Micro Finance Crisis

In

Andhra Pradesh

Written by:

Kuldeep Chaudhary
“The social responsibility of business is to increase it’s profits”, Milton Friedman said in
1970.In 1990 this doctrine of Friedman appeared to face challenges from new group of
people calling themselves as “Social entrepreneurs ”.For them Friedman’s insistence on
increasing profits was not in a contradiction to the theory of social responsibility of ending
poverty. These people ( social entrepreneurs) gave insight to the world that poverty
alleviation is not the sphere where private partners have no role to play. In this paper we will
try to understand role of social entrepreneurship in the area of micro-credit and more
recently micro-finance which consists micro credit plus savings, insurance ,money transfers
etc. Indeed , since the late 1990 the provision of microcredit has been officially accepted as
“an effective tool for alleviating poverty”.(Union Budget 2000-01)

Source:- http://indiabudget.nic.in/ub2000-01/bs/bsa3.htm

Before analysing the various aspect of microfinance crisis, I would like to give examples of
some cases which can directly cited as a sad consequences of this credit facility:

(1) In 2006, there were reports that about 10 MFI-borrowers had committed suicide in
Krishna district. The suicide stories began to pile up after 2006. In 2010 itself, there
were about 30 to 60 reported suicides (as per different estimates) of MFI-borrowers;
of the 30 suicides, 17 were of those who had at least one loan from SKS.

Source: http://www.pragoti.org/node/4202

(2) Microfinance Focus (2010) has reported that there have been 54 suicides by
microfinance borrowers in the State of Andhra Pradesh alone.
Source: http://www.microfinancegateway.org/gm/document-
1.9.49964/Does%20Microfinance%20Cause.pdf.
(3) Here is a list prepared by SERP (Society for Elimination of Poverty) of 123 victims
who took loans from some of the MFIs.
* Please have a look at the following site. I am unable to attach it here due to large
size of the report.
Source:http://www.microfinancefocus.com/content/exclusive-54-microfinance-
related-suicides-ap-says-serp-report
(4) K. Venkata lakshmi of Devarapalli, Visakha district, took a loan of Rs. 15000.“16
years old daughter was harassed and humiliated, asked the girl to do prostitution for
 repayment, She was kept in a house under lock, under wrongful confinement, and the
girl Committed suicide.”.

Source: http://www.microfinancefocus.com/content/exclusive-54-microfinance-related-
suicides-ap-says-serp-report

(5) Jayaramappa of Madakasira SC colony, Madaka sira mandal, Ananthapoor district,

took Rs 64000 “from three MFIs. On 3rd of October 2010 committed suicide because
of MFIs harassing his wife and abusing with filthy vulgar language .”
Source: http://www.microfinancefocus.com/content/exclusive-54-microfinance-
related- suicides-ap-says-serp-report

Rural Credit and financing in Post-Liberalisation period

In the post liberalisation period rural banks were closed down.

Number of rural Banks

Year 1997 Year 2004
32939 32227

On the other hand, number of banks in the urban areas increased.

Number of banks in Urban(metropolitan) areas

Year 1997 Year 2004
8930 9750
Source:
http://www.madhyam.org.in/admin/tender/Banking%20Sector%20Liberalization%20i
n%20India,%20Some%20Disturbing%20Trends.htm
From the above data, it can be understood that government preferred to set up banking
facility in urban areas to meet the profitability criteria. BIMARU states for instance,
Uttar Pradesh, Bihar and few states of the North-eastern region witnessed a decline
in the number of branches in the post-liberalization period whereas states such
as Delhi, Haryana, Punjab and Maharashtra have witnessed a steep hike in the bank
 branches. Delhi, for instance, witnessed a jump of more than 30 per cent in bank
branches, from 1256 branches in 1997 to 1639 in 2004.
The banking sector under the post-liberalization period is witnessing a secular decline
in rural credit. The rural credit went down from 15.7 per cent in 1992 to 11.8 per cent
in 2002 .
18

16

14

12

10

0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Figure: Rural Credit scenario in India

Source: Figure is drawn with the help of data taken from the following site:

http://www.madhyam.org.in/admin/tender/Banking%20Sector%20Liberalization%20in%20I
ndia,%20Some%20Disturbing%20Trends.htm

Only five public sector banking institutions out of 27 state owned banks, two from the private
sectors were providing the required 18% credit extension target to the farming community
between 1992 and 2002. Credit allocation towards metropolitan region increased from 44.84
per cent in 1990-91 to 61 per cent by the end of 2003-04.

From all the facts cited above it can be concluded that after the liberalisation government
stepped back from the area of rural credit and financing . It created the vacuum and this
vacuum wad filled by the profit -seeking institutions, private money lenders and a number of
NGO’s and SHG’s. and several MFIs .Here is the distribution of Microfinance institutions in

the country since 2008.

Microfinance Penetration Map of India in 2008

Source: http://indiamicrofinance.com/andhra-pradesh-mfi-ordinance-2010.html

Here is the list of some of MFIs and NGOs who are doing the crediting job in state of
Andhra Pradesh.

