India’s microfinance industry is reportedly on the verge of “collapsing,” according to the UK’s Financial Times newspaper, due to politically-triggered bank freezes on credit in the state of Andhra Pradesh, where outstanding loans reportedly measure USD 2.7 billion distributed to 6.7 million borrowers. After a series of borrower suicides that were linked to harassment from debt collectors, the state government issued an order to suspend collections in Andhra Pradesh for the month of October. Indian commercial banks then froze disbursals of approximately USD 133 million that were normally provided to microfinance institutions (MFIs) on a weekly basis.
MFIs were subsequently permitted to resume collections but continue to experience complications. The suspension order reportedly created false expectations among some borrowers of a permanent loan waiver. Fears have arisen that the crisis will spread beyond Andhra Pradesh and will create a series of bank defaults throughout the country. Altogether, commercial and state banks reportedly have USD 6 billion at stake in India’s microfinance sector [1].
By Diana Baide, Research Assistant
[1] Financial Times. “Microfinance warns of collapse over credit freeze” by Amy Kazmin
http://www.ft.com/cms/s/0/b08e7542-e11e-11df-90b7-00144feabdc0,s01=1.html
MicroCapital. “MICROCAPITAL BRIEF: Payment Strike Hits India’s Andhra Pradesh State As Local Governments Urge Microfinance Borrowers Not to Repay” by John Howard-Smith, 9 November 2010
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