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Journal of Economics and Sustainable Development ISSN 2222-17 !"aper# ISSN 2222-2$%% !&nline# 'ol.() No.

17) 2 1*

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Is Commercialization of Microfinance Responsible for OverIndebtedness? The Case of Andhra Pradesh Crisis
S+a+adat ,ossain Department of -inance . /an0ing) 1niversit2 of 3+ittagong) /anglades+ .4aroc5ue 6esearc+ 3entre) 1niversit2 of 7ons) /elgium E-mail8 s+97:2 2;2a+oo.com< ss+a+ada;ulb.ac.be Abstract =+e main purpose of t+is t+eoretical stud2 is to anal2>es w+et+er commerciali>ation of microfinance institutions !7-Is# is responsible for over-indebting t+eir poor borrowers ta0ing into account t+e recent ?nd+ra "rades+ !?"# incidence. 3ritics argue t+at massive influ@ of commercial capital cause e@ponential growt+ of loan portfolios of t+e 7-Is t+at finall2 cause over-indebtedness. =+e diagnosis of ?" incidence indicates t+at commerciali>ation is not solel2 and directl2 responsible for over-indebting t+eir clients. It is t+e outcome of internal inefficiencies) unet+ical operations and malpractices of 7-Is. ,owever) commerciali>ation is indirectl2 responsible for overindebtedness w+en Aprofit see0ingB 7-Is start unet+ical practices to ma@imi>e t+eir profit. =+is issue is important not onl2 for India but also in some ot+er developing countries to ensure sustainabilit2 of 7-Is and to protect t+eir poor clients. Key ords! 7icrofinance< commerciali>ation< over-indebtedness< ?" crisis. "#$ Classification! G21, O17 %& Introd'ction Immense public recognition of microfinance for its social orientation and fig+ting against povert2 is now facing increasing criticism and public attention due to its allegation of e@ploiting and over-indebting its clients. =+e benefit of microfinance is now an illusion. 7. CunusBs !2 :# claim of microcredit as +uman rig+t1 is now in 5uestion especiall2 after t+e 2 1 ?nd+ra "rades+ over-indebted microfinance borrowersB suicides 2 . 3ommerciali>ation of microfinance institutions !7-Is# are sometimes alleged for over-indebting t+eir poor borrowers. 3ritics argue t+at massive influ@ of capital from s+are+olders) commercial ban0s) international and private investors cause e@ponential growt+ of loan portfolios of 7-Is t+at finall2 pus+ t+e w+ole sector as an ideal breeding ground of over-indebtedness !=a2lor) 2 11< 7ader) 2 1*< 4ic+terisc) 2 12#. =rade liberali>ation) state retrenc+ment of formal ban0ing sector) and agricultural transformation in India infused 7-Is as a lucrative private sector offering +ig+ and attractive profit to investors. It endangers social impact and t+e industr2 sustainabilit2 !,udon) 2 D#< cause e@ploitations) economic) social and ps2c+ological pressure to borrowers and results t+e worst scenario as claimed in media8 suicide and prostitution !Euerin et al) 2 Da< 7ader) 2 1*< =a2lor) 2 11#. ,owever) commerciali>ation of microfinance is t+e strateg2 to accumulate funds w+en subsid2 from donors and c+arities ceases to e@ist for a long time. /ut commerciali>ation translated into deluge of funds for investment in 7-Is) caused +uge mar0et penetration) mar0et saturation) multiple lending and over lending< and finall2) overindebting t+eir clients. =+e crisis in ?nd+ra "rades+ is t+e worst case of t+is allegation. It +appened not onl2 in India but also in man2 ot+er developing countries of t+e world suc+ as /osnia) ,er>egovina) 7orocco) "a0istan) /olivia and Nicaragua wit+ different dimensions and e@periences !&lteanu) 2 11#. /ut we cannot avoid commerciali>ation in t+e absence of subsid2 and donor support as investors will not provide funds wit+out financial incentives. ?t t+is moment) it is important to Fustif2 w+et+er commerciali>ation of microfinance is responsible for t+eir clientsB over-indebtedness and if so) to w+at e@tent and in w+at wa2 it is responsible< or w+et+er it is t+e outcome of unet+ical practices of 7-Is or some ot+er factors rat+er t+an commerciali>ation. =+is t+eoretical stud2 tries to find out t+e answer of t+ese 5uestions. =+e main obFective of t+is paper is to stud2 w+et+er commerciali>ation of microfinance institutions !7-Is# is responsible for over-indebting t+eir poor borrowers ta0ing into account t+e ?nd+ra "rades+ crisis. =+e main researc+ 5uestions are8 w+et+er over-indebtedness is t+e outcome of unet+ical and malpractice of profit +unger
1 Speec+ at t+e Nobel "eace "ri>e 3eremon2 at &slo) Norwa28 +e mentioned microfinance as t+e tool to establis+ peace b2 fig+ting against povert2 and treated microcredit as +uman rig+t. Source8 +ttp8GGwww.nobelpri>e.orgGnobel9pri>esGpeaceGlaureatesG2 :G2unus-lecture-en.+tml !Date8 December 1 ) 2 :#. 2 See Yoolim Lee & 6ut+ David8 Suicides in India 6evealing ,ow 7en 7ade a 7ess of 7icrocredit. /loomberg 7ar0et 7aga>ine !December 2$) 2 1 # +ttp8GGwww.bloomberg.comGnewsG2 1 -12-2$Gsuicides-among-borrowers-in-india-s+ow+ow-men-made-a-mess-of-microcredit.+tml

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Journal of Economics and Sustainable Development ISSN 2222-17 !"aper# ISSN 2222-2$%% !&nline# 'ol.() No.17) 2 1*

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commerciali>ed microfinance institutionsH 4+at is t+e e@tent of t+is convictionH &r is it t+e outcome of some ot+er factorsH 4+at counter-mec+anism and polic2 implications are necessar2 to overcome t+is crisisH 6esult of t+e ?nd+ra "rades+ diagnosis indicates t+at commerciali>ation is not solel2 and directl2 responsible for overindebting t+eir clients. It is t+e outcome of internal inefficiencies and unet+ical practices of 7-Is and some ot+er e@ternal factors. =+e anal2sis) +owever) indicates t+at commerciali>ation is indirectl2 responsible for overindebtedness w+en commercial investments in t+ese Aprofit see0ingB) 7-Is caused +uge mar0et penetration) multiple lending and over lending t+roug+ some unet+ical practices. I presented t+e rest of t+is paper as follow8 section two is t+eoretical bac0ground and literature review) section t+ree is t+e diagnosis of ?nd+ra "rades+ crisis) section four is t+e discussion and Fustification w+et+er commerciali>ation is responsible or not) section five discusses management conse5uences) section si@ is t+e recommendation) polic2 implications and limitations and finall2 section seven is conclusion. (& Theoretical )ac*+ro'nd and $iterat're Revie 3ommerciali>ation generall2 means t+e 7-IBs see0ing to operate wit+ commercial sources of funding following mar0et based business principles and wit+out direct or indirect subsid2 elements in its funding structure !?rmendari> and 7orduc+) 2 1 #. It indicates leveraging interest revenues) mobili>ing savings deposits1 and t+e abilit2 of t+e 7-Is to distribute profits to t+eir s+are+olders t+at +elps t+e 7-Is to access vast pool of capital. ?rmendari> and 7orduc+ !2 1 # treated commerciali>ation as a Awin-winB situation b2 adopting commercial principles and practices in fig+ting against povert2. ,owever) see0ing profit b2 serving t+e poor in t+is wa2 +as fear of Amission driftB due to t+e trade-off between profitabilit2 and outreac+ to t+e poor !7orduc+) 2 < ?rmendari> and S>afar>) 2 11#. =+e bac0ground of t+e spirit of commerciali>ation approac+ of 7-Is is on 7a@ 4eberBs proposition of Aet+ics of responsibilit2B) w+ere as) 7. Counus and man2 ot+er criticsB view commerciali>ation as t+e Aet+ics of convictionB !Sc+midt+) 2 12#. =+e first one is t+e urgenc2 of microfinance institutions for its sustainabilit2 and social orientation. =+e evil side is w+en 7-Is commerciali>ation is alleged for Aet+ics of convictionB. &ver-indebtedness is t+e outcome of t+e Aet+ics of convictionB of 7-Is !Sc+midt+) 2 12#. 3anner and Iuc0ett !1DD1# treat over-indebtedness w+en t+e debt problems are structural and persistent over a certain time +ori>on. &i0o 3redit defines over-indebtedness w+en a client cannot repa2 t+e loan more t+an t+ree mont+s !EravestiFn et al) 2 11#. Sc+ic0s !2 1*# defines over-indebtedness from client sacrifice perspective w+en a customer continuousl2 struggle to meet repa2ment deadlines and +as to ma0e undue sacrifice related to +isG+er loan obligations t+at +as more t+an transitor2 effects. Some researc+ers and practitioners measure it as t+e net indebtedness inde@ 2 !/etti et al.) 2 7#) debt service ratio !3ollins 2 $#) legall2 ban0rupt borrowers or delin5uenc2GdefaultGarrear ratio !Disne2 et al) 2 $< Jappel et al.) 2 1 #< ot+ers measure it as t+e perception of debt burden !Iea et al) 1DD*< Euerin et al) 2 Db#. ,owever) according to Euerin et al. !2 Db# t+e consideration of onl2 default or debt burden is not suitable to measure over-indebtedness in developing countries. It can result in eit+er inabilit2 to repa2 or unwillingness and costl2 actins re5uired to repa2 !Eon>ale>) 2 $< Sc+ic0s) 2 1*#. ,owever) t+ese definitions and measurements e@clude t+ose borrowers w+o do repa2 t+eir loans b2 ma0ing strategic sacrifice or assisted b2 famil2 members to repa2 t+eir loan !EravestiFn et al) 2 11#. It also e@cludes t+e borrowers w+o strategicall2 default or deliberatel2 accumulate unsustainable amount of debt !Sc+ic0s) 2 1*#. =+e causes) factors be+ind and conse5uences of commerciali>ation of microfinance are discussed b2 /abri et al. !2 1 #) 3arrilo !2 D#) 3+asmar !2 D# and Sc+midt+ !2 12#. Sriram !2 1 a# discussed commerciali>ation of microfinance from Indian conte@t. =+e literature on ?nd+ra "rades+ microfinance crisis) e@tent of microfinance commerciali>ation) clientsB over-indebtedness) factors and causes related to over-indebtedness in India till to date are 6edd2 !2 1 #) 7ader !2 1*#) Jumar !2 12#) 4ic+teric+ !2 12#) ?runac+alam !2 11#) Sc+midt !2 1 #) Nair !2 11#) =a2lor !2 11#) E+ate !2 7b#) "ic+erit !2 D#) Euerin et al. !2 Da# and Josep+ !2 12#. =+e ot+er studies on over-indebtedness in ot+er parts of t+e world are8 7orvant-6ou@ !2 D# on 7e@ico< &lteanu !2 11# on "eru< /ur0i !2 D# on "anFab province in "a0istan< "2t0ows0a and Spannut+ !2 11# on Josovo< 7aurer and "2t0ows0a !2 11# on /osnia and ,er>egovina< Sc+ic0s !2 1*# on E+ana< J+alil2 and -aridi !2 11# on /anglades+< 6+2ne !2 1#) 'ogelgesang !2 *#) Eon>ale> !2 $#) Eon>ale>-'ega and 'illafani-Ibarnegara2 !2 11# on /olivia crisis 1DDD-2 ) and ,urwit> and Iui> !2 7# on Sout+ ?frican conte@t. =+e detail of t+e findings is not possible to discuss in t+is limited space. ,owever) t+ere is +ardl2 an2 stud2 found t+at empiricall2 and t+eoreticall2 discussed w+et+er commerciali>ation of microfinance causes over-indebting t+eir clients< maForit2 of t+em indirectl2 claimed commerciali>ation for t+is crisis. =+is paper is a step towards to e@plore t+is critical debate.

