A crisis is unfolding in India’s microcredit sector that– beyond its immediate effects on borrowers and lenders– will greatly affect the future of financial services for the poor. I’m joined by David Roodman, senior fellow here at the Center for Global Development and author of the forthcoming book Due Diligence: A Guide to Microfinance (which he has shared step by step on his Open Book Blog). David recently traveled to Andhra Pradesh, the epicenter of the crisis. On the Wonkcast, he leads me through the story of the explosive growth of Indian microcredit– and its sudden fall from grace. [more]

The microfinance crisis in Andhra Pradesh has been compared to the situation in Nicaragua, which I wrote about for MyKRO last year. I haven’t been following the news all that closely, and the podcast gives a fascinating overview. I found the following points particularly thought-provoking:

• Entrepreneurial journalists found out that as many as 30 microfinance borrowers had committed suicide in the state of Andhra Pradesh. This put the dark side of microfinance into the spotlight, and made it a political issue.
• When compared with other personal finance options in India, microfinance is a mass production with low-quality service. Microfinance Institutions (MFIs) are more aggressive about repayment, unlike moneylenders (who charge higher interest rates but are like “parasitic organisms… who don’t want to kill the host.”)
• Investors might be part of the problem, and not just part of the solution. The “bottom of the pyramid” gospel says that microfinance should commercialize, so it can scale and provide more opportunities to more people. The “social investors” promoting this gospel have good intentions, but their drive for scale might have lowered the service standards for these organizations.

That’s a photo of microfinance borrowers in Andhra Pradesh, from this Indian news website.

Andhra Pradesh : Micro Finance becomes ‘Macro Curse’ for people The past few years have seen the entire microfinance sector grow exponentially. As with any other boom, suspicion always exists on whether a bust is just around the corner. This is especially true in the current international setting; with a major financial bust that humbled Alan Greenspan to admit he was “in a state of shocked disbelief”.

In hindsight, it might seem obvious that the years of heady growth directly resulted in the sub-prime crisis and credit crunch. This heightens the sense of unease over the rapid growth of the microfinance industry and one is often seized of whether we are sitting on a bubble waiting to burst.In the case of microfinance, a bubble will be created if a significant number of members are funded beyond their repayment capability.

The atrocities of the Micro finance men on the consumers is increasing day by day. Already two people have committed suicides in the Srikakulam and Warangal districts and some suicide attempts.Since past two days the people have attacked the offices of microfinance and destroyed the infrastructure.

Read the rest here.

Overall, I think that the situation in Andhra Pradesh is devastating and tragic, but should not be interpreted as a blanket statement that microfinance is harmful.

I think that the key issues in microfinance are education and customer service. It is absolutely crucial that borrowers know how to use their loans, and that the MFIs provide real service. I think education and customer service should take precedent over commercial scale.

What do you think?