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The Andhra Pradesh microfinance crisis in India: manifestation, causal analysis, and regulatory response

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  • Anurag Priyadarshee
  • Asad K. Ghalib
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    Abstract

    The microfinance sector in India’s state of Andhra Pradesh was recently marred by a series of mishaps that occurred due to extensive lending, which resulted in over-indebtedness and ultimately, defaults. Lending institutions resorted to coercive measures for loan recovery that led to suicides amongst borrowers. In this paper, we explore the reasons that led to such circumstances. We will consider how the widespread operations and omnipresent Self-Help Groups, together with their linkages with banks, attracted private microfinance providers. This, coupled with the absence of adequate regulatory mechanisms, resulted in over-lending to the poor. The paper discusses policy implications of the various regulatory measures that the Government subsequently took to harness and regulate micro-lending practices in the state. It is argued that the regulatory measures initiated to address the issue do not focus on the social structures, i.e., the unequal distribution of the community institutional infrastructure base for delivery of microfinance among different states, and the singular focus of privatesector MFIs on maximizing profits in an inefficiently regulated environment, that gave rise to the current circumstances.

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    Paper provided by BWPI, The University of Manchester in its series Brooks World Poverty Institute Working Paper Series with number 15711.

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    Date of creation: 2011
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    Handle: RePEc:bwp:bwppap:15711

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    1. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    2. Sununtar Setboonsarng & Ziyodullo Parpiev, 2010. "Microfinance and the Millennium Development Goals in Pakistan: Impact Assessment Using Propensity Score Matching," Working Papers id:2380, eSocialSciences.
    3. Wendy Olsen, 2008. "Aspiration Paradox in Indian Micro-Finance: A Difficulty and an Opportunity for Debate," Brooks World Poverty Institute Working Paper Series 4208, BWPI, The University of Manchester.
    4. Wydick, Bruce, 1999. "Can Social Cohesion Be Harnessed to Repair Market Failures? Evidence from Group Lending in Guatemala," Economic Journal, Royal Economic Society, vol. 109(457), pages 463-75, July.
    5. Besley, T., 1992. "How Do Market Failures Justify Interventions in Rural Credit Markets?," Papers 162, Princeton, Woodrow Wilson School - Development Studies.
    6. Katsushi Imai & Thankom Arun & Samuel Kobina Annim, 2010. "Microfinance and Household Poverty Reduction: New evidence from India," The School of Economics Discussion Paper Series 1008, Economics, The University of Manchester.
    7. de Aghion, Beatriz Armendariz & Gollier, Christian, 2000. "Peer Group Formation in an Adverse Selection Model," Economic Journal, Royal Economic Society, vol. 110(465), pages 632-43, July.
    8. Beatriz Armendariz & Jonathan Morduch, 2007. "The Economics of Microfinance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262512017, December.
    9. Conning, Jonathan, 1999. "Outreach, sustainability and leverage in monitored and peer-monitored lending," Journal of Development Economics, Elsevier, vol. 60(1), pages 51-77, October.
    10. Braverman, Avishay & Guasch, J. Luis, 1986. "Rural credit markets and institutions in developing countries: Lessons for policy analysis from practice and modern theory," World Development, Elsevier, vol. 14(10-11), pages 1253-1267.
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