Understanding the "microcredit crisis" in Andhra Pradesh

Reuters blogger Felix Salmon has scorching media-criticism over the coverage of the "debt-strike" in the Indian state of Andhra Pradesh, where the governor has urged citizens to stop paying some of the microcredit lenders that operate in the region. The Western press accounts have painted this as a question of poor people rebelling against trendy-but-usurious lending institutions, but Salmon suggests that the real motivation behind the governor's anti-microfinance campaign: he is behind a competing, state-run microcredit venture that stands to benefit from defaults against other firms.

In fact, I'm beginning to think that this is one of those stories which is better reported from your neighborhood coffee shop with wifi than it is from Andhra Pradesh itself. There's nobility in sending reporters halfway around the world to get the story at first hand, and the NYT does provide the compulsory human-interest color by ending the story with a 38-year-old farmer who owes $2,000 and has no ability to repay it. But the paper breaks no news with this story, and seems so keen to re-report everything by talking to the principals involved that it's forgotten the first purpose of stories such as these, which is to explain the world clearly to the readers back home.

The irony here is that by flying across the planet for the story, the NYT has missed the big global picture, which is that Andhra Pradesh is simply the latest and largest proof that microfinance as an industry is at the mercy of regulators and politicians, who are more likely to get things wrong than they are to get things right. Remember Nicaragua? It doesn't take much in the way of political demagoguery to persuade a population to stop paying its loans en masse, driving the local lenders into immediate bankruptcy. Similar things have happened in Bolivia, Bosnia, Pakistan, and Morocco, but the microfinance true believers are often oblivious to this kind of political risk. Silicon Valley billionaire Pierre Omidyar has put some $200 million of his own money into microfinance, for instance, but when I met him in New York recently and asked him about this risk to the model, he had no idea what I was talking about.