Contrary to what the microfinance industry would have us believe, the poor seem to have worked out superior substitutes.

How is life for the poor without microfinance?

This question bothers many experts in Andhra Pradesh, where fresh loan disbursals by Microfinance Institutions (MFIs) have all but dried up over the last two years.

It was in October 2010 that the State Government brought in the Andhra Pradesh Microfinance (Regulation of Moneylending) Act, unleashing a turbulent period for the Rs 33,000-crore microfinance sector.

Even as the MFIs appear to be breathing easy now in relative terms, the crisis and its aftermath throw up pertinent issues on the so-called inevitability of microfinance as a tool for growth and empowerment of the poor. Have the poor suffered?

One side of the argument

The industry and Microfinance Institutions Network (MFIN) have been maintaining that poor women clients in the State have now fallen victim to private moneylenders.

A recently released report of MicroSave (Market-led Solutions for Financial Services) claims that MFI clients have taken loans from moneylenders to bridge the credit gap, post October 2010, and also reduced the scale of their businesses due to non-availability of working capital.

The study is based on participatory methods and was done during July-August 2011. It also shows a discernable industry-friendly tilt and concludes that moneylenders increased lending between October 2010 and July 2011 in the areas with higher penetration of MFIs.

Not surprisingly, leading MFIs have readily subscribed to MicroSave report, advocating the need for speedy normalisation of things and annulment of the AP MFI Act.

SKS Microfinance has referred to a substantial portion of the report in its annual report for 2011-12, highlighting the key findings.

But some critical questions on the scientific nature of the report still remain unanswered.

First, MicroSave tried to capture the situation during the first eight months of the crisis during which other interventions for higher credit supply did not take off.

In the last one year, credit flow from Government-driven sources has gone up significantly.

So, the report and its conclusions may not represent the prevailing ground-level realities.

Second, the study does not define the purpose of loans, when it says borrowing from moneylenders had gone up. You could take a loan for a variety of purposes. But any discussion on the efficacy of microloans should only be seen in terms of loans for productive purposes.

Even the Reserve Bank of India’s Malegam panel observed that only a little over quarter of MFI loans were used by the clients for productive purposes. So, if the poor are taking loans from moneylenders for other purposes, it’s an altogether different issue.

Finally, dependence on participatory methods involving group discussion in a crucial study such as this is not universally accepted. It should have been empirically sounder.


Now, let’s see the other side. The State government does not see any sudden rise in money lending activity post October 2010.

According to Reddy Subrahmanyam, Principal Secretary, Department of Rural Development, studies commissioned by the Government showed that the share of private moneylenders in rural credit market in the State has remained unchanged at about 30 per cent in the last two years. It maintains that credit availability has increased substantially through bank route with an addition of over Rs 1,000 crore in the last one year.

Another upcoming source is Sthreenidhi, a credit cooperative for women in Self-Help Groups, popularly labelled as microfinance bank. It had disbursed a little over Rs 400 crore till date, taking the total incremental additional credit to the poor to about Rs 1,500 crore.

Given the fact that entire MFI loans extended earlier were not used for productive purposes, the actual credit-gap should not have been too huge and the urgent productive needs could have been met for over one crore SHG women in the State.

The credit-targets for the current year, both from the Bank-SHG linkage and Sthreenidhi, have been upwardly revised. For instance, Sthreenidhi targets Rs 1,500 crore disbursals this year.

In December 2012, the State government has also replicated the Sthreenidhi model for the urban SHGs as well.


The divergent stances of the industry and Government have one commonality — they agree to disagree. In the absence of reliable data, any final conclusion on credit-gaps and increase in incidence of moneylending is unlikely to be acceptable.

Hence, it may be worthwhile to see whether Andhra Pradesh — which has been the only State in the country without MFI loans for two years — has anything to offer to different stakeholders as a model state.

A noteworthy element is the financial and technological innovation achieved in the form of Sthreenidhi.

It promises a new microfinance model that takes people into confidence. The due diligence, sanction and disbursals are being entirely done by women.

The credit cooperative has also dispelled the notion that microfinance is intrinsically a high-cost model, especially in terms of operational costs. It gives loans at 12 per cent interest rate, including a 3 per cent profit.

This is made possible to some extent by leveraging technology at the grassroots level. Not that MFIs don’t use technology. But it is used more in their head offices.

As major MFIs are spread unevenly in various States, a region-wide analysis of operational costs may be useful in this regard. It should also be examined whether differential interest rates can be offered by MFIs in different States, taking into account variations in operational costs.

If this happens, the poor in some regions are not made to pay for the high operational costs in other regions. Banks can take note of speedy sanctioning of loans within 48 hours by Sthreenidhi.

A key factor that draws women to private microlenders is the delay in processing bank loans. If this is addressed, it may be possible to prevent some from knocking on the doors of MFIs for loans.

Finally, one question comes to mind. Has Andhra Pradesh proved that microfinance is not an inevitability, as is portrayed by the MFI lobby?

One should not forget that poor clients, who protested over high interest rates and harassment by recovery agents two years ago, are not coming out in large numbers to seek MFI loans now.

If we separate the financial inclusion agenda from empowerment of the poor through loans for productive uses, the AP model, especially Sthreenidhi, may carry more messages than what is being seen superficially.

(This article was published on January 4, 2013)
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