The emergence of microfinance has gained a great importance in the development strategy. Microfinance came into existence in the eighties, and was considered as a panacea for poverty. Its main focus was on the women sector which became a cause for the model to be more attractive. This model got its recognition formally in the mid seventies, governments and other development agencies aided in development of this model widespread amongst all the nations. There were many supporters of this model, one of the supporter, Mohammad Yunus, believed that after declaring microfinance there will be no space for poverty except in the poverty museum (Beg, 2016). On the other hand there were many critics who believed that this strategy will undermine other effective poverty reduction strategies like essential services of education and health.
This paper focuses mainly on the trajectory of microfinance sector in Andhra Pradesh. There were two microfinance models in India. One was led by the government and the other by the private microfinance organisations. Many private microfinance organisations were headquartered in Andhra Pradesh. There were large number of clients and also the number of loans in Andhra Pradesh exceeded that of national average (Gajjala & Gajjala, 2016). But this did not prevent the microfinance sector from the crisis in 2006. In this crisis the private microfinance institutions were accused for using predatory practices. There were many suicides committed by the clients and the interest of several stakeholders were clashed in the year of 2010.
Firstly, the crisis led to shut down of the operations of the private microfinance institutions and also the access to the poor in Andhra Pradesh to loans. On the other hand it also provided relief to the clients who were harassed by these institutions and the clients had no power to stop this (Pandit, 2020).
Who has to be blamed? Either the government or the private microfinance institutions; or both can be blamed for it. There were accusations on the microfinance institutions of being mercenary. They were blamed for earning profits on the back of poor (Mukhopadhyay, 2016). The government was accused for promoting its own interests and strategies. The situation can be summarised as macro-mass in the microfinance sector in India.
This report highlights the evolution of the microfinance sector. It also underlines the impacts of the crisis in Andhra Pradesh in the year of 2010. This report examines the actions of private microfinance institutions and the consequences of these on several stakeholders. Further it tries to provide recommendation for the government and private microfinance institutions. This can lead to not repeating the crisis which was a bubble in Andhra Pradesh. Microfinance institutions can try to make its operations more transparent, ethical and sustainable.
The origin of microfinance can be owed to the Grameen bank model. This model was setup by Dr. Md. Yunus in Bangladesh. It started by providing small loans to women and the needy people during the period of famine. This was to aid the poor people escaping the vicious cycle of money lenders. This idea of lending the small loans to the poor took the form of Grameen bank model. The loan was easily provided without any collateral as security by the poor (Chaturvedi & Sharma, 2019). In 1983, the government passed an order and the Grameen bank became an independent bank. The belief of the Grameen bank is that loans are much better than charity, if the poor are given the chance to repay it. After the model being successful, it generated interest for several other nations worldwide.
In the seventies and eighties, many other nations started to microfinance like Brazil and Latin America. In India a trade union known as Self Employed Womens’ Association (Sewa) was registered in the year 1972. The trouble for women to access the capital was realised by the trade union. Finally this was turned into the first microfinance institution in India by the name Sri Mahila Sewa Sahakari Bank Limited.
The microfinance sector slowed down during the financial crisis period 2007-2008. Initially it was thought that the growth was slowed due to the financial crisis but it was found out that there were internal problems in the sector (Venittelli, 2017). Many predatory methods were practiced where the agents were forcefully pushing the loans to meet their targets.
Andhra Pradesh is a key state in south India where microfinance has originated. It was found out that the quantum of loans and the average savings balance of Self Help Groups were the highest for south India. In the year of 2010, it was seen that more than a third of the total households using microfinance in India were in Andhra Pradesh (Milana & Ashta, 2020). The state government of Andhra Pradesh aided in promoting the Self Help Group model while ensuring that the citizens were aware about the microfinance and the concept of group liability. Another important step taken by the state government was the program initiated by World Bank, formerly called ‘Velugu’ and Indira Kranthi Pratham later. This was basically for promoting the livelihoods and Self Help Groups.
The initial signs of crisis in microcredit in Andhra Pradesh was seen in the year 2006. It took place in the district Krishna and was termed as Krishna Crisis, this was due to the shutdown of 50 branches of two large microfinance institutions by the state government. These two institutions were accused of charging excessive rates of interest from their clients and also implemented predatory recovery practices. These two big institutions were also blamed for stealing the clients from the Government led Self Help Group Programs.
