Indian Microfinance Crisis of 2010: Turf War or a Battle of Intentions?

Revisiting fundamentals of India’s microfinance industry
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This white paper by Intellecap, an India-based social business advisory firm, analyzes the build-up to the microfinance crisis in Andhra Pradesh (AP), India. It revisits some fundamentals of microfinance and questions the effectiveness of radical approaches to multiple bottom-line businesses by the State.

Social businesses like microfinance need to walk a fine line to balance their commercial interests with the social and moral expectations of a wide variety of stakeholders. Recent allegations against MFIs by the media and the State include coercive practices, lack of transparency, and usurious interest rates. These accusations have resulted in the passage of an Ordinance by the State Government of AP. The paper states that:

  • Ordinance will have adverse consequences and might inadvertently lead to the closure of the microfinance industry;
  • Government and the media should recognize the adverse consequences of this ordinance;
  • Microfinance industry must establish stronger ethical practices, reporting and compliance rules and encourage transparency.

The allegation that some MFIs, in pursuit of growth are pushing unaffordable loans and then using unethical measures to recover them, represents a very real issue. But wholesale closure of the industry damages India more than it punishes irresponsible or criminal lenders.

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