In mid-October, the government of the southern Indian state of Andhra Pradesh passed an ordinance severely restricting the operations of microfinance institutions (MFIs) in the region. The controversial action was taken after local officials complained of wide-spread abuses in the rapidly growing for-profit microfinance sector; the MFIs have challenged the ordinance in the state’s high court.
As confusion and uncertainty continue in the Indian microfinance sector, one thing is becoming clear: the truth lies somewhere in between.
While Opportunity does not operate in Andhra Pradesh, it does in neighboring Tamil Nadu. This post explores what can be learned from the current crisis and whether it’s expected to spread to other regions in India.
While Andhra Pradesh is not a unique situation, it’s most likely not a bellwether either. As has been widely discussed, microfinance in Andhra Pradesh is largely divided between two models: a long-standing, government-run group savings and lending program on one side, and a rapidly growing commercial microfinance sector (that is not allowed to take deposits) on the other. While aggressive for-profit growth leading to an overly saturated market is a significant concern, the extreme accusations, legal actions and counter suits, widely varying regulations, and politically volatile environment make it difficult to assess the situation from a purely microfinance-based perspective, much less consider it a “bellwether” for the entire industry, or for the rest of India. While Opportunity does not have operations in Andhra Pradesh, our locations in neighboring Tamil Nadu have been largely unaffected by the crisis.
Over-indebtedness is a serious concern, and industry leaders work hard to address it. Opportunity joins the many voices expressing concern about the reports of over-indebtedness, harsh treatment, and despair in Andhra Pradesh. While recent research challenges some of the claims being made about over-indebtedness in the region, the industry universally condemns the harassment and coercion being reported. Opportunity along with other industry leaders are committed to a core set of client protection principles and share best practices with one another through industry organizations such as CGAP, SEEP and the Smart Campaign. Together, we are committed to the following principles: avoidance of over-indebtedness; transparent and responsible pricing; appropriate collections practices; ethical staff behavior; mechanisms for redress of grievances; privacy of client data.
Profit-driven models can lead to negative outcomes, but the majority of institutions pursue a double bottom line. While rapid commercial expansion and aggressive lending certainly played a factor in Andhra Pradesh, it is unfair to judge an institution solely on the source of its capital or whether or not it operates as a for-profit entity. As a non-profit organization, Opportunity International works toward sustainability, not profitability, but microfinance organizations of all types have demonstrated their commitment to put their clients first. We are, however, concerned that a profit-maximizing model in microfinance could result in fewer providers reaching into rural areas, financing agriculture or piloting new programs. The risk the for-profit sector faces is that it may drift toward larger loan sizes and a more secure client base in order to meet shareholder demands.
Government oversight is necessary in the sector, but hastily implemented regulation can backfire. It is an entirely appropriate and welcome step for regulators to insist on transparency and client protections. One of the more contentious aspects in Andhra Pradesh is the manner in which new regulations have been implemented. Opportunity’s banks work closely with the central banking authority in each country to meet reporting and operational requirements. Moreover, we diligently pursue lower interest rates for our clients through streamlined business operations and the use of innovations in technology.
Loans by themselves are not a cure-all; Opportunity couldn’t agree more. Much of the recent coverage has focused on organizations offering “one-size-fits-all” loans and the negative consequences when they don’t fit. Opportunity has not only been an industry leader in promoting savings-based microfinance, we utilize a wide variety of client-centered products including short- and long-term savings, loans, insurance, training, and business-specific financing in areas such as agriculture and education.
Microfinance organizations in Andhra Pradesh are struggling, and most importantly, so are their clients. Somewhat missing in most of the coverage is a discussion of the impact the crisis is having on entrepreneurs who cannot currently access the financing they need to meet the day-to-day demands of their business, or what options they will be left with if the market dramatically contracts. Moreover, much of the coverage continues to perpetuate the false notion that people living in poverty are not good money managers, though the research, and our experience, would suggest otherwise. While providers take steps to comply with regulations, government officials clarify their intentions and India’s biggest banks calculate their exposure, the health of microfinance in India can’t be measured only in rupees, regulations and press coverage, but rather, it must be measured in the lives of our clients and their families.