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Microfinance in India is still where it was months ago – in a stalemate with the government. The crisis of microcredit in the southern Indian state of Andhra Pradesh which began last October with a rash of client suicides – we were the first to blog about this, and followed its development throughout – climaxed in a standoff in late October between the state legislature and microfinance institutions (MFIs). Mud was thrown by both sides in an intense blame-game, while actually the crisis had systemic causes rooted in weak legislation and a hyper-competitive market.
Neither side has found a way to break out. But the stalemate is becoming unstable. It is increasingly clear to MFIs and their funders that most loans in Andhra Pradesh will not be recoverable, since trust in the MFIs’ promise of being “here to stay” is dwindling, and the new legislation has rendered erstwhile coercive recovery practices impossible. On the other hand, the Andhra government cannot step down from its legislature issued under the promise of protecting the poor without losing face, and the Indian federal government has chosen to largely ignore the issue.
The Economic Times from Mumbai recently provided a thorough update on what happened in the past few months, which I’m quoting here. The growing problem is that the MFIs in Andhra Pradesh will need new capital soon in order to replace the loans they have written off, or will soon be forced to write off. Read the rest of this entry »
In this interview, Professor Malcolm Harper analyses some of the underlying causes and consequences of the microfinance crisis in Andhra Pradesh. Professor Harper is chairman of the microfinance rating agency M-CRIL and editor of the volume “What’s wrong with Microfinance?”. He has been Professor of Business Development at Cranfield Business School, and as the former chairman of BASIX, significantly pioneered microfinance in India.
Professor Harper, you recently returned from India. How bad is the situation for the microfinance sector there?
I was in Delhi at a very large meeting of microfinance people, where of course Andhra Pradesh was being talked about a lot. I then spent some time in Orissa, in a village three kilometres from the Andhra Pradesh border. I called in on the local office – which previously I didn’t even know existed – of BASIX. And the local staff said there had been no trace of any repayment difficulties, even though the Andhra Pradesh border was so close by. This surprised me, and even they were rather surprised. Repayments were at the normal high level.
But I was running a course nearby and my students were interviewing various traders in the local market, and a few of them mentioned that one or two of the microfinance institutions, from which they had taken loans, had stopped making disbursements. And that of course has the seeds of trouble, because one reason why people repay is because they’re going to get another loan.
So it seems that the MFIs are having trouble refinancing themselves now, raising capital for their lending activities.
That’s inevitable, I think, because when the banks are beginning to wonder about the quality of their loans to the MFIs, they’re not about to release further loans. And that, of course, contributes to the problem, because – as I said – people repay mainly because they’re going to get another loan. Read the rest of this entry »
As India celebrates Diwali this week, the debate about how to deal with microfinance has calmed a bit. But since I wrote up my analysis of the root causes Andhra Pradesh showdown (part 1, part 2), the news has taken few further twists. Here’s an update:
- Vijay Mahajan, Chairman of BASIX and speaker for the MFIN industry organisation, stated on TV: “Alot of the reasons for invoking the ordinance were the creation of the microfinance sector itself. There has been a certain degree of wrongdoing by our sector. And as the president [of MFIN] I am the first one to accept it, I want to do it on record.”
- The interest rate disclosure requirement under the new microfinance ordinance in AP has uncovered interest rates far higher than previously reported – up to 60.5 percent. I wish I was surprised; but MFIs usually neglect to factor compulsory savings, fees, etc., into their publicly quoted rates.
- The AP government has published the complete list of complaints of malpractice and suicide launched against the MFIs – see it here.
- A massive borrower database in AP will go on-line in January, in an effort to clear up the mess.
Meanwhile, India’s vibrant media and civil society have been grappling with the issue, as are some American media. The rest of this post is a digest of the most provocative, insightful and intelligent commentary I’ve seen on the subject.
This is more shocking news from Andhra Pradesh. Obligatory life insurance sold with microfinance loans may be incentivising overindebted borrowers to commit suicide. Worse yet, it appears that loan officers have been pushing debtors to commit suicide as a way out of debt.
Here’s the gist of a Times of India article by Jinka Nagaraju published earler today:
A government study has found that some MFI agents themselves are encouraging the debtors to commit suicide so that their loans are repaid. This happens because the borrowers are covered by insurance.
Till now, there have been at least 45 suicides reported in the state in the last one-and-a-half months allegedly due to the coercive practices employed by the MFIs in recovering the loans. …
Just right now, a severe microfinance crisis appears to be brewing in Southern India. A large number of suicides has led to a legal clampdown and a corporate backlash. With a complaint launched by microfinance institutions (MFIs) at the Andhra Pradesh High Court in Hyderabad against the Andhra government, the recent conflict over MFI practices and borrowers’ debt levels – debt which may be responsible for the deaths of over thirty people – has come to a head. How this case develops is bound to shed light onto what actually matters in microfinance in India today. Bluntly: is it power, profits or people?
