Radical Departure in Andhra Pradesh Debate: Data

November 12, 2010

…more precisely: systematically collected data about clients.

Some people say microfinance needs to grow quickly in India in order to bring its benefits to the poor at the speed they deserve. Others say it should be shut down quickly in order to stop the harm it is doing to the poor—and that at the speed they deserve. These assertions are not generally backed by much evidence. Ironically, one of the best studies ever done of the impacts of microcredit took place right in the capital of Andhra Pradesh, Hyderabad. Amidst the sturm und drang, it offers the econometric equivalent of a shoulder shrug.

Justin Oliver, who directs the Indian institution that helped execute that study, the Centre for Microfinance Research, has just written the first post I’ve seen on the Andhra Pradesh crisis with serious data on clients. It is based on surveys done six months ago in the state.

E.g., on the perplexing question of whether borrowing from multiple sources indicates the equivalent of unsustainable credit card juggling or the clever patching-together of financial tools that are individually inadequate:

“Multiple borrowing” is rampant. Eighty-four percent of households had at least two loans outstanding, and one household we spoke with had 19 loans. But the vast majority of these loans are informal. Of course, even if we ignore informal sources, multiple borrowing is still pretty common. But it’s not limited to people who lend from MFIs. Multiple borrowing from banks and SHGs is pretty common too.

• 17% of households with an SHG [self-help group] loan outstanding had multiple SHG loans outstanding, and 58% had at least one more loan from a formal source.
• 26% of households with a bank loan outstanding had multiple bank loans outstanding, and 74% had at least one more loan from a formal source.
• 28% of households with an MFI loan outstanding had multiple MFI loans outstanding, and 82% had at least one more loan from a formal source.

We also find evidence that people who take multiple loans frequently take them out at the same time and for the same purpose, rather than staggering them as you would if you were using one to pay off the other. This bundling of several loans suggests that many people just find it difficult to get all of the credit they need from one place.

This is of course not an impact study. It doesn’t tell us whether microcredit is increasing suicides nor whether MFIs are rampantly harassing clients for repayment. But I think it does cast the the government’s move to shut down MFIs in order to protect SHGs in a dubious light.

I trust this kind of information more than impressionistic reports from people who have spent at most a day in Andhra Pradesh talking to actual poor people.

Which is why I’m going to spend a day next week in Andhra Pradesh talking to actual poor people. Look forward to my impressionistic reports.

I’m speaking about my book on Monday at the Microfinance India Summit. I have extended the trip in order to visit AP Wednesday–Saturday. I welcome suggestions of what to do with my time.

Possibly Related Posts

• What’s Really Happening in Andhra Pradesh
• The Massive Microcredit Implosion in Andhra Pradesh Daily Is Out!
• More Must-Reads on Andhra Pradesh

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1. Clint Wilson Says:
   November 13th, 2010 at 1:13 am

   Always a good read David and our CnC Cafe’ members love your open and honest analysis.

   Looking forward to your findings on the ground.

   -Clint
   @cazoomi
   @cncpartners

2. Patrick O' Brian Says:
   November 14th, 2010 at 8:25 am

   Mr Roodman,

   I read the article by Mr Oliver on CGAP. This article raises some interesting questions. However- pardon me if this is a naive question- I could not understand one point. Mr Oliver suggests:

   “this [the cmf study] was a representative survey of the state’s entire rural population, rich and poor, and collected detailed information on household savings and borrowing from SHGs, MFIs, banks, moneylenders, friends and family, and other sources.”

   Suppose I am household A and I have 2 loans outstanding with a formal source, 1 with a SHG and 1 with a MFI, how is that being captured in the study? From the description above it seems that CMF collected different data sets from SHGs, MFIs, banks etc..NOT the household itself. How were they able to correlate the different data to construct an individual household profile?

   My guess is that the data sets from each of these sources contained details of the INDIVIDUALS other loans. But then again, would this provide a picture of a HOUSEHOLDS overall indebtedness? For example, multiple family members could have multiple loans from different sources; the husband could take out a loan from a formal source, while the wife could be participating in a SHG or a JLG.

   Would be grateful if you could clarify.

3. David Roodman Says:
   November 14th, 2010 at 11:51 am

   Actually, Patrick, I believe that the researchers visited households and asked them about all the different kinds of loans they might have–SHG, MFI, etc.

4. B S Suran Says:
   November 15th, 2010 at 3:54 am

   Thanks for the post. All the writing that I have seen or read so far seem to demonise Govt initiatives ??? and least of Govt regulation ?, Why don’t these erudite writers appreciate some efforts in client protection and client education, which the Govt intends to make. My specific point for issue of multiple loans and multiple financing is……..

   I fear its not bad to have multiple loans …well being a banker (NABARD) I already have three of them ( formal + informal)…so what . the issue is about over indebting and not all multiple loans and over indebting !!
   Cheers
   Suran

5. David Roodman Says:
   November 16th, 2010 at 11:57 pm

   Suran, I agree regulation can be constructive, and that multiple borrowing is not automatically bad. I think that my only criticism has been about the suddenness and severity of the recent government move in AP. It may well kill rather than reform the industry.

6. B S Suran Says:
   November 17th, 2010 at 10:06 am

   @ Shri David : If one looks at the history of MF in the state which is often quoted as the mecca of microFinance; the initiatives haven been largely driven by the Govt- I repeat Government . The issues, which emerged with hyper activeness by all players and especially MFIs, warranted some action to temper the growth; it was comin and should not the Govt step in some time??. If the readers have seen/ read the ordinance, there is no cap in int rates or ban on recovery. Though some issues need to be sorted out , the issue is about removing the opaqueness and building a better client protection system …
   Cheers
   Suran

7. Shardul Says:
   November 18th, 2010 at 7:34 am

   Hello,

   The report which Justin Oliver cites in his blog post is now available on the Centre for Micro Finance’s website at http://ifmr.ac.in/cmf .

8. Jonathan C Says:
   November 18th, 2010 at 3:14 pm

   Emily Breza of MIT has a very nice recent paper on an earlier March 2006 default wave episode in Krishna District of AP which ought to be studied for how these defaults spread, and possibly how they sometimes resolve. http://mitsloan.mit.edu/neudc/papers/paper_285.pdf