a separate “SHG promoting institution.”
Read the rest on CGAP Microfinance Blog