Published by Legatum Ventures; May 2011; 11 pages; available at http://www.legatum.org/attachments/MicrofinanceCrisis.pdf
This paper, published by private investment group Legatum of the United Arab Emirates, discusses the recent turmoil in the microfinance industry in the Indian state of Andhra Pradesh (AP) and the implications of the state government’s response, namely the Andhra Pradesh Microfinance Institutions Act (AP Act) that was issued in late 2010. Legatum suggests that the AP Act has the potential to limit the role of private-sector microfinance thus jeopardizing the Indian government’s stated objective to promote financial inclusion.
Legatum argues that the enactment of the AP Act has already had an adverse impact on low-income households by denying them access to basic financial services. As part of its policy of financial inclusion, the federal government requires Indian commercial banks to lend to “priority sectors” such as the microfinance sector; however following the turmoil and issuance of the AP Act, commercial banks have placed a hold on new lending to microfinance institutions (MFIs) nationwide. Legatum exclaims that this lending freeze has particularly affected end-borrowers in AP given that MFI disbursements in AP have diminished from INR 5,000 crore (USD 1.13 billion) during the six months ending September 2010 to INR 8.5 crore (USD 1.9 million) during the six months ending March 2011.
Legatum argues that the AP government justifies its action by claiming to protect citizens from MFIs charging usurious interest rates and employing coercive collection practices. Legatum rebuts these allegations as follows: (1) considering the “door-step” nature of services provided, MFI interest rates are commercial, reasonable and competitive and (2) strict policies and codes of conduct have been put in place to ensure that loan repayments are professionally managed and humanely carried out. Regarding the allegation that lending practices have resulted in suicides, Legatum finds no causal link between MFIs and suicides.
Legatum also intimates that the AP Act serves the interest of the self-help group (SHG) program that is backed by the AP government and run by the Society for the Elimination of Rural Poverty (SERP). In December 2010, MicroCapital announced the publication of a white paper by social-sector advisory firm Intellecap that points to the possibility of the state government’s concern that its programs were being undercut by private MFIs [2]. Legatum refers to private MFIs as the SHG program’s “number one competitor,” to which it has reportedly lost significant market share. As such, Legatum suggests that the enactment of the AP Act would bolster the SHG program. In addition, Legatum argues that the enactment of the AP Act is timely as SERP is reportedly being considered for USD 1 billion in funding from the World Bank Group.
Legatum recommends that the Reserve Bank of India and central government take immediate and decisive action to supersede, suspend or repeal the AP Act. Failure to do so would create grave consequences for low-income households and the microfinance sector according to this paper. Consistent with this position, global ratings agency Fitch recently published a document that reportedly states that a single regulatory body is crucial to ensuring a stable microfinance sector in India and that future legislation affecting microfinance should be developed through cooperative efforts between state and federal authorities [2].
By Jacqueline Foelster, Research Associate
About Legatum Ventures: Legatum Ventures is one of the five divisions of the Legatum Group, a private investment group headquartered in the United Arab Emirates. Legatum Ventures is a double-bottom- line investor that invests in for-profit enterprises worldwide that deliver both social and financial returns. No current financial information on Legatum Ventures is available.
Additional Resources:
[1] MicroCapital.org Brief, December 13, 2010, “Intellecap Publishes White Paper Analyzing Events Leading Up to Andhra Pradesh Microfinance Lending Crisis and State, Media Responses to the Crisis”, https://www.microcapital.org/microcapital-brief-intellecap-publishes-white-paper-analyzing-events-leading-up-to-andhra-pradesh-microfinance-lending-crisis-and-state-media-responses-to-the-crisis/
[2] MicroCapital.org Brief, May 3, 2011, “Fitch Ratings Stresses Importance of Single Regulator for Indian Microfinance Sector”, https://www.microcapital.org/microcapital-brief-fitch-ratings-stresses-importance-of-single-regulator-for-indian-microfinance-sector/
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