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MFIs: Learning from the
AP Crisis
However there were news reports in early October that the major lender ICICI Bank had offered
to break the stalemate by resuming management of its portfolio in 46 villages that had been
identified by the district authorities as being particularly distressed, where it would reschedule
loans and collect them though the Village Organizations (VOs -- the second tier of the Velugu
structure of institutions) at the lower rate of interest already agreed to by the MFIs. The
arrangement was widely seen as a "compromise", with the MFIs and lenders conceding to the
long-standing demand of the government that they should lend through the VOs, at a much
lower interest, and the government allowing normal operations to resume in the rest of the
district. The on-time repayment rate has recovered to 40 to 50 per cent. 4
The causes of the crisis: enabling
While it is somewhat arbitrary to divide the causes of the AP crisis into the categories of
enabling and underlying, it is a useful analytical device. In the absence of more definitive
empirical data, the numbers in the following discussion are taken mostly (from two quick small
sample surveys carried out by APMAS, and is subject to revision as further studies take place.
The first of these surveys was carried out to provide an objective assessment of the complaints
made to the Chief Minister during his visit to Guntur in April 2005, and sampled 40 Spandana
borrowers (the Guntur survey, APMAS 2005). After the crisis, a year later, APMAS conducted a
second survey in Krishna district of 130 borrowers who had borrowed from either SHGs, or
MFIs, or from both (the Krishna survey, APMAS 2006).
The most important enabling (or contextual) cause was the near-saturation of coastal Andhra
with microfinance. AP as a whole has covered a very large proportion of poor families under
the SHG programme, which in AP is assisted by the World Bank and popularly referred to as
Velugu. 5 Ninety-two per cent of poor households in AP had already been covered by March
2005 according to the annual report of the AP rural development department, and the project
aimed to cover the rest by end-2005, (Government of AP 2005). For the MFIs, the high
proportion of poor landless or near-landless agricultural labour families in the coastal districts
and the high population density generally, provided strong demand conditions, and important
operational cost saving advantages. Spandana actually started life in Guntur district, next
door to Krishna district. Given the high coverage of both Velugu and the MFIs in coastal
Andhra, the Guntur survey found that dual membership was as high as 67 per cent, and that
multiple membership in Velugu, Spandana and SHARE was 32 per cent. The proportion of dual
membership in a second quick survey of 130 borrowers from any of the three sources undertaken
in Krishna district just after the crisis was even higher, at 82 per cent. Further, despite the
presence in the area of two large MFIs (the two largest in the country) both expanding
rapidly, reportedly with considerable rivalry, new local MFIs were still springing up and joining
them. 6
The most
important
enabling (or
contextual)
cause was the
near-saturation
of coastal
Andhra with
microfinance
Despite all this competition, the Krishna survey reported the widespread presence of informal
lenders, referred to locally as "girigiri" bankers, 7 indicating that demand was still not satiated.
18 per cent of borrowers had taken loans at some time from moneylenders to pay for MFI
instalments. However, despite the much publicised "comeback" of moneylenders, 80 per cent
of respondents said dependence on moneylenders had decreased. It is interesting that while
increasing loan size is the most prominently reported means of competition in the literature, 8
and both MFIs were increasingly making individual loans above a size of about Rs 10,000,
Spandana reports that in view of difficulties being experienced by borrowers, its average loan
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