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147 Chapter Eight From Tigers to Cats? The Rise and Crisis of Microfinance in Rural India Marcus Taylor Before the crisis MFIs used to be tigers. After the crisis, they have become cats. Earlier we used to wait for them but now they wait for us. Earlier they will not accept a penny less, now they accept whatever we give, whenever we give. —Discussion group respondent, Andhra Pradesh, 2011 Introduction The striking imagery of microfinance institutions (MFIs) reduced from tigers to cats demonstrates the intensity of the crisis that struck commercial microfinance in India in 2010. The depth of this crisis may appear surprising given that immediately prior to its outbreak India had been seen as a boom market for commercially operated microfinance. Backed by state support under the rubric of “financial inclusion,” investment flowed into the sector from both Indian banks and international financial institutions. As a result, MFIs dramatically increased their loan portfolios, rising precipitously from US$252 million to US$3.8 billion between 2005 and 2010 (Srinivasan 2012). Although geographically concentrated—almost half this expansion occurred in the southern state of Andhra Pradesh alone—the pace of growth was nonetheless argued to represent a necessary scaling up of financial inclusion across rural India. As the epicenter for this growth, Andhra Pradesh appeared to set the direction and pace for the rest of India to follow. Driven forward bya consolidated “big six” MFIs and facilitated by state agencies keen to promote credit availability as a means of livelihood diversification, this boom nonetheless turned to bust in 2010. Following the well-­publicized suicides of a number of borrowers who encountered aggressive collection tactics 148 Marcus Taylor in Andhra Pradesh, the state government withdrew its support for commercial microfinance and placed a moratorium on the collection of loan repayments to MFIs. This act precipitated a vicious cycle of defaulting clients, a loss of confidence in the industry, a downgrading of credit ratings for MFIs, and a liquidity crisis as banks refused to extend further credit to the sector. With Andhra Pradesh serving as the focal point for MFI lending across India, the crisis had national reverberations. As the liquidity crunch continued, many smaller MFIs collapsed and larger ones faced the ominous prospect of loan write-­ offs and a paucity of means to meet their own credit needs. The tigers, it seemed, had not only been declawed but were in danger of extinction. It has subsequently taken a national-­ level reaffirmation of governmental support for microfinance as an industry to forestall its generalized collapse. What led to this dramatic tale of boom to bust and then to an uncertain stabilization of commercial microfinance in India? For many, the crisis in Andhra Pradesh was symptomatic of a failed regulatory environment that was unable to curb the “irrational exuberance” of a microfinance industry in which CEOs enjoyed spectacularly high salaries and bonuses and outside investors reaped quick profits by infusing credit into the marginal corners of agrarian India. Observers have frequently focused on the failings of “self-­ regulating” MFIs that pursued a course of systematic overlending followed by ruthless collection and have identified the need for a suitable regulatory framework that can tame such practices. Elisabeth Rhyne (2011), the managing director of the Center for Financial Inclusion at Accion International, puts this finding in a suitably direct manner when she claims, “Like sex, microfinance can be safe if practiced responsibly. Recently, however, we’ve seen that not all participants in the microfinance industry are practicing safe microfinance . . . one need look no farther than Andhra Pradesh.” Rhyne’s point is well taken. Without doubt, the MFIs in Andhra Pradesh operated within a regulatory vacuum that facilitated some extremely poor practices . However, to focus solely on faulty regulatory frameworks is to miss two other factors. First, this position takes at face value the rhetoric of financial inclusion, which argues that the absence of credit is a significant cause of both vulnerability and poverty among marginal households. Commercially operated microfinance that can rapidly scale up its activities emerges as the necessary solution (Taylor 2012; Soederberg 2013; Mader 2015). While compelling, this narrative obscures the complexity of localized debt relations in rural India. It fails to ask at what point the extension of credit can become part of the problem From Tigers to Cats? 149 rather than its cure. Given that most households in rural India already juggle high debt levels, access to credit might simply increase the prevalence of debt traps. At the same time...


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MARC Record
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