The alarm bells are ringing once again in Andhra Pradesh and Telangana’s microfinance sector. The warning signs of another full-blown crisis are all too familiar: over-lending, coercive recoveries, political interventions, and borrower distress. If history is any guide, we are hurtling toward a repeat of the 2010 Andhra Pradesh microfinance crisis, where unregulated expansion, reckless lending, and borrower exploitation led to mass defaults, regulatory crackdowns, and a near-collapse of the industry.
The latest concerns from within the MFI industry itself—circulated in a candid plea—paint a grim picture. In several locations, over 30 institutions, including banks, NBFCs, cooperative societies, and informal lenders, are all aggressively lending to the same poor households. The same client is being chased by multiple lenders, forcing many to take fresh loans just to meet existing repayments. With floods and economic disruptions already straining the financial health of borrowers, delinquency rates have climbed alarmingly, with Portfolio at Risk (PAR) exceeding 20% in some branches. This is eerily reminiscent of the conditions that triggered the 2010 crisis, where widespread over-indebtedness and coercive recovery practices led to borrower suicides, mass protests, and a regulatory clampdown.
The desperation is visible. Borrowers are now banding together to resist repayments, turning to politicians for intervention, and in some cases, even resorting to violence against MFI staff. Entire villages have taken an oath not to repay their loans, frustrated by the relentless harassment from collections agents. In some places, local MLAs have stepped in to protect borrowers from what is now being perceived as an industry of exploitation rather than empowerment. The optics are damning: a sector that started with the noble mission of financial inclusion has now become a symbol of predatory lending.
The core problem is greed. MFIs, in their relentless pursuit of growth, are blind to the reality that they are suffocating the very people they set out to help. When 30 lenders are competing for the same borrower, responsible lending becomes impossible. The current environment is one of hyper-competition, where the focus is not on borrower well-being but on aggressive loan disbursement targets and portfolio expansion. This is a recipe for disaster.
What makes the current situation even more dangerous than 2010 is that there may be no regulatory lifeline this time. Back then, the Reserve Bank of India (RBI) and state governments intervened to contain the damage, though the measures, such as the draconian AP MFI Act, crippled the sector for years. Today, with the microfinance industry increasingly fragmented and diversified, a single regulatory intervention may not be enough to prevent collapse. If MFIs continue down this path, they might find themselves beyond rescue.
The way forward is clear: immediate self-regulation. MFIs must voluntarily curb their expansion, introduce tighter credit checks to prevent multiple lending, and refocus on borrower-centric policies. The industry needs to relearn what it once stood for—lifting people out of poverty, not trapping them in a debt spiral. If it fails to course-correct, history will repeat itself, and this time, the consequences could be irreversible.
This development comes in the backdrop of fresh developments in the Karnataka where the state government is planning a new regulation for MFIs.
According to reports, the Karnataka state government is planning to discuss a draft Bill to rein in the reported violations by Microfinance Institutions (MFIs), signalling a growing concern over the lending practices of microlenders, particularly their treatment of borrowers in distress.
This development comes amid reports of multiple loans to the same borrower and aggressive lending and recovery practices. About 6% of microfinance borrowers have loans from four or more lenders, with a similar percentage exceeding Rs 2 lakh in borrowings, according to industry experts.
Hence, the proposed bill is intended to address the increasing complaints of harassment by lenders, especially in rural areas, where farmers and marginalized communities have become vulnerable to exploitative lending practices. The government has clearly stated that it doesn’t want to stop lending and collection but insists that collections should be done within the guidelines.
For instance, the government wants collections to be done within a specified time of the day and has asked MFIs not to burden borrowers with loans beyond their capacity. Additionally, the government has warned that suo moto actions will be taken against erring entities. The government is consulting with industry bodies and the RBI to understand the issue better.
While the Karnataka government’s proposed bill is a necessary step toward regulating microfinance companies and protecting borrowers, it must be crafted carefully to avoid the pitfalls seen in Andhra Pradesh in 2010.