The lessons of Andhra Pradesh

By Felix Salmon
November 18, 2010

Are we ever going to get a good article on the hugely important microcredit crisis in the Indian state of Andhra Pradesh? The WSJ took a stab on October 29, but the article was thin, added nothing to the FT’s earlier report, and spent more time rehearsing well-known facts about the microfinance industry than it did trying to explain exactly what was going on so suddenly and why. The WSJ didn’t even mention the precipitating cause of the crisis, an ordinance passed by the state governor on October 15 which essentially shut down a whole class of microfinance lenders.

Now the NYT has published its own attempt to cover the story, under the striking headline “India Microcredit Faces Collapse From Defaults”. The story does a good job of bringing us rapidly up to speed on the extent of the crisis:

Responding to public anger over abuses in the microcredit industry — and growing reports of suicides among people unable to pay mounting debts — legislators in the state of Andhra Pradesh last month passed a stringent new law restricting how the companies can lend and collect money.

Even as the new legislation was being passed, local leaders urged people to renege on their loans, and repayments on nearly $2 billion in loans in the state have virtually ceased. Lenders say that less than 10 percent of borrowers have made payments in the past couple of weeks.

I’m not sure that the language about legislators is true: the ordinance clearly states that “the Legislature of the State is not now in session” and that it is being promulgated by the governor.

More importantly, the NYT fails to mention the main reason why the ordinance was passed, which is that the government runs a rival microlending program, known as self-help groups, or SHGs. As Justin Oliver explains,

It’s only the MFIs that are affected by the current crisis. Clients in Andhra Pradesh have essentially stopped repaying MFI loans, but SHG loans continue to be repaid for the time being. It’s worth noting that some of the loudest complaints about MFIs have come from the Andhra Pradesh state agency that oversees and promotes the SHG program.

All of this starts getting very messy very quickly; the Center for Global Development’s David Roodman, who has been the foremost blogger covering the crisis in detail, feels the need to qualify one recent post by saying that “as an outsider, I only half-understand the extraordinarily complex situation.”

But the way to make sense of a complex situation is not to do what the NYT does, and simply concatenate a series of quotes from various important participants. In one long and frustrating passage, the NYT quotes Vasant Kumar, the state’s minister for rural development; Reddy Subrahmanyam, a government official; Vikram Akula, the chairman of SKS Microfinance; Vijay Mahajan, the chairman of Basix; Ela Bhatt, head of the Self-Employed Women’s Association; and then Mahajan again, this time identifying him as chairman of the Microfinance Institutions Network. They all talk their various books, and the NYT writers — Lydia Polgreen and Vikas Bajaj — seemingly just throw their hands up in the air and leave it to the reader to decide whom to believe.

That’s pretty much impossible, not least because the NYT fails to spell out all the biases: the story neglects to mention, for instance, that Basix has moved beyond microfinance to offer many other financial services, which explains why its chairman is willing to be quite critical of the industry.

The NYT also ignores a strong counternarrative which blames the whole crisis not on predatory microlenders but rather on the government of Andhra Pradesh. Impassioned blog entries along these lines from Eric Bellman at the WSJ and Vineet Rai at the Harvard Business Review are contentious (which is fine, they’re blogs), but they are also much more deeply informed than most of the reporting we’re seeing. Much the same can be said of Milford Bateman, who takes the other side of the debate with virulence and verve, accusing the microlenders of greedily looting the poor. If you read, say, Rai and then Bateman, you’ll learn a lot more about what’s really going on than you will if you try to follow the tenuous thread of the NYT article.

The blogosphere is also the best place to look for a genuinely fair and balanced one-stop take on the whole affair. Beth Rhyne, of the Center for Financial Inclusion, wrote a great blog entry on the Andhra Pradesh crisis for HuffPo a couple of weeks ago, spreading the blame for the crisis liberally among microlenders, federal regulators, and state-level politicians. If you want to read a short piece explaining the crisis and its implications for microfinance globally, this is undoubtedly the place to go. And in an interesting twist, Rhyne only wrote it after the WSJ story came out, because she felt that story was in such dire need of a corrective.

In fact, I’m beginning to think that this is one of those stories which is better reported from your neighborhood coffee shop with wifi than it is from Andhra Pradesh itself. There’s nobility in sending reporters halfway around the world to get the story at first hand, and the NYT does provide the compulsory human-interest color by ending the story with a 38-year-old farmer who owes $2,000 and has no ability to repay it. But the paper breaks no news with this story, and seems so keen to re-report everything by talking to the principals involved that it’s forgotten the first purpose of stories such as these, which is to explain the world clearly to the readers back home.

The irony here is that by flying across the planet for the story, the NYT has missed the big global picture, which is that Andhra Pradesh is simply the latest and largest proof that microfinance as an industry is at the mercy of regulators and politicians, who are more likely to get things wrong than they are to get things right. Remember Nicaragua? It doesn’t take much in the way of political demagoguery to persuade a population to stop paying its loans en masse, driving the local lenders into immediate bankruptcy. Similar things have happened in Bolivia, Bosnia, Pakistan, and Morocco, but the microfinance true believers are often oblivious to this kind of political risk. Silicon Valley billionaire Pierre Omidyar has put some $200 million of his own money into microfinance, for instance, but when I met him in New York recently and asked him about this risk to the model, he had no idea what I was talking about.

