MICROCAPITAL BRIEF: Microfinance Experts Say “Microcredit Is Not The Enemy”

The Financial Times, a UK-based newspaper, recently published an opinion piece titled “Microcredit is not the enemy,” which examines the recent microfinance trouble in the Indian state of Andhra Pradesh and some of the misperceptions that have subsequently emerged that deem the industry as “a flawed idea.” The authors – Abhijit Banerjee, Pranab Bardhan, Esther Duflo, Erica Field, Dean Karlan, Asim Khwaja, Dilip Mookherjee, Rohini Pande and Raghuram Rajan – note that what has been dubbed as a microfinance crisis in Andhra Pradesh was not directly a product of the microfinance institutions (MFIs) themselves or their policies, but was rather the result of excessive government intervention. MFIs rely on the trust they build with their borrowers to repay their loans and avoid default. The authors argue that the problem did not get out of hand until the local government asked all borrowers in the state to stop repayment on their loans. The authors highlight the potential consequences that the larger Indian financial system could face should the local microfinance industry collapse. Indian banks could suffer major losses, and borrowers might be more inclined not to repay their loans, scaring away foreign investors that support a significant part of the microfinance sector.

But the authors also acknowledge the flaws in the microfinance sector in India that have created certain difficulties. For example, loan officers are often pressured to recruit as many clients as possible, which can lead to inadequate screening and over-lending. To help improve this situation, the authors suggest lifting the recent law that regulates interest rates and focusing new regulation on better borrower screening, a better code of conduct for loan officers and more attention to client grievances.

By Diana Baide, Research Assistant

[1] Financial Times. “Microcredit is not the enemy” by Abhijit Banerjee, Pranab Bardhan, Esther Duflo, Erica Field, Dean Karlan, Asim Khwaja, Dilip Mookherjee, Rohini Pande and Raghuram Rajan.

http://www.ft.com/cms/s/0/53e4724c-06f3-11e0-8c29-00144feabdc0.html#axzz18fIycovt

“An Ordinance to protect the women Self Help Groups from exploitation by the Micro Finance Institutions in the State of Andhra Pradesh and for the matters connected therewith or incidental thereto”

http://indiamicrofinance.com/wp-content/uploads/2010/10/Andhra-MFI-Ordinance.pdf

MicroCapital. “MICROCAPITAL BRIEF: Finance Minister of India Vows Not to Strangle Indian Microfinance Industry” by Trevor Kwong, 23 November 2010

https://www.microcapital.org/microcapital-brief-finance-minister-of-india-vows-not-to-strangle-indian-microfinance-industry/

MicroCapital “MICROCAPITAL BRIEF: Under Pressure from State Government of Andhra Pradesh, Indian Microfinance Institutions Agree to Cap Interest Rates at 24%” by Diana Baide, 16 November 2010

https://www.microcapital.org/microcapital-brief-under-pressure-from-state-government-of-andhra-pradesh-indian-microfinance-institutions-agree-to-cap-interest-rates-at-24/

MicroCapital. “MICROCAPITAL BRIEF: India’s Microfinance Industry on Brink of ‘Collapse’ Due to Credit Freeze in State of Andhra” by Diana Baide, 15 November 2010

https://www.microcapital.org/microcapital-brief-indias-microfinance-industry-on-brink-of-collapse-due-to-credit-freeze-in-state-of-andhra-pradesh/

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