Microfinance in Kolar, Karnataka, Revisited

20 July 2011

Events of 2009 in the Kolar district in Karnataka, a state in southern India, offer a valuable case study for the microfinance sector because they show the complex intersection between cultural and social factors and household financial decisions. Kolar, famous for its silk industry, is a small town which witnessed mass defaults after a local organization banned MFIs from operating in the area.

A study released by the Association of Karnataka Microfinance Institutions identified several factors that led to the crisis including aggressive growth of MFIs, multiple lending, coercive collection practices, not re-financing loans for customers with legitimate hardship, and non cooperation with the Anjuman Committee, a local Muslim organization that finally issued the “Kolar Fatwa,” banning MFIs from operating in the area.

Within weeks of the ban, the 43 MFIs operating in the area lost about Rs 60 crores ($13.4 million).

Immediately following the repayment crisis, CGAP and EDA Rural Systems jointly conducted a study on clients in Kolar district. The study surveyed 900 clients in two mass default towns (Kolar and Ramanagaram), as well as two towns that did not experience defaults (Nanjangud and Davanagere). Both defaulters and non-defaulters were interviewed. You can learn more about the study and access the data here.

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