State-owned banks and nonprofits in India have begun to establish businesslike practices at the same time that commercial banks have started to adopt the philanthropic aims traditionally associated with governments and NGOs by adhering to notions of corporate social responsibility. These actions are effectively blurring the lines between the state, the market and civil society. The political economy of microfinance institutions (MFIs) exemplifies the struggle between varied methods of civil arrangement, as market-oriented commercial banks, state-run banking institutions and NGOs each declare themselves most capable of extending microcredit services to the rural poor in a dual attempt to alleviate poverty and encourage entrepreneurship. In India, such dynamics resulted in harsh regulations that crippled the microfinance industry in the Andhra Pradesh (AP) region following the October 2010 microcredit crisis. The debate in AP pits market proponents, who sanction a sustainability agenda and praise the power of commercial growth strategies, against state-centrists, who endorse goals of fairness and celebrate the capacity of community policies to ensure a more equitable distribution of wealth. The choice is a false one, however, as both are equally right (or wrong) depending on one’s position along the market versus state dichotomy. As Robert Gilpin elucidates: “It may not be an exaggeration to say that every controversy in the field of political economy is ultimately reducible to differing conceptions of the relationships among society, state and market.”
Estimated to have directly touched some 100 million customers by 2008, MFIs have had a positive impact on impoverished communities. A World Bank report released in 2009 utilized household survey data for the years 2004 and 2006 to assess whether the provision of more than 3,000 loans by microfinance self-help groups (SHGs) in AP were improving the economic and social conditions of program participants. The authors cited significant social and economic gains in the way of better nutrition, elevated consumption levels and greater female empowerment. Additional advantages were found amongst the broader community as well, pointing to the program’s potential to impart positive externalities. Interestingly, no effects on income were identified, although the authors conclude that the benefits accruing from improved income diversification and consumption smoothing alone render the program cost-effective.
Differing conceptions of the proper role of the state and the market were a critical force behind the 2010 microcredit crisis and subsequent regulatory crackdown in AP. Even though the state’s SHGs were providing millions of poor women with lower-cost loans, commercial banks attracted more new borrowers and garnered higher repayment rates. The state was unwilling to forgo what they believed to be their higher caliber services in favor of private banks’ offerings; only coercive business practices amongst the latter, they presumed, could add up to such success. After a spell of 57 farmer suicides in 2010 were erroneously attributed to the unusually high interest rates and strong-armed collection tactics of MFIs, the AP government issued the Andhra Pradesh Micro Finance Institutions Ordinance, which prohibited MFIs from collecting repayments outside of state offices and publicly championed clients who could not (or would not) repay their loans. As a result, repayment rates fell to a dismal 10 percent, and the MFI industry approached ruin.
Yet the government’s allocation of blame for the suicides was misguided: suicides were chronicled in agrarian societies long before MFIs came into existence, and interest rates in India are amongst the lowest in the world. Even so, some have likened what happened in AP to the subprime mortgage debacle in the U.S., where the ostensibly chivalrous concept of conferring home ownership to the previously ineligible was exposed as nothing more than a profit-pursuing posture with the near-collapse of the global banking system in 2008. Insinuations that heavy regulations were necessary to prevent microfinance from following a similar fate are, however, inadequate in justifying the tyrannical 2010 Ordinance, which was commensurate with outlawing homeowners’ loans after a subprime mortgage crisis.
What, then, can explain the government’s heavy crackdown on the MFI sector in 2010? The underlying political dimensions of the crisis suggest that the response may have constituted a territorial battle between the AP government and the commercial microfinance industry, with the former trying to safeguard a competing World Bank-financed government program that provided credit to poor women through SHGs. Since MFIs were achieving better repayment rates, the government grew concerned that over-indebted borrowers with multiple loans would opt to default on their SHG loans first—hence the antipathy between the two providers. Furthermore, increases in private lending meant that interest rates and repayment conditions could no longer serve as instruments of populist politics. MFIs thus directly clashed with politicians’ abilities to use government-led loan policies to win the hearts and minds of impoverished constituents.
Regardless of its intentions, the Ordinance’s imposition of burdensome demands on MFIs without commensurate concern for SHGs suggests that the move to render MFIs “guilty until proven innocent” was more of a political calculation than an attempt to address issues of over-indebtedness and coercive collection. The AP case exemplifies the dangers of relying on competing political ideologies when delimiting the proper relationship between the market, the state and civil society. Microfinance has proven successful in all its forms—for-profit, nonprofit and state-run. Optimal lending practices should thus focus on emulating the tactics employed by the most successful organizations rather than allow the irrelevant distinction between public and private loan provision to fuel a harrowing but ultimately meaningless political debate over what are essentially two identical approaches.