Struggle for Survival in Andhra Pradesh

I explained in May about the Slow-Motion Bankruptcy of microfinance institutions in India's Andhra Pradesh state. In retrospect, it may well be right to conclude that outstanding microloans in the state permanently lost most of their value last October, within days of the passage of the restrictive Ordinance. Yet exactly when those losses take their toll in formal write-offs and bankruptcies is a complex function of banks' willingness to forbear in collecting on trouble microfinance institutions (MFIs), accounting rules and regulations, and a dash politics.Livemint reported last week that BASIX, India's oldest MFI, is on the verge of collapse. This is a potential tragedy because BASIX has always marched to the beat of a different, more evidence-based drummer. It does individual, not group, microcredit. It has long understood that the principle challenge that poor farmers face is risk, which credit alone amplifies rather than mitigates. It has sought ways to help farmers develop or improve "livelihoods," precisely defined economic activities such as buffalo-raising. Unfortunately, BASIX allowed itself to be pulled into the frenetic credit growth of the last few years, and now it is paying a steep price.The microfinance bill under consideration by the central government's parliament might eventually rescue the industry. But it is unclear whether it will provide adequate cover for MFIs in Andhra Pradesh to collect on their outstanding loans, partly because many borrowers may really have been in over their heads, partly because the widespread, tacit agreement not to repay will be hard to reverse. And even if the central government rescuers are properly equipped, they may come too late. BASIX and other MFIs may now be counting down in weeks.Today, the Wall Street Journal blog India Real Time describes how BASIX is experimenting with an alternative way of operating, one that would end its exposure to political backlash and borrower default. BASIX would work as a front end for conventional banks:

...critically, the BASIX representatives will be dispensing bank loans, rather than BASIX taking credit from banks onto its books and then assuming responsibility for the loans it issues. The bank will be able to set the interest rate and will pay BASIX a fee for handling the loan.If the politicians of a particular state don’t like what they see, they will have to deal with a politically-connected, well-established bank—most likely government-owned—as well as possibly the Reserve Bank of India, rather than targeting small, politically lightweight microlenders. For microfinance companies, this model has the added advantage that the bank assumes the risk of default on the loan.