Andhra Pradesh: Crisis or Opportunity?

Referring to the situation in Andhra Pradesh (AP) as a ‘crisis’ in recent coverage has become commonplace. Much of the debate and analysis is centered on microcredit. A number of analysts have compared SHGs and MFIs as competitive approaches, offering microfinance services to the poor. I feel that we are comparing apples to oranges and first need to understand the main characteristics of the self help group (SHG) approach before reaching conclusions.

The SHG approach is not unique to India. It derives its inspiration from mutualistic approaches which were prevalent in the UK, Europe, and USA in the form of credit unions, building societies, mutual insurance companies, friendly societies, and sickness funds much before the evolution of the formal financial sector as we understand it now. Mutualistic organizations refer to membership organizations which meet the financial services need of the poor.

Mutualistic approaches in AP                                                                                                                                                                                 
AP is one of the largest examples of the mutualistic approaches in the world. A total of 10.9 million poor households have been organized into self help groups and their federations through a state supported initiative that has built on the excellent work done by many NGOs and NABARD. This initiative, called Indira Kranthi Patham, is managed by the Society to Eliminate Rural Poverty (SERP), an independent organization housed within the Ministry of Rural Development in AP. The primary aim of this entity is to alleviate poverty and not make profit.

These groups save and meet regularly, do inter-loaning to meet their immediate and consumption needs. Their cumulative savings amount to more than $1 billion. They have also developed prudent financial management practices including bookkeeping, appraisal of loan requests, microcredit planning, community auditing, and community based recovery systems.

Significant part of the planning, appraisal, and support services are delivered through federations of self help groups known as Gram Sanghas (village organizations) and Mandal Samakhyas (block level federations). All these membership organizations are registered under the Mutually Aided Cooperative Societies Act (MACS) and are subject to all the regulations of the cooperative sector in India. They are functioning as community owned financial institutions.

These investments in creating the community based institutions have been made in AP over the last fifteen years. Although these institutions have 90% of the rural poor as its members and have achieved quantitative coverage, there is significant scope to improve the quality of these institutions.

Creating a pro-poor ecosystem                                                                                                                                                                          
Andhra Pradesh has the largest institution platform of the rural poor in the country and has created an ecosystem for social capital based financing and credit. The most important aspect of this approach is not the volume of the credit mobilized (which cumulatively amounts to over $6.5 billion over the last ten years) but the development of diversified financial products adapted to varied livelihoods and cash flows of the poor households.

These products include food credit line, health risk fund, higher education opportunity fund, cash credit limit for enterprises and nutrition access fund. The community owned financial institutions have also negotiated elongated repayment periods (18-24 months) and rural cash flow linked repayment installments. A microcredit plan is prepared by each village organization after understanding the livelihood of each household. A commercial bank then funds the plan.

Livelihood services: beyond microcredit                                                                                                                                                                         
Another aspect which has not been highlighted in the debate so far is the livelihood enhancement and value addition support provided by the community federations to members as producers and participants in the market. The federations have provided technical assistance to members for dairy, agriculture, food distribution and marketing of various commodities, thus enabling them to earn more from their core livelihoods. In many cases, income has almost doubled for these households.

Federations have managed milk collection and processing centers, provided quality control and grading of agri-products for both state and private sector as franchisees. Significant investment in human capital has enabled 10,000 rural women to emerge as grass root graders and quality controllers. This has helped link small farmers to value chains and receive better prices for their produce.

Based on this investment in human capital, 300,000 young men and women have also acquired skills and jobs in the modern retail, construction, and service sector.

Investment in SHGs and their federations is a more holistic investment which may start with financial intermediation but over a period of time creates an institutional ecosystem for investment by public and private sector. Eminent thought leader, late Professor C.K Prahalad called this the largest ‘social marketing project for the poor which will democratize commerce’.

