Fall 2012 -- The Microfinance Crisis in Andhra Pradesh, India: A Window on Rural Distress?
Microcredit has often been presented as an archetypal tool for addressing rural poverty. By placing small loans directly into the hands of women, proponents have argued that microcredit is able to achieve two feats simultaneously. First, it tackles poverty by unleashing the entrepreneurial abilities of the rural poor. Second, it breaks down patriarchal barriers by empowering women. Portrayed as a simple, progressive and effective development intervention, there seemed little to dislike about microcredit. Under the patronage of major international institutions, it was rapidly catapulted into the development mainstream in the 1990s and 2005 was pronounced the ‘Year of Microcredit’ by the United Nations. Leaving behind its origins in small-scale, locally based operations it has grown to become a multi-billion dollar industry that is increasingly operated on commercial lines in pursuit of scale and sustainability through profitability. Alongside the proliferation of microcredit (i.e. small loans), markets for other products such as microinsurance and microsavings have grown rapidly. Together, these kinds of financial products make up what is termed microfinance.
In recent years, however, the pristine facade of microfinance has become tarnished. On the one hand, a number of well-publicized studies have suggested that there is little hard evidence to show that microcredit is an effective means of alleviating poverty. While the industry itself has regularly promoted individual success stories, randomized studies of microcredit programs indicate no clear link between microfinance provision and income growth. On the other, there have been an increasing number of crises within the microfinance sectors of various countries. In particular, the dramatic expansion of microfinance in Andhra Pradesh, a state in southern India, ended in a crisis that caused significant ripples across the industry. The common response to this crisis has been to call for better regulated microfinance operations. The latter is undoubtedly important yet, in what follows, I suggest that the Andhra Pradesh crisis opens a window onto bigger issues of debt and distress within agrarian India. We can only fully understand the Andhra Pradesh crisis by examining how the expansion of commercial microfinance became intermeshed with uneven processes of social transformation in rural India under liberalization policies since the 1990s. Within this context, the livelihood opportunities of small and marginal landholders were becoming increasingly squeezed, leading to a proliferation of debt in the Indian countryside. Before examining what occurred in Andhra Pradesh, however, it is useful to first briefly review what microfinance was expected to achieve in the first place.
Read the rest of this backgrounder in the attached pdf file.