When the Poor Became Bankable: Microfinance Crisis in Andhra Pradesh

Abstract

The success of Grameen Bank, founded by Muhammad Yunus, had led to the sprouting of microfinance institutions in India. The Grameen model provided financing support for income generation in remote areas where banks had been tardy in providing service and had historically seen high repayment rates. However, the microfinance sector in India underwent a change in its model in August 2009 when India’s largest private microfinance institution (MFI) raised funds from the public through an IPO, promising high rates of return. While this was condemned as commercialization of microfinance, the market-oriented model aimed to help more poor people by tapping the large pool of investor capital rather than the limited pool of donor or subsidized funds. The situation reached a crisis in October 2010 when there was a spate of farmer suicides in Andhra Pradesh, the microfinance capital of India. More shocking facts about the industry such as the exorbitantly high interest rates, intense competition among MFIs which had led to multiple loans being offered for consumption in addition to income generation and tight repayment schedules, came to light. The group-lending system which enforced repayment through social pressure had exacerbated the situation for women caught in debt traps. The Reserve Bank of India, the country’s central bank had to intervene urgently. This case raises questions of ethics, profit models for social businesses and regulation through government intervention.