The Andhra Pradesh Crisis: Three Dress Rehearsals...and Then the Full Drama

This note discusses the build-up to the Andhra Pradesh crisis and the future implications of the crisis to Indian microfinance.

The microfinance crisis in the Indian state of Andhra Pradesh in 2010 has been attributed to usurious interest rates and coercive recovery practices of MFIs. The crisis prompted the Government of Andhra Pradesh to issue an Ordinance requiring MFIs to register with local government offices, which will monitor complaints from MFI clients. The note narrates three situations which were precursors to the Andhra Pradesh crisis:

• The closure of 50 MFI offices in Krishna District of Andhra Pradesh by the District Collector on charges of exorbitant interest rates and coercive practices by MFIs, followed by withdrawal of ICICI Bank’s MFI partnerships;
• Loan default by a local MFI in Uttar Pradesh amidst portfolio problems;
• Repayment strike by a group of MFI clients in Karnataka state, followed by formation of MFIN by MFIs to establish a credit bureau for assessing multiple borrowing and ensuring transparent pricing.

The note predicts that consequent to the Andhra Pradesh crisis and the Ordinance, interest rates may be capped and priority sector lending may be halted.