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If regulation in t+e countr2 permits savings debt service pa2ment in relation to net income

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Journal of Economics and Sustainable Development ISSN 2222-17 !"aper# ISSN 2222-2$%% !&nline# 'ol.() No.17) 2 1*

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,& A -ia+nosis of the Commercialization and Microfinance Crisis in Andhra Pradesh =+e recent e@ample of microfinance commerciali>ation is ?nd+ra "rades+) a sout+ern state of India. 7icrofinance operation in t+is A+ubB began in 1D$ s in small scale as NE& driven 7-Is. /ut due to t+e state drive as t+e Apriorit2 sectorB and t+e 4orld /an0 funding in 1DD s) it underwent e@pansion and commerciali>ation !=a2lor) 2 11#. =rade liberali>ation) state retrenc+ment of formal ban0ing sector and transformation in t+e agricultural sector facilitate liveli+ood diversification. It bolstered 7-Is as t+e new breed of private sector offering attractive profit to investors. 7assive influ@ of capital from s+are+olders) commercial ban0s) and international and private investors cause e@ponential growt+ of loan portfolios of 7-Is t+at finall2 pus+ t+e w+ole state as an ideal breeding ground of debt dependenc2 and over-indebtedness of t+e poor +ouse+olds !7ader) 2 1*< =a2lor) 2 11#. ,& %& Krishna -istrict! The .irst /arnin+ of the Crisis =+e first warning of t+e crisis was in 2 : at Jris+na district of ?nd+ra "rades+. It started b2 borrowersB demonstration to bac0 !return# t+eir +ouse title !deed# t+at +ad been sei>ed as collateral and it turned into violent protest. ?t t+at time 7-Is were alleged for 2 suicides and repa2ment rate went down around 1 K to 2 K for several mont+s !E+ate) 2 : . 2 7a< S+arma) 2 :#. ?s a conse5uence) t+e state government temporaril2 closed % 7-I offices of Spandana Spoorthy and SHARE Microfinance !7ader) 2 1*#. ,owever) t+ese 7-Is +ave denied t+eir allegation of wrong doing< rat+er claimed t+at state lending program) Self Help Gro p !S,E# +as acted as enabling factor in t+e crisis !7ader) 2 1*< E+ate) 2 7b#. ,& (& The Microfinance )'bble In India) during 1DD s) t+ousands of microfinance institutions and non-ban0ing finance companies acted as intermediaries between t+e women borrowers at marginal level and t+e commercial ban0s. =+e2 too0 loan from Indian and foreign ban0s at usual interest rate to bolster t+eir capital and guarantee li5uidit2< t+en re-lend it to poor women and +ouse+olds at usurious interest rates and c+arges !4ic+teric+) 2 12#. =urning t+is creditlending process into mar0et mec+ani>ed profit ma0ing sector) 7-Is +ave establis+ed as an attractive sector of +andsome return from investment !7ader) 2 1*#. =+e number of 7-Is soared to above *) wit+in a decade !4ic+tric+) 2 12#. ?fter t+e Jris+na incidence) rat+er t+an +alting t+e inflow of capital) t+e trend continued for its t2pical prospects of attractive return. =+e investment funds !7I's# geared t+is fastest growing segment articulated b2 penetration into financiall2 e@cluded segment of Indian population t+at was impressed for +ig+ rate of repa2ments and widespread outreac+) gender e5ualit2 and articulated success stories. =+e promise of double digit return on t+eir investment) widespread belief of microcredit as t+e panacea to reduce povert2) empowering women) and promoting small entrepreneurs+ip fulfilled t+e ban0ersB and investorsB need to ma0e attractive profit wit+ social orientation !=a2lor) 2 11< 4ic+teric+) 2 12< 7ader) 2 1*#. In t+is microfinance investment mania) e5uit2 infusion drove a rapid growt+ in lending< si@ leading 7-Is attracted $ K of investment and it caused an annual portfolio growt+ of $DK between 7arc+ 2 : and 7arc+ 2 1 !7ader) 2 1*#. =+e commercial inFection of investment c+anged a +erd of +ig+l2 ambitious Ayo n! t r"# !Ereenfield# 7-Is) w+ic+ were ma0ing losses) surprisingl2 become profitable !"arames+war et al.) 2 1 < 7ader) 2 1*#. In 2 7-2 $) S$S) t+e largest 7-I in India) rose net profit b2 7 K and t+e second largest 7-I) Spandana Spoorthy) increased net profit b2 1)7 K !Nair) 2 1 < 4ic+teric+) 2 12#. In 2 $-2 D) t+e2 confirmed increase of : K clients from previous 2ear) reac+ed $.% million female clients wit+ appro@imatel2 $ billion 1S dollar !*: billion rupees# loan portfolios !Srinivasan) 2 1 < 4ic+teric+) 2 12#. =+e immense loan factor2 in ?nd+ra "rades+ accounted Fust around * K of IndiaBs total loan portfolio despite onl2 7K of t+e total Indian population in t+at state !Srinivasan) 2 1 < 7ader) 2 1*#. =+e industr2 s+own an immensel2 profitable sector wit+ an average return on e5uit2 !6&E# of 27.%K in 2 $ and 2%K in 2 D< t+e 1 largest 7-Is even earned on average *7.$K and *%.2K in 2 $ and 2 D respectivel2 !7ader) 2 1*#. =+is e@traordinar2 return fueled private capital< loan portfolio stood around 2.7 billion 1S dollar among t+ese si@ leading 7-Is wit+ an annual compound growt+ of $DK !?runac+alam) 2 11< 7ader) 2 1*#. ,& ,& 0K0! The $ynchpin in the )'bble S$S was at t+e frontline of t+e ?nd+ra "rades+ microfinance boom. SJS started its business in 1DD7 b2 Indian?merican Asocial entrepreneurB %i"ram A" la as a non-profit NE&) but transformed into Non-ban0 -inance 3orporation !N/-3# in 2 %. /2 2 7) it +as become t+e largest profitable 7-I in India !7ader) 2 1*#. Due to its illusive growt+ and lucrative financial profit) Se& oia 'apital) an ?merican venture capital fund) invested in 2*.:K of its e5uit2 wit+ t+e aim of Ae@it wit+ profitB t+roug+ s+are issue in stoc0 mar0et !7ader) 2 1*#. 3ommercial ban0s also too0 opportunit2 to lend t+em as a safe bet profitable Apriorit2 sectorB 1 . ? deal of

"lease see 6ediff /usiness. 2 (. /an0s ta0e t+e +int) to step up farm loans. 6ediff /usiness) 7umbai) 7a2 2$. ?vailable at8 +ttp8GGin+ome.rediff.comGmone2G2 (Gma2G2$spec.+tm.

