Microfinance Models Must Evolve to Support Healthy Outreach and Development of a Broad Range of Financial Services, CGAP

Dec 09, 2010, 11:25 ET from CGAP

Crisis in Andhra Pradesh highlights importance of effective controls

WASHINGTON, Dec. 9, 2010 /PRNewswire-USNewswire/ -- In the midst of the microfinance crisis in the Indian State of Andhra Pradesh, CGAP CEO Tilman Ehrbeck has called for the microfinance delivery model to evolve to support healthy growth and the development of a broad range of products and services that poor people need. The global microfinance body today released a paper that analyses the ongoing situation in Andhra Pradesh, and discusses the way forward for poor people's access to finance globally.

As microfinance institutions, the state government of Andhra Pradesh, and other key stakeholders work to resolve the crisis, Ehrbeck said that it is important for the microfinance industry to draw the right lessons from the situation, so that progress on financial inclusion globally continues in the right direction.

The CGAP paper, Andhra Pradesh 2010: Global Implications of the Crisis in Indian Microfinance, points out that there is much higher penetration of microfinance in Andhra Pradesh than in any other state in India, with household debt coming from several sources, not just MFIs.  "Households in Andhra Pradesh have as many as four loans from different lenders and high levels of outstanding debt," said Greg Chen, CGAP's representative for South Asia and one of the authors of the paper. "But let's be clear that this is exceptional: 2.7 billion people around the world still have no access to any kind of formal financial services--services that are cheaper and more reliable than moneylenders and other informal options. While we need to learn from the crisis, we must not let it take us off track on the bigger priority of improving financial inclusion globally."

Developments in Andhra Pradesh shine the spotlight on some of the same issues that have emerged in other high-growth microfinance markets in recent years. Rapid growth, CGAP warns, can undermine credit discipline, driving unhealthy rises in loan amounts, cutting corners in the underwriting process, and excessive supply of credit.

"In places where there is high penetration of microcredit—such as Andhra Pradesh—we see evidence of the strains caused by rapid growth," said Ehrbeck. "As local markets mature, the microfinance delivery model must evolve to support healthy outreach and the development of a broad range of products that poor people need."

CGAP's analysis of the effects of fast growth in Andhra Pradesh builds on CGAP's earlier analysis of hyper-growth in diverse microfinance markets such as Bosnia and Herzegovina, Morocco, Nicaragua, and Pakistan.

According to CGAP, the situation in Andhra Pradesh also highlights the need for appropriate controls:

  • At the institutional level to support a robust business model, including effective incentives and training for staff at all levels to encourage sound underwriting and customer care
  • At the industry level, including information sharing/credit bureaus
  • Appropriate regulation that encourages interest rate and pricing transparency, in an environment in which poor clients are well informed and understand the products, understand how to use them effectively, and have clear means for recourse

"Across the globe and in India, the microcredit movement has proved that it is possible to deliver financial services to poor people living in rural areas at a large scale free from any reliance on subsidies," said Ehrbeck. "If we're really committed to financial inclusion we need to take it to the next level. Poor people don't need just credit. Savings, microinsurance, and money transfers are all services that poor people demand and that help poor families to manage their household finances more effectively. We need to commit to delivering high quality services to the 2.7 billion people left out."

Read the paper: http://www.cgap.org/gm/document-1.9.48945/FN67.pdf