The crisis that erupted in the Indian State of Andhra Pradesh is early October 2010 hit at the epicenter of microfinance in India and has implications there, across the country, and globally. As events continue to unfold in Andhra Pradesh, this note provides background and context on the situation, which raises important questions about the evolution of microfinance markets more broadly.
Financial Inclusion in India
India has a population of 1.2 billion, with less than one-quarter of adults having access to basic formal financial services. Financial inclusion initiatives are not new to India. Over the past century, a range of innovative approaches to expanding access to finance for poor people has been pursued. Early in the 20th Century laws were passed to create cooperative financial institutions to serve people living in rural areas. Following independence in 1947, much of India's financial sector was nationalized. Part of the rationale was to ensure access to finance to a much larger number of Indians, especially those living in rural areas. As a further effort to reach rural areas, India established a specialized class of regional rural banks in the 1970s. And in the 1980s social entrepreneurs created the self-help group (SHG)-bank linkage program, whereby commercial banks were encouraged to lend funds to groups of 10 to 20 women.
Indian SHGs were initially formed as a means to extend training and other nonfinancial services to rural areas; some also mobilized savings and made loans to members. But through the bank linkages program, the SHG model began to incorporate credit from the banks thus allowing for much larger lending volumes. Today there are 4.5 million SHGs receiving credit nationwide, with 58 million members.