The Impact of the 2010 Andhra Pradesh Crisis on the Operational Efficiency of Indian Microfinance Institutions

Abstract

MFIs provide financial services such as deposits, loans, money transfers, and insurance to poor and low-income households and their microenterprizes. The provision of microcredit has, however, dominated the microfinance sector. Mersland and Strøm (2012) provide an overview of the history, characteristics, and recent developments of the microfinance field. India has a large microfinance sector, with two main models: the state-promoted self-help-group bank model and the private- sector-driven MFI model. The total value of loans outstanding under the two models in 2012 was Rs. 572 billion (around US$ 9.4 billion) (Puhazhendi, 2012). Indian MFIs are reported to compare favourably on efficiency parameters with MFIs in other parts of Asia (George, 2008). In the second half of 2010, the Indian microfinance sector witnessed a series of challenges that was eventually termed a ‘crisis’. The epicentre of the crisis was in the state of Andhra Pradesh (AP), where media reports highlighting suicides by MFI members resulted in the state government imposing severe restrictions on MFI activities. These restrictions resulted in loan recovery rates in the state dropping from 99 per cent prior to the crisis to 10 per cent soon afterwards (Srinivasan, 2011).