In 2011, fewer of the world’s poorest families received access to microcredit and other financial services than had in 2010. This marks the first time since the Campaign started recording Institutional Action Plans in 1998 that both the total number of clients and the number of poorest families reached has declined from one year to the next.
Why have the numbers decreased?
In India, many MFIs shut down lending operations in Andhra Pradesh, which held the majority of their clients. Rapid growth by many microfinance institutions in the state led to over lending, multiple loans to the same borrowers, and, in some cases, harsh collection practices.
Allegations of client suicides led to the state government enacting legislation that severely restricted the ability of MFIs to make and collect loans. Many MFIs shut down lending operations in the state that held the majority of their clients. Banks and international investors stopped making investments in Indian MFIs, so the flow up funding to MFIs dried up.
The slowdown also affected lending to Self Help Groups (or SHGs, a self-managed savings and lending group of 10-20 people, mostly women). The National Bank for Agricultural and Rural Development (NABARD) operates a program that encourages Indian banks to lend to SHGs. NABARD reported 12 million fewer clients for this program as of March 31, 2012 than in 2010.
A recent report by the Microfinance Institutions Network in India (MFIN) summarized the impact of the crisis thus:
During the year 2011-12, for the most part, the industry continued to struggle with the devastating effects of the Andhra Pradesh Microfinance Institutions (regulation of money lending) Ordinance/Law, 2010. Funding constraints, negative perceptions combined with higher operating costs, remained all too real challenges to the growth of the industry. On a pan India basis, all indicators… deteriorated. Not surprisingly, the decline was directly attributable to nonperforming portfolios in Andhra Pradesh (AP) and performance of AP based MFIs.