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microloan securiti>ation of (2.: billion 1S dollar was made between SJS and I3I3I /an0 1 . =+ese capital inFections fueled its portfolio growt+. In Jul2 2 1 ) its I"& went forward in 7umbai Stoc0 E@c+ange wit+ appro@imatel2 1.% billion 1S dollar) an over subscription of more t+an 1* times< t+e compan2 valued at nearl2 ( times of its 2 1 earnings !7ader) 2 1*#. =+is I"& raised 1S L *%$ million rising stoc0 price for over following si@ wee0s2. ,owever) t+e controvers2 to t+is I"& arose w+en t+e Seattle based NE& unit announced to sale all its s+ares in SJS for 7 -$ million 1S dollar to e@it its microfinance investment !6aFs+e0+ar . Erenn2) 2 1 < 7ader) 2 1*# to earn profit from I"&. =+e director !7r. ?0ula# sold +is 1* million 1S dollar wort+ private s+ares to a +edge fund in Singapore t+at fueled t+is controvers2 and it reinforced accusation of Apersonal enric+ment at t+e e@pense of poor womenB !4ic+tric+) 2 12#. ?runac+alamBs !2 11# e@amination of SJS /alance S+eet found t+at 7r. ?0ula owned t+ese s+ares b2 borrowing roug+l2 *% ) 1S dollar from SJS to bu2 at 1 6upees per s+are) a discount of nearl2 DDK against t+e I"& price. It raised et+ical 5uestion w+et+er commerciali>ed 7-I is a club of ric+ investors see0ing to Acas+ inB on poor borrowers ma0ing t+em poorer and over-indebted. 1& Commercialization of M.Is and Over-indebtedness 1& %& Commercialization of M.Is! #2tent of Conviction =+e neo-liberal reform !/ateman) 2 1 # in t+e econom2 opened t+e door to transform NE& t2pe 7-Is into Aprofit see0ingB) 7-Is driven b2 commercial funding as t+eir main sources of capital !4ic+teric+) 2 12< =a2lor) 2 11#. =+is +as driven t+e influ@ of commercial investment in 7-Is !=a2lor) 2 11#. ?gain it influenced some of t+e 7-Is to c+ange t+eir funding pattern from Aloan for investmentB to As+are capital for investmentB b2 entering into formal capital mar0et !=a2lor) 2 11< 7ader) 2 1*#. 3ritics argue t+at it translated into deluge of funds for investment in 7-Is) caused +uge mar0et penetration) mar0et saturation) multiple lending and over lending) and as a result) over-indebting t+eir clients. =+is section outlines w+et+er commerciali>ation of microfinance is responsible for t+eir clientsB over-indebtedness and if so) to w+at e@tent and in w+at wa2 it is responsible. (el !e of capital ind ced irrational !ro)th, mar"et *at ration and competition+ ?t t+e pinnacle of t+e factors responsible for t+e crisis was t+e e@ponential and irrational growt+ of loan portfolio due to +uge commercial fund inFection in t+ese 7-Is. /2 7arc+ 2 1 ) *%.DK of all +ouse+olds in ?nd+ra "rades+ +ad 7-I loan !7ader) 2 1*#. =o re-lend t+is capital) 7-Is used ever2 possible angle in t+e client ac5uisition process !?runac+alam) 2 11#. =+e average loan balance per borrower was more t+an doubled and compounded b2 multiple lending !7ader) 2 1*#. It result indebting of $2K of t+e rural +ouse+olds in t+e region !4ic+teric+) 2 12#. 3ommerciali>ation of microfinance in t+is area caused competition and t+e mar0et became saturated. Despite t+e default rate increased) 7-Is +ave +ide it b2 Arolling overB*) t+e loans replacing t+e non-performing loans b2 resc+eduling it !7ader) 2 1*#. It caused t+eir clients multiple borrowing and loan Fuggling !i.e. using new loan to pa2 bac0 t+e old debt# !7ader) 2 1*< =a2lor) 2 11< 4ic+teric+) 2 12< 6+2ne) 2 1< /ur0i) 2 D#. In ?nd+ra "rades+) it caused growt+ of loan portfolio of between :(K and D$K eac+ 2ear !7ader) 2 1*#. ?bout $(K of t+e +ouse+olds obtained two or more loans w+ile %$K even +ad four or more loans !Jo+nson and 7e0a) 2 1 #. It result 1.% loans per +ouse+old in t+e w+ole state of ?nd+ra "rades+ !Srinivasan) 2 1 #. =+is situation is not onl2 in ?". In 7orocco) 1 reporting 7-Is reporting in 7IM 7ar0et also e@perienced t+e same situation. =+ere was 11 K growt+ of loan portfolio wit+ t+e +ig+est ** K b2 t+e fastest growing 7-I) ?6DI in t+e 2 :- 7 crises !Sc+ic0s) 2 1*#. =+is situation is also true in some ot+er developing countries suc+ as /olivia and 7e@ico for creating t+eir clients over-indebted !6+2ne) 2 1< 3arrillo) 2 D< Eon>ale>) 2 $#. 'oercion and home made inefficiency+ ,ome made inefficienc2 of 7-Is !3+owdri) 2 11# and 5uantit2 based incentive mec+anism to loan officers and agents to inflate t+eir loan portfolio resulted in greater mar0et penetration and loss of credit discipline. =+e2 started client poac+ing) snatc+ing customers from eac+ ot+er) and even encouraged ver2 poor +ouse+olds to borrow wit+out considering repa2ment capacities !4ic+teric+) 2 12< /ur0i) 2 D#. It was almost impossible for an agent to A0now customersB due to dealing wit+ around % customers on average !7IM 7ar0et database#. =+is loss of credit discipline !3+en et al) 2 1 # put t+eir clients into debt trap !Sriram) 2 1 #. =+is situation is true not onl2 in ?nd+ra "rades+) but also in some ot+er countries li0e "a0istan !/ur0i) 2 D#
1 India 7icrofinance !2 D#) SJS 7icrofinance and I3I3I ban0 conclude securiti>ation deal. India 7icrofinance /usiness News) -ebruar2 1D) 2 D. ?vailable at8 +ttp8GGindiamicrofinance.comGs0s-microfinance-icici-ban0-conclude-securitisationdeal.+tml. 2 =+e Economic =imes) ?ugust 17) 2 1 SJS 7icrofinance debuts at 11K premium. ?vailable at8 +ttp8GGarticles.economictimes.indiatimes.comG2 1 - $-17GnewsG27%DD%2(919s0s-s+ares-listing-gains-s0s-microfinance. * David 6. 2 1 . =+reat of microfinance defaults rise in India as SJS plans I"&. /loomberg) New Cor0 3it2) June 1() 2 1 . ?vailable at8+ttp8GGwww.bloomberg.comGnewsG2 1 N :N1(Gindia-microfinance-evo0es-ris0-of-subprime-in-t+e-east-as-s0sprepares-ipo.+tml.