Name of MFI Number of Branches Number of borrowers Loan(Rs in millions)

As on 2008 As on 2008 As on 2008
SKS Microfinance 1413 25,90,950 2,395
Limited

Spandan Finance ltd. 696 16,68,807 1,225

Share Microlin ltd 666 12,31,556 1,448

Bhartiya Samrudhi 87 4,57,668 317
Finance ltd
Future Financial 50 1,35,488 234
Service
SWAWS Credit 44 90,082 115
Corporation India
private ltd
Saadhna 36 73,443 59
MicroFinance
Society
Rashtriya Seva 5 41,453 56
Samiti(RASS)
Annapurna Financial 30 43,267 176
Services ltd (AFSL)
PWMACTS 5 31,040 42

CRESA 15 32,491 18

Source: Table is prepared from the facts given on the following site:

http://www.scribd.com/doc/20998565/Top-50-Microfinance-Institutions-in-India-by-CRISIL

Now let’s try to understand what went wrong with MFI’s in India. Microfinance loans
provide financial access to the poorest to meet the expenditure for marriages, ceremonies and
certain other rituals, repayment of old dues, children’s education, income generation
activities including agriculture and to start a new business .To meet out their financial
demands people have three options :

1.State owned banks

2.SHGs & MFI

3.Private Moneylenders

As we have seen earlier that state owned banks were reduced in numbers remarkably after
1990’s.Beside that taking loan from state owned banks is a very long process which fails in
fulfilling the immediate demands. The option of private moneylender is fast but unregulated
where rate of interest in some cases becomes as high as 60-120 % per annum. In this
scenario, needy people do not having any other option rather than going to MFIs. Vikram
Akula’s SKS Microfinance is one of the biggest players in the field. SKS charges 26.7%
interest (lowered to 24% after public furore).The borrowers, mostly uneducated, cannot
distinguish between a flat rate and a diminishing rate. MFIs charged exorbitant rates of
interst,used unethical coercive means to get their money back and in some cases it became
unhuman also like in the case I have cited above in which , a 16 year old girl was forced to do
prostitution, a woman was denied to give fire to the dead body of her husband .Most of the
people used to take loan from some other MFI to repay the money of previous MFI . In other
way we can say it , in order to get relieved from one debt another debt was taken. But the
question is “Did it really relieved them from the debt or it open the gate for a bigger debt”. It
is quite similar to a popular saying in hindi,”ANGARON SE AAG BUJHANA” means
extinguish the fire from fire.

But as per to the very first statement of Milton Friedman given in this report, “The social
responsibility of business is to increase it’s profits”. These MFIs were all dedicated to
increase their profit. But what role was government playing in all this crisis? The action of
stepping back from rural-credit and financing sector had already invited these MFI monsters
in the market. Bolivian microfinance crisis of 1999-2000,and number of such crises in
Bosnia, Pakistan etc were precursor(mini crisis) to this mega crisis, but government never
tried to learn a lesson from these events. We can say in terms of crisis management
government failed in pro-active measures. On one hand the rate of interest for a car loan is
offered at an average rate of 9-12% by various banks, on other hand MFIs were charging rate
of 26.7% in case of SKS(mentioned above)

Source: Bank rates for car loan

http://www.bankbazaar.com/car-loan-interest-rate.html

Constitution has given a fundamental right , “Right of life and personal liberty” to every
citizen. This right also contain a right to lead the life with dignity. Is it not the duty of the
government to check the violation of these fundamental rights.

Let’s now analyse that the government which failed in pro-active measures of crisis
management, how well it adopted responsive measures to the crisis.

Andhra Pradesh Micro-Finance Institutions, Ordinance 2010:

1)It enforced that repayment collections occur at Gram Panchayat offices only.
2) The Ordinance now makes it mandatory for all Microfinance Institutions in Andhra
Pradesh to register with the district registering authority ;district authorities ,who may at any
time can cancel the registration of MFIs.

3) MFI shall not deploy any agents for recovery nor shall use any other coercive action
either by itself or by its agents for recovery of money from the borrower; and any form of
coercive recovery including but not limited to visiting the house of the borrower shall,apart
being punishable under the provisions of the Ordinance.

4) Establishment of Fast-Track Court for such other areas in the State, as it may deem
necessary.
Source: http://indiamicrofinance.com/download-andhra-microfinance-ordinance-908172.html

The Microfinance Institution ordinance passed by the State government of Andhra Pradesh,
has some strong provision to check the coercive measures adopted by the MFIs. It also has a
provision of punishment and registration authorities(District registrar) are now not toothless
as they were previously .But there are few points which still demand a better regulation. The
bill doesn’t specify a cap on the rate of interest that can be charged. The RBI has made it
compulsory for the NBFCs (Non Bank Finance Companies) to disclose in the application
form for the loan, the rate of interest to different categories of the borrowers. The Fair
Practice Code for NBFCs also makes it clear that Board of each NBFC is free to “adopt an
interest rate model taking into account relevant factors such as cost of funds, margin etc .The
most surprising thing in the Ordinance is that it completely takes away the rights of the poor
to decide for themselves, since it seems to specifically target “ low income households” for
these restrictions –presumably leaving all of those of us that hold multiple credit cards and
home loans untouched. The Ordinance requires all borrowers to repay all their loans only on
a monthly cycle and to continue to pay an interest for a longer period. But the point I want to
make is that, most of the loan borrowers are women. Most of them are daily wage workers ,
it’s difficult for them to keep the money safe till the last date of month for the instalment.
Monthly repayment requires women , who usually don’t have an access to a safe place to
save to sum aside and wait to repay till the end of the month hoping that money doesn’t get
stolen in the interim and to pay an additional amount of interest on the loan not having earned
anything on the savings. Instead of these monthly payments, weekly repayments that took
place at her door step is a better option. No doubt the ordinance passed by the stae
government will improve the conditions to some extent but still there are few gap which can
be filled by a more regulated and strong intervention by the state.
Reference:

1.Some selected issues from Kurushetra,Frontline.

2.All required references are given below the data(wherever it has been borrowed).