The microfinance sector in Andhra Pradesh, an Indian state, faced an existential crisis in 2010 as a consequence of extensive lending, leading to over-indebtedness and default. Coercive measures were employed to recover loans, suicides became endemic, and the matter escalated. In this
article, we explore various mechanisms that caused such a phenomenon, and note that a similar situation to what unfolded in India can develop in other parts of the world as well. We discuss the policy implications of various regulatory measures that the governments of Andhra Pradesh and India
subsequently undertook to harness and regulate microfinancial practices in the country. It is argued that the governmental response to the crisis has not addressed the issue of unequal distribution of the community institutional infrastructure base for delivery of microfinance among different
states in India, which largely contributed to development of the current situation.