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and /olivia !6+2ne) 2 1#. 7oreover) SJS offered attractive salaries and incentives to t+eir staffs wor0ing at t+e village and semi-urban areas t+an t+at of t+eir peers !7ader) 2 1*#. =+is lucrative incentive mec+anism influenced t+em to collect as man2 clients as possible causing to ta0e multiple loans b2 same client. E,or-itant intere*t rate+ 3ommercial 7-Is c+arge usurious interest rate to poor clients to ensure t+eir profits at t+e e@pense of putting t+eir clients into debt trap. ?lt+oug+ researc+ers argue t+at microfinance borrowers earn super-normal profit t+an t+at of a corporation to repa2 t+eir loan wit+ all c+arges) t+e2 alwa2s cannot earn sufficient profit !return# to repa2 t+eir loans. ?n et+nograp+ic anal2sis from /olivia b2 /rett !2 :# reveals t+at most micro-enterprises in t+eir local conte@t do not earn sufficient profit to repa2 t+eir loans. 'ompartamo#* interest rate is around 1 K< and wit+out '?= !value added ta@# it stands to $:K per annum !6+2ne and Euimon) 2 7#. =+is rate ensures its +ig+ profit t+at +elps to attract commercial funds. ?st+a !2 D# s+ows t+at effective annual rate !E?6# of 'ompartamo* reac+ed to 11DK. =+e ?nd+ra "rades+ 7-Is also earned above : K annual effective rate but t+e2 disclosed onl2 2(K-2$K annual rate !nominal rate# in public !7ader) 2 1*#. =+e above discussion and t+e diagnosis of ?nd+ra "rades+ incidence ma0e it clear t+at commerciali>ation can be a catal2st in over-indebting t+eir clients) not directl2 responsible for over-indebtedness. =+e main cause was t+eir greed2 mentalit2 following some unet+ical practices to support t+eir irrational and un+ealt+2 growt+ targets w+ere commerciali>ation was t+e catal2st. 1& (& Other .actors behind Over-indebtedness 4e cannot convict commerciali>ation alone responsible for t+e microfinance pla2ers to initiate and e@pedite unet+ical practices. Some ot+er factors are also responsible for over-indebtedness. ,owever) some of t+ese factors are also influenced b2 commerciali>ation. State of the a!rarian economy+ =+e maForit2 of t+e poor people in India are dependent on agriculture. /ut agriculture is vulnerable to climatic conditions suc+ as droug+ts) rainfall and floods etc. =+e agricultural small+olders in recent 2ears +ave s+ifted towards cultivating cas+ crops !non food grain items# suc+ as ground nuts) cotton and used +2brid seeds !6ao and Suri) 2 :< Eari0ipati) 2 $< 'asavi) 2 1 ) =a2lor) 2 11#. ,ig+ input prices) fluctuation in mar0et price and production fluctuations !drop in production# due to droug+ts in t+is semi-arid region in t+e last few 2ears aggravated t+eir situations< t+e2 +ave ta0en more loans) again invested it in agriculture wit+out reali>ing an2 substantial returns !=a2lor) 2 11< Ealab et al) 2 D#. =+is irregular c2cle of agrarian cas+ flows spurred debt traps in t+e absences of alternative income generating activities !Eari0ipati) 2 $ . 2 D#. .ndia#* lon! tradition of de-t dependency+ ?ccording to 7alcolm Darling !1D2%) stated b2 =a2lor) 2 11#) t+e Indian peasants are born in debt) live in debt and die in debt. Surprisingl2) t+is statement is true to small+olders and landless laborers w+en t+ere is around 2% ) suicidal deat+ from 1DD% to 2 1 1 !Sainat+) 2 1 < =a2lor) 2 11#. ?ccording to =a2lor !2 11#) Ealab et al !2 D# and Sainat+ !2 1 #2) t+e ?nd+ra "rades+ is in t+e leading state of suicidal incidence wit+ 1) D$ farmers from 7a2 2 ( to November 2 % and it pea0ed at 2)(1( deat+s in 2 D. =+e land-poor farmers and landless laborers are t+e largest social classes in agrarian India) and t+e2 +ave e@perienced increased insecurit2 in t+eir abilit2 to meet +ouse+old needs !6ao and Suri) 2 :#. 3+anges in agricultural pattern +ave greatl2 amplified t+eir insecurit2 due to c+anging crop prices< e@ploitative contracts for land rent and inputs) unpredictable climatic condition and 5ualit2 of off farm activities put t+em into ris02 position !Jod+a) 2 $< /reman) 2 7< ,arris-4+ite) 2 $< =a2lor) 2 11#. ? number of suc+ overlapping processes escalate pressure on marginal cultivators and landless laborers to put t+em into debt traps. 3ommerciali>ation of microfinance in t+is case) t+ereb2) fueled to renew t+e c2cle of indebtedness. /ut t+e fundamental cause of t+e crisis lies wit+ IndiaBs +istorical tradition of abusing debt !=a2lor) 2 11#. .nappropriate prod ct de*i!n+ =+e product design itself wit+out considering clientsB abilit2 to repa2 !Sc+ic0s) 2 1*# and abilit2 to generate cas+ flow is anot+er problem t+at fueled t+e crisis. In t+e Indian agrarian econom2) t+e repa2ment starts immediatel2 after loan disbursement and installments are fre5uent t+roug+out t+e w+ole loan tenure irrespective of t+e farmersB +arvest time to reali>e cas+. =+is income seasonalit2 caused furt+er borrowing from informal sources !=a2lor) 2 11< Eo0+le) 2 D#. ?gain) credit to women onl2 ma0es anot+er problem of grabbing it b2 t+eir +usbands in t+ese male dominated societies. It put t+ese women at ris0 of over-indebtedness as t+e2 lost t+eir control on debt use !/rett) 2 :< 6a+man) 1DDD< Sc+ic0s) 2 1*#. A-*ence of Sa/in!* Mechani*m+ 3redit onl2 approac+ is not panacea for clients. State regulation in some countries does not aut+ori>e savings !7ader) 2 1*< =a2lor) 2 11#. =+is is true in /olivian and 7e@ican case also. In t+e absence of savings) 7-Is lost t+eir low cost source of funds on t+e one +and) and) borrowers lost t+eir
1 2

Sainat+) ". 2 1 . &f Iu@ur2 3ars and Iowl2 =ractors. 0he Hind ) 27 December. Sainat+) ". 2 1 . 17)*:$ -arm Suicides in 2 D. 0he Hind ) 27 December.

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opportunities to consumption smoot+ing) meeting emergenc2 needs and pa2 big sum e@penditures on t+e ot+er +and !3ollins et al) 2 D#. It causes t+e borrowers to cope wit+ s+oc0s and increase dependenc2 on debt) +ence lost t+eir opportunit2 to self discipline !?rmendari> and 7orduc+) 2 1 #. 7-Is also lost t+eir opportunit2 to use savings as collateral !?rmendari> and 7orduc+) 2 1 #. 1nprod cti/e credit *e+ 4it+in ?nd+ra "rades+) microloan usage was mainl2 for consumption smoot+ing) covering +ealt+ related e@penditures) costs of wedding) dowries and ot+er social events !6ao) 2 %< Samal) 2 :< =a2lor) 2 11< 6amac+andran et al) 2 1 #. &nl2 a 5uarter of t+e loans were used for productive purpose particularl2 for agricultural inputs and one fift+ was used to repa2 t+e old debt !Srinivasan) 2 1 < =a2lor) 2 11#. =+is pattern varies greatl2 according to socio-economic classes and castes. =+e low caste groups mostl2 use credit for meeting t+eir basic consumption needs or pa2ing e@isting debts !=a2lor) 2 11#. =+is use of loan to smoot+ consumption1 !6+2ne) 2 1< /ateman) 2 1 # ma2 temporaril2 overcome e@ternal s+oc0s !6osenberg) 2 1 #) but do not +elp in generating return and alleviating povert2 rat+er t+an putting t+em into Adebt trapB. .nformal -orro)in!+ 7oreover) +ouse+oldsB borrowing from a variet2 of formal and informal sources2 worsened t+e situation. In Sout+ern India including ?nd+ra "rades+) some ric+ and upper castes obtained loan from ban0s and 7-Is) lend it to poor +ouse+olds at eas2 conditions but +ig+er interest rate) and it fueled in multiple borrowing and debt trap !=a2lor) 2 11< 7ader) 2 1*#. It cause debt bondage and attac+ed labor !Euerine et al) 2 Da< 7ader) 2 1*#. "articularl2 to agricultural wor0ers and marginal farmers in semi-arid India) it is common w+en production falls and cannot recover t+e costs of cultivation !Eori0ipati) 2 D< &lsen and 6amanamurp+2) 2 #. State inter/ention and SHG pro!ram+ =+e design of state sponsored S,E program also fueled in t+is race. Srinivasan !2 1 # estimated t+at t+e total number of microfinance clients in ?nd+ra "rades+ was 2%.*: million of w+om S,E program alone accounts for 1D.11 million clients. It caused mar0et saturation) ta0ing multiple loans to cover repa2ment sc+edules and overlapping of about 1 K between 7-Is and S,Es !=a2lor) 2 11#. 7oreover some 7-Is claim t+at ?" government intervention acted as enabling factor in t+e crisis !7ader) 2 1*#. 6ao !2 $# mentioned S,E program in t+is battle to monopoli>e t+e poor. Staff and !ro p pre** re to committin! * icide+ =o recover t+e default loan) sometimes t+e field officers and agents influenced and pressed clients to commit suicide to recover t+e loan due from credit life insurance !7ader) 2 1*#. &n t+e ot+er +and) 7-I staffs also claimed t+at group members influenced t+e over-indebted client to commit suicide to avoid group repa2ment of t+e defaulted loan. ,owever) a subse5uent investigation b2 ?s+ta et al !2 11# across different states of India found positive but insignificant correlation between microfinance penetration and suicidal cases. ,owever) it found stronger and significant correlation between S,E penetration and suicidal cases. 7oreover) in all t+e states) it found positive association of microfinance penetration wit+ male suicides) not female suicides< but maForit2 of microfinance clients are female. It indicates t+at rat+er t+an microfinance) agricultural production fluctuation and ot+er +ouse+old uncertainties are mainl2 responsible in t+eir suicides. 3& Conse4'ences of over indebtedness =+oug+ commerciali>ation of 7-Is allows entering into large pool of funds to support t+eir portfolio growt+) it is a great concern for management from ris0 management and customer protection perspective w+en it increases t+e probabilit2 of t+eir clientsB over-indebtedness. &ver-indebtedness is a t+reat to profitabilit2 and sustainabilit2 of 7-Is w+en it results delin5uenc2 and deterioration of portfolio 5ualit2. 3+en et al. !2 1 # found t+at overindebtedness increase portfolio at ris0 !"a6# around 7K in /osnia) 12K in Nicaragua) 1 K in 7orocco and 1*K in "a0istan. It re5uires +ig+er loan loss provisions !Sc+ic0s) 2 1*#) and t+en write-off finall2 causes permanent loss of portfolio. &t+er conse5uences are +ig+er screening) collection and operating costs in dealing wit+ overindebted customers !3anner and Iuc0ett) 1DD1#. 3ollection of default debt c+allenges organi>ational identit2) it causes s+rin0ing t+eir operations and results in portfolio losses and retrenc+ment< loan officers and ot+er emplo2ees ma2 loss t+eir Fob) cause lower staff morale) and ma0e bad impression on good borrowers. It wea0ens 7-Is) put t+em at ris0) create instabilit2) and put t+eir ot+er operations and even savings at ris0 !Sc+ic0s) 2 1*< /urton) 2 $#. =+e crisis in ?nd+ra "rades+ and /olivia is t+e evidence of t+is situation !6+2ne) 2 1< Eon>ale>) 2 $< 4ic+teric+) 2 12< 7ader) 2 1*#. In ?nd+ra "rades+) t+e overall loan portfolio s+run0 from 1S L %.( billion in 2 1 to 1S L (.* billion in 2 11 wit+ decline in number of clients borrowing from *2.% million to 2:.( million !7ader) 2 1*#. &ver-indebtedness) in t+is case) not onl2 +arms t+e poor clients) but also causes t+e investors to lose confidence in 7-Is w+en t+e 7-Is ma0e losses) crunc+ t+eir li5uidit2) and suffers negative growt+. It ma0es difficulties for t+e 7-Is to find new capital and t+eir s+are prices in t+e mar0et fall. So) it not onl2 cause problem to t+ese
1 2

=+is case is also true for /olivian crisis !1DDD-2 #. 'illage mone2 lenders pla2ed a big role in t+is case.

