Microfinance Models Must Evolve to Support Healthy Outreach and Development of a Broad Range of Financial Services, CGAP

Crisis in Andhra Pradesh highlights importance of effective controls

WASHINGTON, December 9, 2010 - In the midst of the microfinance crisis in the Indian State of Andhra
Pradesh, CGAP CEO Tilman Ehrbeck has called for the microfinance delivery
model to evolve to support healthy growth and the development of a broad
range of products and services that poor people need. The global microfinance
body today released a paper that analyses the ongoing situation in Andhra
Pradesh, and discusses the way forward for poor people's access to finance
globally.

As microfinance institutions, the state government of Andhra Pradesh, and
other key stakeholders work to resolve the crisis, Ehrbeck said that it is
important for the microfinance industry to draw the right lessons from the
situation, so that progress on financial inclusion globally continues in the
right direction.

The CGAP paper, Andhra Pradesh 2010: Global Implications of the Crisis in
Indian Microfinance, points out that there is much higher penetration of
microfinance in Andhra Pradesh than in any other state in India, with
household debt coming from several sources, not just MFIs. "Households in
Andhra Pradesh have as many as four loans from different lenders and high
levels of outstanding debt," said Greg Chen, CGAP's representative for South
Asia and one of the authors of the paper. "But let's be clear that this is
exceptional: 2.7 billion people around the world still have no access to any
kind of formal financial services–services that are cheaper and more
reliable than moneylenders and other informal options. While we need to learn
from the crisis, we must not let it take us off track on the bigger priority
of improving financial inclusion globally."

Developments in Andhra Pradesh shine the spotlight on some of the same
issues that have emerged in other high-growth microfinance markets in recent
years. Rapid growth, CGAP warns, can undermine credit discipline, driving
unhealthy rises in loan amounts, cutting corners in the underwriting process,
and excessive supply of credit.

"In places where there is high penetration of microcredit-such as Andhra
Pradesh-we see evidence of the strains caused by rapid growth," said Ehrbeck.
"As local markets mature, the microfinance delivery model must evolve to
support healthy outreach and the development of a broad range of products
that poor people need."

CGAP's analysis of the effects of fast growth in Andhra Pradesh builds on
CGAP's earlier analysis of hyper-growth in diverse microfinance markets such
as Bosnia and Herzegovina, Morocco, Nicaragua, and Pakistan.

According to CGAP, the situation in Andhra Pradesh also highlights the
need for appropriate controls:

    -- At the institutional level to support a robust business model,
       including effective incentives and training for staff at all levels
       to encourage sound underwriting and customer care
    -- At the industry level, including information sharing/credit bureaus
    -- Appropriate regulation that encourages interest rate and pricing
       transparency, in an environment in which poor clients are well
       informed and understand the products, understand how to use them
       effectively, and have clear means for recourse

"Across the globe and in India, the microcredit movement has proved that
it is possible to deliver financial services to poor people living in rural
areas at a large scale free from any reliance on subsidies," said Ehrbeck.
"If we're really committed to financial inclusion we need to take it to the
next level. Poor people don't need just credit. Savings, microinsurance, and
money transfers are all services that poor people demand and that help poor
families to manage their household finances more effectively. We need to
commit to delivering high quality services to the 2.7 billion people left
out."

Read the paper: www.cgap.org/gm/document-1.9.48945/FN67.pdf

Jeanette Thomas, jthomas1 at cgap.org, +1-202-744-4829