Paper

The Andhra Pradesh Microfinance Crisis in India: Manifestation, Causal Analysis, and Regulatory Response

Discussing the microfinance crisis in Andhra Pradesh, India
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This paper explores reasons that led to the microfinance crisis in Andhra Pradesh (AP), India. It examines how a series of factors led to rapid and substantial growth of self-help groups (SHGs) in AP. It also analyzes the responses of the AP Government as well as the Reserve Bank of India to the crisis.The paper states that regulatory measures initiated to deal with the issue have focused more on the symptoms rather than the root cause of the crisis. Conclusions include:
  • Richness of SHG infrastructural base attracted private-sector MFIs;
  • Such MFIs oversupplied credit to the poor in an attempt to maximize their profits;
  • Easy availability of credit made poor households borrow beyond their ability to repay, leading to defaults on repayment;
  • MFIs resorted to coercive methods to recover their loans, leading to some borrowers committing suicide.
The paper concludes that the situation arose primarily due to social structures, private sector MFI focus on maximizing profits and inefficient regulation. It predicts that the absence of adequate policy measures may lead the private microfinance sector to face similar circumstances in different Indian states.