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The lack of contact and communication with other players in
the political economy
A final
underlying
cause was the
MFIs, in their
self-absorption
with growth at
the cost of
other
objectives,
underestimated
the degree to
which they were
antagonising
several powerful
players in the
local political
economy
A final underlying cause was the MFIs, in their self-absorption with growth at the cost of
other objectives, underestimated the degree to which they were antagonising several powerful
players in the local political economy. Among these were informal lenders such as chit fund
organisers 30 and local girigiri bankers, politicians who were embarrassed by the fact that the
MFIs were disbursing much more money in their constituencies than they could lay their
hands on themselves through their constituency funds, some bureaucrats who felt uncomfortable
about anything major happening, even if it is good, without their "blessings", or at least
their knowledge. Even retail traders of consumer durables are said to have felt threatened by
the fact that Spandana had earlier set up a consumer store so as to be able to purchase goods
in bulk and enable borrowers to benefit from lower prices using vouchers they had the option
to accept instead of cash loans. 31 And finally of course there were a number of discontented
borrowers, as we have seen above, some of who were championed by local politicians. This
powerful combination of interests may explain the lack of public support when the crisis hit.
Implications for the MFI model, short and medium
term, and lessons
One short-term impact of the crisis was a heightened perception of political risk among
banks, who both increased interest rates, and reduced new lending to MFIs in AP, especially
SHARE and Spandana, in the first few months of the current year. It is too early to say what
overall lending growth in the country as a whole will be during the year. At least one of the
medium-sized lenders (see Table 7.1) has plans to more than double lending this year, but a
great deal depends on ICICI, since it has the lion's share of total lending to MFIs. SHARE and
Spandana both had to make higher provisions in 2005-06, as well as write-off loans. However
they were not the only ones affected. Other AP MFIs had to make higher provisions too.
Another impact
has been a
sharp
diminution in
the rate of
growth
of the MFI
model in AP
Another impact has been a sharp diminution in the rate of growth of the MFI model in AP.
SHARE's portfolio actually shrunk by about 10 percent during the first six months of the year,
while Spandana's has climbed back to a level only slightly higher than in March. Although
Spandana may have been the larger lender in Krishna district, with Rs 74 crore outstanding in
March, it has a larger share of borrowers in the urban and semi-urban areas, and is shifting its
rural lending to the Telengana and Rayalseema areas of the state, apart from expanding in
Hyderabad, and opening branches in Karnataka. SHARE has not opened any new branches in
the state since the crisis, but has added 15, all outside the state, to its 300 in March. It now
has 100 branches in four neighbouring states - Karnataka, Maharashtra, Madhya Pradesh and
Chhattisgarh and has plans to open branches also in Rajasthan, Orissa and UP. SKS is also
expanding rapidly outside the state. Thus while the crisis is a short-term loss to the poor
families of AP, this will be partly offset by acceleration of growth in other states, many of them
badly underserved.
Hopefully, risk perceptions will improve as things return to normalcy. The AP crisis was caused
essentially by a combination of four factors, (i) the fact that the state itself was an active
promoter of microfinance through a politically-attractive and high visibility programme, Velegu,
(ii) competition between this programme and MFIs (iii) the fact that this competition was
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