AP: Microfinance crisis                                                                                                                                                                                                         
Coming back to the present crisis, this investment in the institutional platform has created a creditworthy client base for both commercial banks and the MFIs in AP. The commercial bank finance to SHGs over the last decade has exceeded $ 6.5 billion. The state has a large number of private MFIs which together report a client base of 6.25 million. I will not get into the number debate as it distracts attention from core issues. It cannot be denied that Andhra Pradesh has the highest density and intensity of engagement for both commercial banks and MFIs.

The commercial banks are providing credit to both SHGs and MFIs. My analysis shows that there is an overlap of client base not only among different MFIs but also with the commercial bank lending to SHGs.

The problem is accentuated with concentration of loan portfolios of MFIs in districts like East Godavari, West Godavari, Nalagonda. Warangal, Medak etc. which have ‘near saturation’ penetration under the SHG-Bank linkage model.

Easy availability of credit made poor households borrow indiscriminately from several MFIs and commercial banks. Multiple loans to same households without proper due diligence and sharing of credit information has ultimately lead to unsustainable debt burden. The loan tenor and structure of weekly repayments make it difficult to service credit obligations due to irregular cash flows of the poor households.

The altered incentive structure in MFIs due to the pressure to deliver at a very fast growth rate in last two years has lead to customer acquisition in an inorganic way without taking into account the impact on the self help groups. The rapid growth has also pushed MFIs to move away from the Joint Liability Group approach which is integral to the Grameen model of microfinance.

It is critical to ensure that any financial intermediation in Andhra Pradesh should take into account the unique nature of the mutualistic institutional platform created for the rural poor which delivers a combination of services and products for their members including financial, livelihoods and safety nets.

The members of these institutions are the same poor households that are clients of MFIs. I think taking adversarial positions is counter-productive for the poor households and others who want to work with them. It is also important to bring the poor households at the centre of the discussion.

Instead of being obsessed with microcredit, we need to think about livelihoods as a whole. MFIs need to work with this institutional platform which adds significant value to livelihoods of poor households. This is one of the major causes of strife between the Government of Andhra Pradesh and MFIs.

Ways Forward                                                                                                                                                                                                                                                                         
It must be recognized that community owned financial institutions and privately owned microfinance institutions have to develop a co-production model where they will work together in AP.

This would mean looking at scale, speed of expansion, business models, sharing of information and investing in an ecosystem which creates win-win situations for both parties. Some suggestions for moving forward are indicated below:

1. Invest on a large scale in financial literacy and debt counseling services. This should be undertaken by both SERP and MFIs and draw on databases of MFI and SHG clients. There is a need to initiate these services immediately for districts where over-indebtedness is the highest. This is similar to approaches being tried in US after the sub-prime crisis. More credit should be only given after these services are provided.
2. Form client information bureau: Client/Borrower data base is created for both various MFIs and community owned SHGs. This should help in ensuring that red flags are raised once the household crosses a pre-determined threshold. Even though efforts are being made in this direction, MFI and SERP staff need to be trained in using this information.
3. Invest in Product development and Research: Commercial banks and large MFIs should work on developing more customized and sophisticated products for rural poor households. The current weekly repayment model has evolved out of urban settings where cash flows are more predictable. Similarly pure microfinance service delivery models which focus on adding value on credit should be supplemented by livelihood services to increase rate of return on investment. The recent product offered in terms of cash credit limit to 100 Mandal Samakhyas in AP ( $ 10 million) is a good example.
4. Engaging SHG Federations as Intermediaries by large MFIs: This will lead to utilization of the existing institutional platform and also build trust between community owned institutions and MFIs.
5. Develop alternate service delivery approaches including branchless banking initiatives that involve SHGs as banking correspondents

​I hope this crisis presents an opportunity for Andhra Pradesh to develop a model for sustainable investment in rural areas, building on work done by communities, government, development professionals, MFIs and commercial banks. I hope there can be a constructive dialogue between the Government of Andhra Pradesh, MFIs and commercial banks following which we can arrive at a new equilibrium. One that harnesses the full potential, enterprise and creative energy of poor people.

We owe it to them.