Ramesh S Arunachalam
Rural Finance Practitioner
As part of a team, I did a report in 2007 for The MicroNed NETWORK, Netherlands…and I reproduce a small portion of the report that looks at the 2005/6 Krishna district crisis…You may find this interesting…and you may also find that it has many similarities to the situation of today…
Déjà vu…Indeed…Read ON…
Quoted from the MicroNed Report…
3.15.1 Why did the Andhra Pradesh (Krishna District) Crisis Occur – Some Thoughts…
While the above discussion highlights the consequences of the Andhra Pradesh crisis and two alternative view points on the cases and learnings, the discussion below highlights a long list of reasons, which in the opinion of authors, were responsible for the Andhra Pradesh crisis. The figure at the end of this section tries to map causality in a tree diagram.
There are several reasons for the Andhra Pradesh crisis and there are given below:
1. The unparalled growth of the MFI model – burgeoning growth where MFIs grew at a scorching pace and MFIs systems/governance were not commensurate to manage that growth
2. Poor governance practices in most MFIs coupled with a perceived lack of transparency in some MFIs
3. Personal life style of certain MFI promoters, who were said to lead an extravagant lifestyle
4. Lack of certain systems in MFIs like risk management, internal control, internal audit, MIS – which, even if available, were not to the required standard to manage the burgeoning growth in a transparent/effective manner.
5. Lack of sensitivity on the part of the government to take an enabling rather than an ideological/restrictive view.
6. Lack of any serious consideration by MFIs to the loan absorption capacity of borrowers – indiscriminate loaning to borrowers, concurrent loans, repeat loans without sufficient gaps between loan cycles etc
7. The govt’s rigid ideological stance on SHG’s being the best way to promote micro-finance.
8. The govt’s lack of sensitivity and appreciation for the actual costs in delivering doorstep financial services to low income people under different models.
9. The inability of MFIs to present credible (cost) data with regard to interest rates and cost structures
10. The lack of consumer education on the part of the MFIs in terms of making clients understand actual and effective costs of borrowing
11. The many hidden charges in case of some MFIs, which made the Effective Interest Rates, as high as 45-80% in special cases.
12. The lethargy and low inertia in the Govt Velugu model, which resulted in SHG member(s) naturally moving to MFIs to get services
13. The MFIs piggyback riding on the promotional work done by Govt in many places and cannebalising the clients in SHGs
14. The genuine desire of mature SHG clients to get larger loans and the lack of tolerance on the part of Govt (Velugu) programs with regard to the fact that clients can indeed graduate and may have differing needs
15. The general impact of large scale delivery of financial services for low income people (MFIs/SHG) on the larger political economy which is closely networked with money lenders, middlemen and politicians
16. The unhealthy competition between MFIs themselves on the one hand and the resultant antagonistic competitive practices on the ground by them against one another, which got undue media attention.
17. The very structure of the subsidised Govt program, which distorted the competitive dynamics in the Microfinance market place – lending at 3% per annum is the issue here
18. The irresponsible and hype style reporting of the media, without serious consideration of facts and figures
19. The over emphasis by some MFIs/Banks on consumption based financing
20. The highhandedness and authoritarian behavior of some MFI promoters, senior bureaucrats and politicians – beyond a point, it become a question of one’s own ego for all concerned
21. The lack of timely intervention by the Central Bank at the early stages of the crisis both to reign in the AP Govt as well as ensure transparent practices by MFIs
22. The inability of commercial banks to do serious and proper due diligence on MFIs
23. The desire of commercial banks to seek growth at all costs, especially with little consideration for the loan absorption capacity of MFIs, prevalence of systems, governance practices etc.
24. The inability of banks to influence MFI boards (in some cases) in terms of practicing good governance and transparent practices
25. The desire of banks to meet priority sector obligations through growth come what may and with little concern for the quality of the growth
26. The repayment recovery excesses committed in some cases by MFIs and the open call by Govt (in some cases) to the clients to not repay the loans”
Please see Figure 6 below