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troubled 7-Is) but also spillover in anot+er 7-Is) put t+e w+ole industr2 in 5uestion !Eon>ale>) 2 $< 4ic+teric+) 2 12< 7ader) 2 1*< Sc+ic0s) 2 1*#. &ver-indebtedness in t+ese problem 7-Is put t+eir public reputation in 5uestion) accuse political interference) media criticism and ultimatel2 government ma2 ta0e drastic action against 7-Is to restrictive regulation. In ?nd+ra "rades+) government closed some 7-I branc+es for t+is allegation !=a2lor) 2 11< 7ader) 2 1*#. &ver-indebtedness also worsens borrowersB socio-economic and ps2c+ological situations rat+er t+an improving t+eir living condition from debt use. Euerin et al. !2 Da# treated microfinance as t+e Adouble edged swordB< it can eit+er reduce financial vulnerabilit2 or pus+ t+e +ouse+olds furt+er into debt. It contradicts social mission of microfinance) e@acerbate povert2 level of borrowers) t+reaten t+eir social and economic position) and pus+ t+em into mental and ps2c+ological disorders !Sc+ic0s) 2 1*#. It causes borrowers to reduce t+eir consumption) sale of income generating assets) stop t+eir c+ildren from sc+ool !Sc+ic0s) 2 1*#. =+e e@treme form of t+is evil act is bonded labor or slaver21) suicide2) se@ual +arassment and prostitution w+en t+e2 fail to repa2 t+e loan in due time !3+urc+ill and Euerin) 2 (< "ic+erit) 2 D#. It ma2 t+reaten 7-I sustainabilit2 b2 triggering delin5uenc2 and default !/ur0i) 2 D< 6+2ne) 2 1< Sc+ic0s) 2 1*#. -inall2 it causes Amission driftB. 7anagement need to ac0nowledge it in due time and need to ta0e proper action before occurring AdisasterB. 5& Recommendations6 Policy Implications and $imitations 5& %& Recommendations 7 Policy Implications ,owever) t+e allegation of over-indebting poor clients) partl2 fueled b2 commerciali>ation) are need to control or eliminate to ensure dual mission) sound and +ealt+2 operation and fair competition t+at can benefit bot+ t+e 7-Is and t+eir poor clients. ?t t+e core of t+e crisis) t+e following t+ree areas of actions are necessar2 to implement so t+at it ma2 not +appen again in t+e future. 6. 1. 1. For the MFIs: Industry self regulation Self regulation of microfinance industr2 is ver2 important in an informal econom2 especiall2 in countries wit+ limited state regulation and supervision !7cJee et al) 2 11#. =+is is possible in different dimensions t+at are discussed below. a2 3ollo) client protection principle*+ 3lient protection principles) introduced b2 Smart 3ampaign) are important to implement to en+ance credibilit2 of 7-Is in providing financial services to t+e poor !?rguello et al) 2 1*< E+ate) 2 7a#. =+e most important principles to eliminate an2 coercive action and to overcome t+e crisis are8 i# (e/elop an appropriate prod ct de*i!n and deli/ery mechani*m so t+at clients do not need to sacrifice in repa2ment on t+e one +and and meet t+eir funding needs on t+e ot+er +and. Determination of appropriate amount of credit) fle@ible and suitable installment s2stem matc+ing wit+ t+eir cas+ flows) option of bot+ group and individual loan) repa2ment options convenient wit+ t+eir capacities are important to consider in t+is case. ii# En* re Re*pon*i-le pricin! suc+ as interest) commissions and fees c+arged to t+eir clients are important bot+ from 7-I sustainabilit2) and social and et+ical viewpoint !?rguello et al) 2 1*#. 6at+er t+an c+arging +ig+ margin in fi@ing interest rate* to pa2 interests and dividends to investors and s+are+olders) controlling operating costs b2 increasing t+eir efficienc2 in operation +elp t+e 7-Is to protect t+eir poor clients from over-indebtedness. iii# Maintain tran*parency and di*clo*e price related information to ensure t+at borrowers are well informed about loan amount) installments) fees) c+arges) repa2ment s2stems and loan durations t+at can eliminate coercive actions) and facilitate clientsB informed decisions. 3learl2 inform t+e effective annual rate !E?6# and ?"6) and penalt2 to be c+arged in failure to repa2 in due time !?rguello et al) 2 1*#. 7-Is can disclose it in a big poster or screen so t+at ever2one can see) understand and aware of it(. iv# 3air and re*pectf l client treatment 4 code of cond ct+ =+e /olivia and ?nd+ra "rades+ crisis blamed t+at 7-I agents and loan officers +ave not respected t+eir clientsB abilit2 to repa2 t+e loan. /uilding strong relations+ip wit+ clients) understanding t+eir situations) developing mutual trust) e@ploring and implementing repa2ment options and agreeing on solutions can redress client grievance) solve conflict and +elp to recover loan overdue !7cJee et al) 2 11# t+an +arassment and pressure to commit suicide.
1 4+en t+e borrowers obtain loan from local mone2lenders to repa2 t+e old loan of 7-I at usurious rate) t+e2 +ave to wor0 for more for t+e mone2lenders as a condition to repa2 t+e loan w+en t+e2 are not able to repa2 t+e loan. 2 3onviction of suicide in ?nd+ra "rades+) India) please see one stor28 +ttp8GGwww.bloomberg.comGnewsG2 1 -122$Gsuicides-among-borrowers-in-india-s+ow-+ow-men-made-a-mess-of-microcredit.+tml * =+at not onl2 covers t+e operating cost) funding cost and loan loss provision but also +ig+ net margin. ( 3ompartamos e@ercise t+is practice in t+eir ever2 branc+.

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Ri*" mana!ement techni& e+ In case of product design) selecting loan application and follow up) it is important to follow ade5uate ris0 management mec+anism. ?mong t+em) some important tec+ni5ues are. i# $no) yo r c *tomer* 5$Y'6+ 1se due diligence in client screening and assessment of loan application. 3lientsB repa2ment capacit2) nature of +ouse+old wor0s or business is needed to consider. 3lose communication and follow up ma2 increase operating cost) but) to a large e@tent) it will reduce over-indebtedness. ii# 0he amo nt of credit8 =+e amount of credit to be sanctioned will be according to repa2ment capacit2 of t+e borrowers. It must not be too low to ta0e multiple loan and not too large for t+e borrower to afford and repa2. iii# Sa/in!* and in* rance+ savings and insurance !credit life# can act as buffer against repa2ment difficulties< reduce borrowersB sacrifice to repa2. In t+is case) commitment device wit+ clientsB consent can be an effective tool. iv# 'ompliance monitorin! and control *y*tem+ =+ere need an effective compliance monitoring s2stem inside t+e 7-Is and field level. 6andom audit) surprise visit and trac0ing staff can ensure it !/ur0i) 2 D#. v# Set p early )arnin! c lt re+ 7anagers s+ould periodicall2 and regularl2 update all client related information< particularl2 in monitoring portfolio at ris0 !"a6#) reserve for loan losses and dropout rate t+at act as t+e earl2 warning s2stem to ta0e ade5uate step. vi# 7rod cti/e *e of loan+ /e sure in productive use of loan b2 t+e clients. 3onsumer loan or use of t+e loan in unproductive purpose worsens t+eir abilit2 to repa2 as t+ese loans will not generate an2 return. c2 A/oid a!!re**i/e competition and portfolio !ro)th+ 6at+er t+an illusive growt+) 7-Is need to ensure sustainable growt+ for its long term survival. 6at+er t+an e@panding in +ig+l2 competitive saturated mar0et) searc+ for new mar0etGregion w+ere poor +ouse+olds actuall2 need financial access and +ave better potential to spread t+eir operations. Iast) 7-Is need to be careful in setting 5uantit2 based incentive mec+anism b2 considering portfolio 5ualit2 and practice of code of conduct. ? balanced corporate governance mec+anism ensuring 0e2 sta0e+oldersB interests t+at address operating and financing mec+anisms of 7-Is can overcome some of t+e problems. 6. 1. 2. For Microfinance Associations, Central Banks, N ! Bureau and "egulators: a2 'redit information - rea + Establis+ credit information bureau) introduce real time information s+aring and update it regularl2< ensure t+at all t+e 7-Is) ban0s and non-ban0 financial institutions are using and s+aring it so t+at not an2 client can ta0e multiple loans. 3entral ban0 and regulator2 or supervisor2 aut+orit2 can ensure it wit+ t+e +elp and co-operation from microfinance associations and donors or investors. -2 Re! lation for M3.*+ ?lt+oug+ it is impossible to cover all t+e 7-Is under same umbrella due to t+eir different regulator2 status) t+e state +ave to be ver2 prudent and careful in forming regulations to ensure microfinance best practices) and to remove all unet+ical practices !de Ouidt et al) 2 12#. c2 A)arene** creation and de-t literacy+ Introduce debt literac2 training and campaign to illiterate poor clients t+roug+ educational video1) and media advertisement to create awareness about t+e proper use of debt and danger of over-indebtedness. 6. 1. #. For In$estors and %onors: Investors and donors +ave to be careful and responsible in selecting 7-Is w+en t+ere is rapid growt+ and strong competition. =+e funders need to conduct t+oroug+ assessment of t+e 7-Is) t+eir operations) and funding proposals wit+ due diligence in t+e lig+t of client protection principles) management strengt+) internal control) ris0 management s2stem and practice of good governance in t+eir operations and management !Ieader . 4ilson) 2 $< /ur0i) 2 D< EravesteiFn et al) 2 11#. 5& (& $imitations =+e above mentioned recommendations and suggestions +ave some limitations in t+eir implementation. -irst) it is almost impossible for t+e 7-Is to ensure productive use of credit b2 t+e clients as per t+e loan agreement. Second) in agrarian econom2) w+en borrowersB income and cas+ flows are dependent on several e@ternal factors t+at are be2ond t+e control of bot+ parties2) t+e above recommendations ma2 not wor0 in full e@tent. =+ird) in some countries) regulation does not permit low cost funding sources suc+ as savings) and +ence it is impossible to reduce cost of funds to reduce E?6. -ourt+) as claimed in ?nd+ra "rades+) introduction of credit life insurance goes in opposite direction w+en t+e group members andG or loan officers force t+e over-indebted -2
1 2

