The state of Andhra Pradesh (AP) had become one of the most competitive microfinance markets in India during this time. But, the AP government started to become uneasy with the outsized impact and influence of commercial MFIs, however. Increased competition led to excessive lending, with many clients taking out multiple loans from both SHGs and commercial MFIs. Average household debt in AP rose to about INR 65,000 compared to a national average of about INR 70,001. The MFIs were accused of harassing customers for repayment. The suicide rate spiked, and the state government began attributing some of these suicides to excessive lending by the MFIs and coercive loan recovery practices. This case study tells the story of how a microfinance crisis in India's Andhra Pradesh nearly wiped out Spandana, a promising and quickly growing non-bank financial institution in 2010, and how it embarked on a long gradual recovery that culminated in a successful IPO.
Impact / Outcome In order to rein in the alleged coercive recovery practices of the commercial MFIs, the state government passed the Andhra Pradesh (AP) Microfinance Institutions (Regulation of Money Lending) Act in October 2010. The ordinance barred MFIs from collecting payments at certain locations, such as a borrower’s home or place of work. The regulatory authority also set interest rate caps and mandated stringent reporting guidelines.
Clients misconstrued the ordinance to justify non-repayment of loans owed to the MFIs with no serious repercussions. Within a month, the loan repayment rate had dropped from 99.89 percent to 1 percent. An estimated INR 70 billion in loans in the state, from about 6.25 million accounts, had come under stress. This led to severe cash flow problems for the MFIs in the region. In the end, the ordinance caused some MFIs in the state to close and declare bankruptcy. For Spandana, even though it had sufficient capital adequacy (with equity of INR 4.85 billion), the unfolding crisis meant severe financial stress and cash flow problems.
Funding sources Public/Private
Key Metrics Accelerate access to credit and other financial services