The downfall of this expansion was witnessed in 2010 as the boom changed to bust. About 50 clients of microcredit committed suicide in October due to the burden of debt and repayment of the credit pressurized by the employees of microfinance. People got very angry seeing the microfinance institutions collecting riches at the cost of the poor. As a response microfinance institutions were clamped by the government of Andhra Pradesh. This further resulted in huge crisis being faced by the companies as microfinance institutions were badly affected in collecting the debt payments of the existing customers and in further accessing refunds of the bank.
After the news of abusive practices followed by the institutions spread, penalties were declared for these organisations. They were also forbidden to give more than one loan to the same client and an upper limit was set on the interest charged. After this, lending and recovery were terminated completely. Even the politicians encouraged and motivated the clients of microfinance institutions to not repay the funds (Lam, 2020). This critically affected the microfinance institutions. The collection rates for these institutions based in Andhra Pradesh drastically came down from 99 percent to 20 percent. Also the clients who did not repay were not eligible for seeking loans in the future (Gupta, 2020). The liquidity of the Microfinance institutions fell drastically due to the curbing of the rates of interest. Commercial banks feared about the anticipated losses and did not extend credits anymore.
The collection practices of the debt were ruthless and the over lending of the funds led to the failings of the microfinance institutions. It lacked responsible practicing of microcredit. The act of microfinance institutions was in a predatory manner so as to accomplish the shareholders’ profit expectations. The households who were already having loans from other institutions were overlend rather than microfinance institutions engaging themselves in searching of new clients (Johnston, 2020). The extend of full charges were also often hid. Microfinance institutions outsourced their activities to agents locally toward the moneylenders supposing to be displaced by the microfinance in view of meeting the goals of new disbursement of loans and ensuring the repayments of the existing loans. There was a great rise of violent and illegal forms of collection and many investigations took place despite of many protests from time to time which led to suicidal cases.
In order to eliminate their problems temporarily, households seeked for loans from various informal sources as well as from the microfinance companies. There was a growing demand of microcredit by the landless and poor people who were small holders facing severe burden. Households borrowed credits from new sources like money lenders and microcredit agencies and made multiple borrowing a common practice while sustaining consumption by paying off old debts (Pati, 2019). There were various external financial shocks faced by the households in the form of crop failure, illness or economic downturn. After the crisis in Andhra Pradesh, this sector in India remained in denial mode. There was fear in the market to give loans to the microfinance. The access gate of the microfinance institutions were shut after the crisis.
There is a need to realise that the microfinance sector is built on the non-performance and negligence of the formal financial sector. This negligence is basically by the government and regulatory bodies. The government has to consider financial inclusion for all the people of India. The original concept of micro credit was to give loans to poor and needy and thus, provide chance for financial inclusion to the people who are incapable of.
The determination of final authority in the Microfinance sector was not clearly mentioned. It was not decided whether the state or central government will supervise this sector. The state government of Andhra Pradesh wants microfinance sector to be a state subject. However, there is a significant role of the central regulating body. It should not allow state to become the participants of the microfinance as well the regulators in this industry.
To provide legitimacy in the eyes of the people of the nation, the government should try to bring microfinance sector under the umbrella of the Reserve Bank of India. The government should ensure judicious and moral operations in microfinance and should put in place mechanism to address the problems. There was a bill which was circulated for some time in the parliament but it was eventually rejected (Reddy, 2018). It is very important for the current government to look for a solution to put aside populist considerations so that the next bill could be legally enforceable.
Private microfinance institutions should also start to follow the code of conduct created by the regulatory bodies in their operations. If the microfinance institutions want to survive on profits while dealing in this sector with many poor people, they should be ready for the inspection. The private microfinance institutions are known for their innovation (Teki, 2017). They should try to find a solution to the problem of multiple lending rather than trapping the poor people who are in real need of funds. The private microfinance sector should not consider the government intervention as a hurdle in their way.
The government can play a very significant role by incentivising moral behaviours and can also charge for the misbehaviour of the private sectors. However, in a sector where there are millions of poor citizens, it is really difficult for a complete supervision. Therefore, it is the responsibility of the microfinance institutions to look after their actions because microfinance is not only for profit motive rather is to help in the reduction of the poverty.
There was a typical trajectory of the microfinance sector in India. It had a slow start in the beginning followed by a period of high growth and finally a bust and a subsequent appease. It was unexpected by the regulatory authorities and the government that the private microfinance institutions will play such a dominant role in this sector. However, after the subsequent crisis, there is an urgent need to look into this sector. Both government and private microfinance institutions should take required steps to prevent the crisis in the future and should aim for the smooth operations of these institutions.
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