In India 1FFiban do t+is 0ind of awareness t+at is compulsor2 for ever2 client to see before obtaining loan. -or e@ample) production fluctuations

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clients to commit suicide to recover t+e loan form insurance compan2. -ift+) some borrowers deliberatel2 stop repa2ing) create artificial over-indebtedness) tr2 to politici>e and attract media attention and create environment for revolt. Iast) w+en some single mission financial institutions 1 offer consumer credit using same lending met+odolog2 of microfinance) it increase competition) cause misunderstanding about microfinance and e@acerbate t+e situation t+at are be2ond t+e control of 7-Is. -urt+ermore) implementation of t+e above mentioned recommendations is not eas2. =+e management of most 7-Is ma2 not +ave ade5uate financial and ris0 management bac0ground. D2namic appraisal of clients ma2 be difficult w+en t+e clients re5uire 5uic0 disbursement. 8& Concl'sion =+e main obFective of t+is paper is to stud2 w+et+er commerciali>ation of microfinance institutions !7-Is# is responsible for over-indebting t+eir poor borrowers ta0ing into account t+e ?nd+ra "rades+ crisis. =+is stud2 argues t+at we cannot avoid commerciali>ation as subsidi>ed credit and donor support ma2 not e@ist for a long time and as investors will not provide funds wit+out financial incentives. 3ritics argue t+at massive influ@ of capital from s+are+olders) commercial ban0s) and international and private investors cause e@ponential growt+ of loan portfolios and t+is result in +uge mar0et penetration) mar0et saturation) multiple lending) over lending) and finall2 over-indebting t+eir clients. =+e diagnosis of ?nd+ra "rades+ incidence indicates t+at commerciali>ation is not solel2 and directl2 responsible for over-indebting t+eir clients. It is t+e outcome of internal inefficiencies) unet+ical and malpractices of 7-Is and some e@ternal factors li0e production fluctuation and transformation in t+e agrarian econom2 in t+is semi-arid region) and IndiaBs long tradition of debt dependenc2. ,owever) t+is stud2 found t+at commerciali>ation is indirectl2 responsible for over-indebtedness w+en Aprofit see0ingB) 7-Is +ave driven b2 commercial investment. It translated into deluge of funds in 7-Is) caused +uge mar0et penetration) mar0et saturation) and as a result) influenced t+eir management and staffs to follow some unet+ical practices li0e multiple lending and over lending) t+at resulted in over-indebting t+eir clients. &ver-indebtedness) in t+is case) not onl2 +arms t+e poor clients) but also causes t+e investors to lose confidence in 7-Is w+en t+e 7-Is loss +ope to earn profit) crunc+ t+eir li5uidit2) and e@perience negative growt+. It endangers bot+ social and financial missions and t+e industr2 sustainabilit2. It ma0es difficult for t+e 7-Is to find new capital< t+eir s+are prices in t+e mar0et fall. 7oreover) it not onl2 cause problem to t+ese troubled 7-Is) but also spillover in anot+er 7-Is) Feopardi>e t+e w+ole industr2 !Eon>ale>) 2 $< 4ic+teric+) 2 12< 7ader) 2 1*< Sc+ic0s) 2 1*#. &ver-indebtedness in t+ese problem 7-Is put t+eir public reputation in 5uestion) accuse political interference) media criticism and ultimatel2 government ma2 ta0e drastic action against t+em t+roug+ restrictive regulation. "roper measure is necessar2 to overcome suc+ problem and to protect t+e 7-Is and t+eir clients for survival and sustainabilit2 of t+is industr2. 4e s+ould not blame commerciali>ation alone for over indebting microfinance clients. 7-Is +ave to be strict in removing all t+e malpractices and finding t+e wa2s for better welfare of t+eir clients fulfilling t+eir needs on t+e one +and and for ensuring sustainable growt+ of t+e 7-Is on t+e ot+er +and. References ?rgPello) N.) Delale@) I.) . Iimvorasa0) S. !2 1*#. "ricing transparenc2 and performance in t+e microfinance industr28 =rut+-in-lending) profitabilit2) scale) and funding. 8o rnal of .nno/ation Economic*) !1#) 17*2 (. ?rmendQri> de ?. /. and) 7orduc+) J. !2 1 #. 0he Economic* of Microfinance, 2nd edition2 3ambridge8 7I= "ress. ?rmendQri>) /.) . S>afar>) ?. !2 11#. &n 7ission Drift In 7icrofinance Institutions. In ?rmendari>) /. and Iabie) 7. !eds.#. 0he Hand-oo" of Microfinance) *(1-*::. Iondon . Singapore8 =+e 4orld Scientific "ublis+ing. ?runac+alam) 6. S. !2 11#. 0he 8o rney of .ndian Micro93inance+ Le**on* for the 3 t re. ?apti "ublications8 3+ennai. ?s+ta) ?. !2 D#. .ntere*t Rate ethic*+ an a*pect of *ocial performance in microfinance. ?vailable at8 +ttp8GGwww.microfinancegatewa2.orgGgmGdocument-1.D.(1(7(G1D.pdf ?s+ta) ?.) J+an) S. . &tto) ". E. !2 11#. (oe* microfinance ca *e or red ce * icide*: 7olicy recommendation* for red cin! -orro)er *tre**2 7arc+ *) 2 11 !unpublis+ed draft paper# available at8 +ttp8GGssrn.comGabstractR171%((2. /abri) 7.) . 'om Dorp) 7. !2 1 #. 0he 'ommerciali;ation (e-ate+ A 'onte,t al St dy of Microfinance in .ndia, Doctoral dissertation) 1meS 1niversit2.
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Ii0e ban0s and non-ban0 financial institutions.

