India's Microfinance Crisis is a Battle to Monopolize the Poor

[Renew Deal]

India has a strong oral tradition. Children are raised on stories passed from generation to generation, and every story holds lessons. The above tale teaches that good intentions are not enough — an overzealous protector can actually cause harm to those it loves. For proof, we need only look to the microfinance crisis playing out in Andhra Pradesh.

Andhra Pradesh is the motherland of Indian microfinance largely due to the early and extraordinary work of its state government. In the late 1980s, it built the Self Help Group-Bank Linkage Programme (SHG-Bank Linkage) with support from the National Bank of Agriculture and Rural Development and World Bank Loans. It invested heavily in client education and, along with the not-for-profit sector, built up a robust microfinance portfolio.

But over the last two decades, many lenders that began as non-profit organizations have transformed into commercial microfinance institutions (MFIs) — among them, BASIX, SHARE, SKS, and Spandana. As compared to SHG-Bank Linkage, these institutions have posted faster growth rates and reached far more borrowers.

Last month, the state government put a halt to that with the AP Microfinance Ordinance, suspending operations of MFIs in the state and for all intents and purposes allowing borrowers to stop repaying their loans. The announcement of the Ordinance stressed the need to protect the poor — but the move might well, in the long term, leave them far worse off.
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http://blogs.hbr.org/cs/2010/11/indias_microfinance_crisis_is.html