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It is a classic case of a government policy going horribly wrong. It was intended to protect consumers' right, but it ended up hurting them the most.
When the Andhra Pradesh government sought to restrict microfinance institutions' (MFI) activities in December 2010, it was with good intentions. But the results were bizarre: "The average household expenditure dropped by 19 per cent, and the largest decrease was observed in expenditure on food," says The real cost of credit constraints: Evidence from micro-finance, a recent paper from the Indira Gandhi Institute of Development Research (IGIDR) written by Renuka Sane and Susan Thomas.
| MACRO SPLASH |
Andhra Pradesh government’s restrictions on microfinance institutions’ activities in Dec ‘10 has some bizarre results
Note: Data from The real cost of credit constraints: Evidence from micro-finance, a paper from the Indira Gandhi Institute of Development Research, written by Renuka Sane and Susan Thomas; sample of 13,000 households |
In an email response to Business Standard, Susan Thomas says: "In our sample, we observe the average consumption expenditure of a little more than 13,000 households. In this sample, we see that the average consumption has fallen. We observe this fall, irrespective of the income bracket the household falls in. This fall is also irrespective of which region the household falls in (the data allows us to observe the average consumption in 14 different regions, seven of which are urban and the rest, rural). Of course, the fall is greater for the lower-income households and those in rural regions. But the analysis shows that on average, the households' consumption fell."
Could this fall be due to other macro-economic factors? "If households in other states, where households have similar socio-economic characteristics as the households in AP, also saw a similar fall in consumption, then we could not have attributed it to the AP micro-finance ban. But the households in the other states did not see a similar fall in average consumption. In fact, for most part, they seem to have seen an increase in consumption. Therefore, we believe the fall in consumption in AP was because of the ban."
The authors analysed household consumption data four quarters prior to the imposition of the ban and four quarters after the ban came into force. The paper says the average AP household used to spend Rs 17,531 in a quarter on consumption in the pre-ban period. This dropped to Rs 15,487 in the post-ban period, a decrease of 12 per cent over two quarters. During the same period, average household consumption expenditure in other parts of the country rose from Rs 16,574 to Rs 17,727, an increase of seven per cent. Hence, the relative decline in AP household expenditure was to the tune of 19 per cent after the MFI ban.
According to the paper, household expenditure on food and education declined the most after the ban. While the relative decline in household expenditure on food items was 21 per cent, expenditure on education fell by 24 per cent after the ban.
Surprisingly, the ban impacted even those households that did not transact with MFIs. The paper says, "The impact of the ban is visible across all income classes (including those which use little micro-credit themselves) which suggests general equilibrium effects. While the ban on micro-finance was initiated by policy makers in AP under the claim that this would help poor people, it has hurt everyone."
Andhra Pradesh has a population of nearly 84 million, of which 27 million are estimated to have borrowed from MFIs, according the paper.
What are the lessons from the AP example? The key takeaway is that a sweeping generalisation and knee-jerk reaction by the state hurts everyone.
"The AP regulation was ostensibly to address the problems of some consumers of the microfinance firms being hurt. A very real possibility would have been for the state to identify the bad guys (either the agents of the MFIs or the specific MFIs) and take corrective action against them. Instead, they chose to deploy an intervention that targeted (a) the entire industry, whether they were the wrong-doers or not, (b) all the customers, whether they were suffering from bad service or not, and (c) removed a channel of financial service, regardless of whether it was beneficial to anyone or not," Thomas observes.
Will the policy makers learn the right lesson from this study? The just-cleared Land Acquisition Bill makes impact assessment study mandatory for land acquisition of any size. Should not the policy makers be asked to assess the consequences of their policy interventions as well? If that is done, we can avoid such mishaps in future.
MACRO SPLASH
Andhra Pradesh government's restrictions on microfinance institutions' activities in Dec '10 has some bizarre results
Rs 17,531 average quarterly household spend before the ban
Rs 15,487 average quarterly household spend after the ban
19% drop in average household expenditure
21% decline in household expenditure on food items
24% decline in expenditure on education
27 mn estimated to have borrowed from MFIs
Note: Data from The real cost of credit constraints: Evidence from micro-finance, a paper from the Indira Gandhi Institute of Development Research, written by Renuka Sane and Susan Thomas; sample of 13,000 households
