How regulation revived micro-lending after the Andhra Pradesh crisis

This paper provides a chronicle of a major disaster in the Indian microfinance sector, the Andhra Pradesh crisis of 2010, and attempts to derive some important lessons. The key research question is: What were the underlying vulnerabilities prior to the crisis and how did regulation help moderate these weaknesses? Following a case study approach, events before, during and after the crisis are recounted. Industry data coupled with practitioner insight were used to clarify the causes of the crisis and the key regulatory actions taken to help get the microfinance industry back on its feet. A lack of regulatory oversight and political opportunism lead to the tragic events in Andhra Pradesh. Subsequent regulations introduced by the Reserve Bank of India, including caps on the size and number of loans to an individual, and restrictions on loan use resulted in greater outreach by the lenders and better portfolio performances. The successful reforms implemented by the Indian regulators may serve as an example for other countries interested in using microfinance to combat poverty.