Flashback: In August and September, nineteen microfinance borrowers in Andhra Pradesh (A.P.) took their lives because of overindebtedness blamed on microfinance – some reports say more than 30 (or even 57; see updates below). Then, in early October, the debt-driven suicide of a fruit-seller named Prabhakar in Kurnool, southern A.P., triggered public outcry and attacks on several MFI offices.
On October 14th, the A.P. state government “brought an ordinance making it compulsory for MFIs to register themselves, declare the effective rate of interest they charge, ensure that no security is sought for loans and no coercion is used for recovery. Non-compliance will be punished with a three-year prison term and a fine of Rs 1 lakh.” In response, yesterday a consortium of MFIs operating in A.P., MFIN, filed a petition at the Andhra Pradesh High Court seeking an order to squash the ordinance issued by the government (NDTV, AP). Meanwhile, another overindebted microborrower, K. Narayana, who was harassed by the agents of four MFIs, took his life by drinking poison.
Video: “The microfinance institutions hit back,” questioning A.P. government’s power of jurisdiction.
Capitalism as a system transcends borders, and so does the latest capitalist crisis. Sometimes pictures tell a story better than words. A brilliant animated cartoon appeared this summer on youtube, illustrating a lecture by CUNY-based British social theorist David Harvey in which he outlines his explanation of the 2008-20xx economic crisis.
Harvey’s analysis of the structural politico-economic origins and mechanisms of the crisis is poignant. The witty animation brought to life by the RSA is a true delight, regardless of what one may think of his arguments. A certain part of Harvey’s narrative caught my eye in relation to microfinance (more below). But first, let me briefly recap his story (in an unduly simplified manner). Harvey says:
There are five common explanations of the crisis, all of which are somewhat true:
 It stems from human nature – predatory instincts, greed, etc.
 The regulators failed, therefore institutions need to be reconfigured.
 Everyone believed in a false theory – forget Hayek, return to Keynes!
 It has cultural origins – homeowning-obsessed Americans and lazy Greeks, your fault!
 It’s a failure of policy – too much regulation of the wrong sort.
In 2009, many received wisdoms of late capitalism are crumbling. To mention a few disappointments, which it didn’t take a telescope to see from a mile away,
- No – we haven’t overcome the business cycle.
- Sorry – China and India aren’t gonna drag us out of the recession.
- Nope – deregulation doesn’t bring widespread prosperity.
- Too bad – wealth doesn’t grow on trees or in banks or hedge funds.
- Please – add your own favourite here: __________________________
A crisis is a moment in which illusions or expectations fall apart. In the Nigerian novel “Things Fall Apart”, the patriarchal protagonist Okonkwo confronts a world of changing values (colonialism, Christianity) in which he finds he has no leading role left to play. Rather than adapt to these circumstances, he takes his life.
This pessimistic example, however, doesn’t seem to apply to some international organisations in the current crisis. Rather, after years of seeming anachronistic, the World Bank, IMF, NATO and OECD are experiencing something of a revival – notable absentee: the UN.
According to classical (or vulgar?) institutional theory, institutions persist rather statically until some kind of “critical juncture” suddenly occurs, at which point they disappear or reinvent themselves (or are reinvented). As far as critical junctures go, they don’t get much bigger than the 2007 to 20xx? global capitalist crisis. Read the rest of this entry »
Even Karl Marx, who saw Capitalism as a production system governed essentially by inescapable laws, acknowledged the key role of special actors who made it their job to advertise the benefits of the market. The market, a political project, needs these people to create the “right” environment. Marx often called them “sycophants”, an ancient Greek word denoting servile persons who would flatter potentates, and even denounce their own peers, in order to garner favour.
Christoph Deutschmann’s fascinating new book, which analyses Capitalism as equivalent to a modern secular religion, also sees these actors performing an important function. He views many economists and business “experts” as performing for the market a role equivalent to that of priests in the Christian church – to interpret the signs given by the deity and to make predictions based on them.
Be they high priests or sycophants, the PR workers of global Capitalism (those who haven’t, at least temporarily, defected to the pro-government side, so long as it subsidises business) are getting in gear again – they literally have a world to lose. However, in this present crisis, neither the numbers, nor the facts, nor people’s everyday experience, really speak strongly for the priests’ side. So some turn to a rather “liberal” treatment of the facts.
Take for instance the statement that luxury goods are cheaper than ever thanks to mass-production. True. But most people in the world haven’t had much from this, while they are getting a taste of the flipside; the massive rise in grain prices over the past years is literally causing riots and civil wars in the South (Haiti, Sudan, Congo…).
Yesterday’s special business section in the German broadsheet “Frankfurter Allgemeine Zeitung” (FAZ) opened with a bleeding-heart appeal for more faith in the market, based on the view that everything isn’t so bad after all. If Capitalism has served us so well for so long, why rebuke it just because of this crisis? Maybe we can bring out the sun simply by wearing sunglasses? Read the rest of this entry »