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/ateman) 7. !2 1 #. <hy doe*n#t microfinance )or": 0he de*tr cti/e ri*e of local neo9li-erali*m) New Cor0 .) Iondon8 Ted /oo0s. /etti) E.) Dourmas+0in) N.) 6ossi) 7. 3.) . Cin) C. ". !2 7#. 3onsumer over-indebtedness in t+e E18 measurement and c+aracteristics. 8o rnal of Economic St die*) *(!2#8 1*:N1%:. /reman) J. !2 7#. 0he 7o/erty Re!ime in %illa!e .ndia+ Half a 'ent ry of <or" and Life at the =ottom of the R ral Economy in So th G >arat. New Del+i . New Cor08 &@ford 1niversit2 "ress. /rett) J. ?. !2 :#. 4e Sacrifice and Eat Iess8 =+e Structural 3omple@ities of 7icrofinance "articipation. H man Or!ani;ation, :%!1#8 $. /ur0i) ,ussain-/anu !2 D#. 1nre/ealin! the delin& ency pro-lem 52??@42??A6 in 7 n>a-9 7a"i*tan. 7icro N&=E No. 1 !&ctober#) "a0istan 7icrofinance Networ0. /urton) D. !2 $#. 'redit and 'on* mer Society. &@on8 6outledge. 3anner) E. /. and 3.?. Iuc0ett !1DD1#. "a2ment of +ouse+old debts. 3ederal Re*er/e = lletin) 77!(#) 21$. 3arrillo) I. 6. !2 D#. 0he 'ommerciali;ation of Microfinance+ Efficiency or E,ploitationH. +ttps8GG0usc+olarwor0s.0u.eduGdspaceGbitstreamG1$ $G: 12G1G3arrillo90u9 DD791 :(*9D?=?91.pdf !accessed8 7arc+ 1() 2 1*#. 3+asmar) J. !2 D#. 0he 'ommerciali;ation of Microfinance in Latin America2 Oueens 1niversit2 Economics Department 1ndergraduate t+esis. ?vailable at8 +ttp8GGwww.microfinancegatewa2.orgGgmGdocument1.D.((D%:G3ommerciali>ationK2 ofK2 7icrofinanceK2 inK2 IatinK2 ?mericaK2 -K2 -inal.pdf 3+en) E.) 6asmussen) S.) 6eille) M.) . 6o>as) D. !2 1 #. Indian 7icrofinance Eoes "ublic8 =+e SJS Initial "ublic &ffering. 3oc * Bote) CD. 3+owdri) S. !2 11#. 3onse5uences of over-indebtedness8 Iessons from India !originall2 publis+ed in June 2 D#. 'enter for 3inancial .ncl *ion =lo!) ?33I&N International) December :) 2 12. ?vailable at8+ttp8GGcenterforfinancialinclusionblog.wordpress.comG2 11G DG :Gconse5uences-of-overindebtednesslessons-from-indiaG 3+urc+ill) 3. and Euerin) I. !2 (#. Microfinance led *trate!ie* to eliminate -onded la-or. 3ollins) D. !2 $#. Debt and +ouse+old finance8 Evidence from t+e -inancial Diaries. (e/elopment So thern Africa) 2%!(#8 (:DN(7D. 3ollins) D.) 7orduc+) J.) 6ut+erford) S. . 6ut+ven) &. !2 D#. "ortfolios of t+e "oor8 ,ow t+e 4orldUs "oor Iive on L2 a Da2. "rinceton) NJ8 "rinceton 1niv. "ress. de Ouidt) J.) -et>er) =.) . E+ata0) 7. !2 12#. Microfinance, Mar"et Str ct re, and =orro)er <elfare+ Re! latory Le**on* from the .ndian 'ri*i*2 Disne2) 6.) /ridges) S. . Eat+ergood) J. !2 $#. (ri/er* of O/er9.nde-tedne**+ Report to the (epartment for = *ine**, Enterpri*e and Re! latory Reform2 3entre for "olic2 Evaluation) 1niversit2 of Notting+am. Ealab) S.) 6evat+i) E. and 6edd2) ".". !2 D#. -armersB Suicides and 1nfolding ?grarian 3risis in ?nd+ra "rades+. In D.N. 6edd2 and S. 7is+ra 5eds#) A!rarian 'ri*i* in .ndia2 New Del+i8 &@ford 1niversit2 "ress. Eari0ipati) S. !2 $#. A?gricultural 4age 4or0) Seasonal 7igration and t+e 4idening Eender Eap8 Evidence from a Semi-?rid 6egion of ?nd+ra "rades+B. E ropean 8o rnal of (e/elopment Re*earch) 2 !(#8 :2DN:($. Eari0ipati) S. !2 D#. Iandless but not ?sset less8 -emale ?gricultural Iabour on t+e 6oad to /etter Status) Evidence from India. 8o rnal of 7ea*ant St die*) *: !*#8 %17N%(%. E+ate ". !2 :#. Microfinance in .ndia+ A *tate of the *ector report2 7icrofinance India) New Del+i. +ttp8GGwww.microfinanceindia.orgGdownload9reportsGstate9of9t+e9sector9 :.pdf. E+ate ". !2 7a#. 3onsumer protection in Indian microfinance8 Iessons from ?nd+ra "rades+ and t+e microfinance bill. Economic and 7olitical <ee"ly (2!1*#8 117:N11$(. E+ate ". !2 7b#. Iearning from t+e ?nd+ra "rades+ crisis. In Dic+ter =) ,arper 7 !eds#) <hatE* <ron! )ith Microfinance: pp. 1:*N17:. Immediate =ec+nolog2 "ublications8 /ourton on Dunsmore. Eo0+ale) J. !2 D#. ?s 7icrofinance Erows in India) So do its 6ivals. <all Street 8o rnal) 1% December) p. ?17. ?vailable at8 +ttp8GGonline.wsF.comGarticleGS/12: %%117*222$7%1*.+tml. Eon>ale>) ?. !2 $#. Microfinance, .ncenti/e* to Repay, and O/er9inde-tedne**+ E/idence from a Ho *ehold S r/ey in =oli/ia2 Doctoral =+esis. &+io8 &+io State 1niversit2. Eon>Qle>-'ega) 3. and 7. 'illafani-Ibarnegara2 !2 11#. 7icrofinance in /olivia8 -oundation of t+e Erowt+) &utreac+ and Stabilit2 of t+e -inancial S2stem. In /. ?rmendQri> . 7. Iabie !Eds.#) 0he Hand-oo" of Microfinance8 2 *N2%1. Iondon . Singapore8 4orld Scientific "ublis+ing. EravesteiFn)6.) Iedesma) E. and Simmes) /. !2 11#. O/er9inde-tedne**2 Department of Social "erformance and -inancial ?nal2sis) &IJ& 36EDI= Investing in "eople. Euerin) I.) 6oesc+) 7.) Jumar) S.) 'en0atasubramanian) E. and Sangare) 7. !2 Da#.7icrofinance and t+e d2namics of financial vulnerabilit2) lessons from rural Sout+ India) R1ME .R( <or"in! 7aper Serie*

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Journal of Economics and Sustainable Development ISSN 2222-17 !"aper# ISSN 2222-2$%% !&nline# 'ol.() No.17) 2 1*

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2??A9D. "aris8 I6D. EuVrin) I.) 6oesc+) 7.) 'en0atasubramanian and Jumar) S. !2 Db#. =+e Social 7eaning of &ver- Indebtedness and 3reditwort+iness in t+e 3onte@t of "oor 6ural Sout+-Indian ,ouse+olds !=amil Nadu#) (raft paper pre*ented at the R1ME 4 .E(ES )or"*hop on o/er9inde-tedne** in 7ari*) December 2 D. ,arriss-4+ite) /. !2 $#. IndiaBs 6ainfed ?gricultural D2stopia. E ropean 8o rnal of (e/elopment Re*earch) 2 !(#8 %(DN:1. ,udon) 7. !2 D#. S+ould ?ccess to 3redit be a 6ig+tH 8o rnal of = *ine** Ethic*, $(8 17N2$. ,urwit>) I. and Iui>) J. !2 7#. 1rban wor0ing class credit usage and over-indebtedness in Sout+ ?frica. 8o rnal of So th African St die*) **!1#) 7arc+. Jod+a) N. !2 $#.6ural 3ommons and Iiveli+ood Strategies in Dr2 6egions of India. E ropean 8o rnal of (e/elopment Re*earch) 2 !(#8 %D7N:11. Jo+nson D. and 7e0a S. !2 1 #. Acce** to finance in Andhra 7rade*h2 Institute for -inancial 7anagement and 6esearc+ 3entre for 7icro -inance) &ctober. ?vailable at8 +ttp8GGwww.microfinancegatewa2.orgGpGsiteGmGtemplate.rcG1.D.($%11G. Josep+) 7. !2 12#. 7icrofinance and Social "ressure in India8 ? stud2 of SJS. .nternational 8o rnal of Mana!ement 'oncept* and 7hilo*ophy) :!*#8 1$D-21 . D&I8 1 .1% (GIJ73".2 12. (DD(D Jappel) '.) Jrauss) ?.) . Iont>e0) I. !2 1 #. O/er9.nde-tedne** and Microfinance 9 'on*tr ctin! an Early <arnin! .nde,2 3enter for 7icrofinance) 1niversit2 of Turic+) respons?bilit2) 3ouncil of 7icrofinance E5uit2 -unds) =riodos Investment 7anagement. Turic+. J+alil2 7. ?. /. and -aridi) 6. !2 11#. M ltiple mem-er*hip 5o/erlappin!6 in microcredit mar"et* of =an!lade*h) Institute of -inance !In7# and "alli0arma Sa+a2a0 -oundation !"JS-#. Jumar) 7. !2 12#. 'ri*i* at the =ottom of the 7yramid+ A 'a*e St dy of Micro93inance in .ndia2 +ttp8GGd@.doi.orgG1 .21*DGssrn.21772D Ie 7ons4al0er) J. !2 $#. Neoliberalism on t+e Eround in 6ural India8 "redator2 Erowt+) ?grarian 3risis) Internal 3oloni>ation) and t+e Intensification of 3lass Struggle. 8o rnal of 7ea*ant St die*) *% !(#8 %%7N:2 . Iea) S.) 4eble2) ". . Ievine) 6. 7. !1DD*#. =+e Economic "s2c+olog2 of 3onsumer Debt. 8o rnal of Economic 7*ycholo!y, 1(!1#8 $%N11D. Ieader) ". S. . 4ilson) J. !2 $#. "rinciples for Et+ical E5uit2 Investing in 7icrofinance Institutions. 7ader) ". !2 1*#. 6ise and -all of 7icrofinance in India8 =+e ?nd+ra "rades+ 3risis in "erspective. Strate!ic 'han!e) 22!12#8 (7-::. D&I8 1 .1 2GFsc.1D21 7aurer) J. and J. "2t0ows0a !2 11#. Indebtedness of 7icrocredit 3lients in /osnia and ,er>egovina8 6esults from a compre+ensive field stud2. E-SE Development -acilit2. 7cJee) J.) Ia+a2e) E.) . Joning) ?. !2 11#. 6esponsible -inance8 "utting "rinciples to 4or0. 3oc * Bote) 7F. 3E?". 7orduc+) J. !2 #. =+e 7icrofinance Sc+ism. <orld (e/elopment, 2$!(#8 :17-:2D. 7orvant-6ou@) S. !2 D#. ?ccess to microcredit and continuit2 of over-indebtedness d2namics in rural 7e@ico8 3ombining economic ant+ropolog2 econometrics. R1ME <or"in! 7aper Serie* 2??A9F2 "aris8 I6D. Nair =. S. !2 11#. 7icrofinance8 Iessons from a crisis. Economic & 7olitical <ee"ly @lvi !:#8 2*N2:. Nair) =. S. !2 1 #.3ommercial 7icrofinance and Social 6esponsibilit28 ? 3riti5ue. Economic and 7olitical <ee"ly) (% !*1#8 *2N$. &lsen)4.J. and 6.'. 6amanamurt+2 !2 #. 3ontract Iabour and /ondage in ?nd+ra "rades+ !India#. 89Spot+ 8o rnal of Social and 7olitical 0ho !ht) 1 !2#) +ttp8GGwww.2or0u.caGFspotG2Gw0olsenrvramana.+tm !accessed % Januar2 2 1*#. &lteanu) 3. !2 11#. O/er9inde-tedne** in microfinance9 ca*e *t dy of the clientle of 3inanciera 'REAR in Lo* Oli/o*, Lima Borte, 7er 2 7aster =+esis) Eraduate Institute of International and Development Studies) Eeneva8 Institut de ,autes Etudes Internationales et du Developpement. "arames+war) D.) ?ggarwal) N.) Tanc+i) 6. and S+an0ar) S. S. !2 1 #. Indian 7-Is8 Erowt+ for old and new institutions ali0e. Micro =an"in! = lletin) September 2 ) 2 1 . ?vailable at8 +ttp8GGwww.t+emi@.orgGsitesGdefaultGfilesG7//K2 2 K2 -K2 IndianK2 7-IsK2 K2 Erowt+K2 forK2 &ldK2 andK2 NewK2 InstitutionsK2 ?li0e.pdf "eac+e2) S. . 6oe) ?. !2 (#. Acce** to 3inance+ A *t dy for the <orld Sa/in!* =an" .n*tit te2 &@ford8 &@ford "olic2 7anagement. "ic+erit) D. !2 D#. =+e multiple times of debt bondage and its practices in Sout+ern India8 =emporar2 protection and over-indebtedness. R1ME <or"in! 7aper 2??A9112 6ural 7icrofinance . Emplo2ment. "ic+erit) D. !2 D#. 0he m ltiple time* of de-t -onda!e and it* practice* in So thern .ndia+ 0emporary 7rotection and o/er9inde-tedne**2 617E 4or0ing "aper Series 2 D-11. "aris8 I6D. "2t0ows0a) J. and Spannut+) S. !2 11#. .nde-tedne** of Microcredit 'lient in $o*o/o2 -inance in 7otion