It’s pretty clear to me that there’s a direct causal relationship between the IPO of SKS Microfinance, which garnered $117 million for another Silicon Valley billionaire, Vinod Khosla, and the collapse of the microfinance industry in SKS’s base state of Andhra Pradesh. When outside dollar investors make millions off the backs of the poor, the poor are liable to rise up and display a decided lack of gratitude.

But that’s not a story you’re going to read in the New York Times — not when Vikas Bajaj, one of the reporters on this story, filed a gushing profile of Khosla last month, calling SKS a “roaring success”:

Some nonprofit experts say commercial social enterprises have significant limitations and pose conflicts of interest. But proponents like Mr. Khosla draw inspiration from the astounding global growth of microfinance — the business of giving small loans to poor entrepreneurs, of which SKS Microfinance is a notable practitioner…

Mr. Khosla said his experience with microfinance had helped shape his views on the best way to tackle poverty. He has invested in commercial microfinance lenders and has donated to nonprofit ones, and he said that moneymaking versions had grown much faster and reached many more needy borrowers.

But did SKS actually make those needy borrowers any richer, even as it was multiplying Khosla’s own investment 37-fold? I suspect that the single best financial decision that many of them ever made was to simply stop paying their SKS loans entirely.

SKS won’t ever be able to collect on the loans where its borrowers have gone on strike, and there’s no point in even trying; neither can it sell those loans to anybody else. Roodman says that “microcredit portfolios are like sand castles” — if you try to pick them up and move them to another institution, they disintegrate, since they’re based on a personal relationship between lender and borrower.

SKS’s loan portfolio in Andhra Pradesh has effectively evaporated, and no for-profit microlender is immune from the same thing happening to them. This is a global issue, which should be addressed by scaling back, going local, giving borrowers ownership of their lenders, and generally being much less ambitious when it comes to growth rates. Much better that full-service banks grow organically out of local communities than monoline microlenders parachute in, flush with venture-capital funds, make a huge splash, and then implode.

Update: Roodman, who should know, says that the best reporting on the AP crisis is coming from M Rajshekhar of The Economic Times in India.


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Where’s the Micro-finance Coercion? Here’s the Proof! A Client Perspective by MFI Consultant Ramesh Arunachalam

Read more:  /11/wheres-coercion-heres-proof.html

Posted by RajanAlexander | Report as abusive

So when are the bailouts?

Posted by lambertstrether | Report as abusive

Excellent overview, Felix!

The only thing missing is a nod to the history in South Asia of debt servitude and caste warfare, which makes “the poor” much easier to convince that they are being ill-used by their lenders. If only Americans could be made to understand how close they are at this moment to classic debt slavery and similarly go on strike to the would-be master class.

Posted by LadyGodiva | Report as abusive


thanks for pointing out all the information lacking in the NY Times report. I’d also point out that Pohlgreen and Bajaj don’t cite sources for their figures on the number of loans that are not being repaid. I find it hard to believe that figure is consistent across AP, urban and rural areas and the various MFIs.

While the crisis in AP is serious, I think we are actually at a positive inflection point in the history of microfinance. Much like the enlightenment, we are living in times where myths and superstition about microfinance are being washed away, paving the way for a lot of learning based on what clients actually need, how products should be designed and how MFIs should be run.

You might note volume of high quality research that is emerging not only about microcredit impact, but also about product design, additional services such as savings and insurance and client behavior, wants and needs. There’s a post here with a round up of discussion of this research from the recent Microfinance Impact and Innovation Conference.

Posted by timothyogden | Report as abusive

Felix: thanks for the excellent reporting on this issue. Your piece stands in stark contrast with the first reference to the NYT article I came accross, over at Business Insider, who just put up a snippet of the original piece under the screaming headline of “The Next Subprime Crisis”. rofinance-collapse-2010-11

… I’ve got to stop wasting my time with that site.

Posted by aTree | Report as abusive

I’m beginning to suspect the new “Ben Stein jihad” is Rupert Murdoch’s Wall Street Journal. Is there no mercy from the heart of Times Square?

Posted by flippant | Report as abusive


What you’re describing is the difference between those who have passion for a story and those who report on it because it’s their job.

Many fine journalists develop a passion for their stories because they can stay on them, write long ones and write more than one on the same topic over a period of time. They develop an interest and aptitude for their subjects and the themes, if not a strong point of view, and maybe even biases.

But that’s rare in this “gerbil wheel” world that most journalists are forced to live in, as Dean Starkman so eloquently described a while ago in CJR.

Bloggers have that passion naturally. I only write about what interests me and what I know or can learn about fairly quickly based on my experience and capacity.

It doesn’t matter whether you’re on site or remote. What matters is caring about the story versus “filing” it.

Posted by FrancineMcKenna | Report as abusive

Justin’s blog post mentioned by Felix in this article is part of a series on CGAP’s microfinance blog. Over the next few weeks, the blog will be featuring several experts deeply familiar with Andhra Pradesh and India who will share their varied views on the crisis. Today’s new post is by N.Srinivasan, author of the State of the Microfinance Sector in India Report 2010, who points out that there were several warning signals that were ignored by the sector. More on

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