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Journal of Economics and Sustainable Development ISSN 2222-17 !"aper# ISSN 2222-2$%% !&nline# 'ol.() No.17) 2 1*

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E7/, 7icrofinance 3enter for 3EE . NISE) European -und for Sout+ Europe. 6a+man) ?. !1DDD#. 7icro-credit Initiatives for E5uitable and Sustainable Development8 4+o "a2s. <orld (e/elopment) 27!1#8:7N$2. 6aFs+e0+ar 7. . Erenn2) J. !2 1 #. SJS I"& proceeds will go to non-profit wor0. 0he Economic 0ime*) 7umbai) ?ugust 1*) 2 1 . ?vailable at8 +ttp8GGarticles.economictimes.indiatimes.comG2 1 N $N 1*GnewsG27%7D$7 919unitus-e5uit2-fund-microfinance-organisations-profit. 6amac+andran) '.J.) 6awal '. and Swaminat+an) 7.eds) !2 1 #. Socio9Economic S r/ey* of 0hree %illa!e* in Andhra 7rade*h+ A St dy of A!rarian Relation*. New Del+i8 =uli0a /oo0s. 6ao) ". N. and Suri) J. 3. !2 :#. Dimensions of ?grarian Distress in ?nd+ra "rades+. Economic and 7olitical <ee"ly) (1 !1:#8 1%(:N1%%*. 6ao) S. !2 %#.4omenBs Self-,elp Eroups and 3redit for t+e "oor8 ? 3ase Stud2 from ?nd+ra "rades+. In '.J. 6amac+andran and 7. Swaminat+an !eds#) 3inancial Li-erali;ation and R ral 'redit in .ndia) 2 (N*7. New Del+i8 =uli0a /oo0s. 6ao) S. !2 $#. 6eforms wit+ a -emale -ace8 Eender) Iiberali>ation) and Economic "olic2 in ?nd+ra "rades+) India. <orld (e/elopment) *: !7#8 121*N12*2. 6edd2) =. ". !2 1 #. Distress and Deceased in ?nd+ra "rades+8 ?n ?nal2sis of 3auses of -armersB Suicide. In 6.S. Des+pande and S. ?rora !eds#) A!rarian 'ri*i* and 3armer S icide*) 2(2N:*. New Del+i8 S?EE "ublications. 6+2ne E. !2 1#. 'ommerciali;ation and cri*i* in =oli/ian microfinance, 7icroenterprise /est "ractices. Development ?lternatives) Inc.) /et+esda) 7D. ?vailable at8 +ttp8GGwww.microfinancegatewa2.orgGgmGdocument1.D.2$*2DG2$ 19file9commerciali>ation9and9crisis9(.pdf. !?ccessed at8 December %) 2 12#. 6+2ne) E. and Euimon) ?. !2 7#. =+e /anco 3ompartamoBs Initial "ublic &ffering. Accion .n*i!ht, ?33I&N. 6osenberg) 6. !2 1 #. Does 7icrocredit 6eall2 ,elp "oor "eopleH 'GA7 3oc * Bote no2 DA.4as+ington D38 3E?". Sc+ic0s) J. !2 1*#. 0he o/er9inde-tedne** of microfinance c *tomer*9An analy*i* from the c *tomer protection per*pecti/e2 "+ D dissertation) 3entre for European researc+ in 7icrofinance !3E67i# . Solva2 /russels Sc+ool of Economics and 7anagement) 1niversite Iibre de /ru@elles. Schmidt, O2 52?1?62 0he E/ol tion of .ndia#* microfinance mar"etG> *t a crac" in the !la** ceilin!: Sc+midt) 6. ,. !2 12#. 7icrofinance) commerciali>ation and et+ics. 7o/erty & 7 -lic 7olicy) 2!1#) DD-1*7. S+arma S. !2 :#. Deat+ b2 microcredit. 0he 0ime* of .ndia) 7umbai) September 1:) 2 :. ?vailable at8+ttp8GGarticles.timesofindia.indiatimes.comG2 :N DN1:Gedit-pageG27$1D( (919erring-mfis-suicidesloan-recover2-practices. S+2lendra) ,. S. !2 :#. 7icrofinance Institutions in ?nd+ra "rades+8 3risis and Diagnosis. Economic and 7olitical <ee"ly) 7a2 2 ) 2 :8 1D%DN1D:*. Srinivasan) N. !2 1 #. Microfinance .ndia+ 0he State of the Sector Report 2?1?. New Del+i8 S?EE "ublications. Sriram) 7. S. !2 1 a#. 3ommercialisation of 7icrofinance in India8 ? Discussion of t+e EmporerBs ?pparel. Economic & 7olitical <ee"ly) (% !2(#8 :%N7%. Sriram) 7. S. !2 1 b#. 7icrofinance8 ? -air2 =ale =urns into a Nig+tmare. Economic and 7olitical <ee"ly) (% !(*#8 1 N1(. =a2lor) 7. !2 11#. -reedom from "overt2 is not for -ree8 6ural Development and t+e 7icrofinance 3risis in ?nd+ra "rades+) India. 8o rnal of A!rarian 'han!e) 11!(#8 ($(-% (. =+e Economic =imes !2 1 #. SJS 7icrofinance debuts at 11K premium. 0he Economic 0ime*) 7umbai) ?ugust 17) 2 1 . ?vailable at8 +ttp8GGarticles.economictimes.indiatimes.comG2 1 - $17GnewsG27%DD%2(919s0s-s+ares-listing-gains-s0s-microfinance. 'asavi) ?.6. !2 1 #. 3onte@tualising t+e ?grarian Suicides. In 6.S. Des+pande and S. ?rora 5eds#) A!rarian 'ri*i* and 3armer S icide*8 7 ND*. New Del+i8 S?EE "ublications. 'ogelgesang) 1. !2 *#. 7icrofinance in =imes of 3risis8 =+e Effects of 3ompetition) 6ising Indebtedness) and Economic 3risis on 6epa2ment /e+avior. <orld (e/elopment) *1!12#8 2 $%N211(. 4ic+teric+) 3. !2 12#. =+e &t+er -inancial 3risis8 Erowt+ and cras+ of t+e microfinance sector in India. (e/elopment) DD!*#) ( :-(12.

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