Microfinance in India: helping or hurting?

The move was prompted by a spate of suicides by borrowers, allegedly after being hounded by their lenders.

Andhra Pradesh has received an estimated $2.1 billion in microloans, as much as 40% of India’s total $6.5 billion. The region came under the spotlight after 30 microloan borrowers committed suicide, after reportedly being pressed by MFI agents. Tactics apparently included kidnapping borrowers’ family members and boarding up their homes until repayments were made. “We are working on bringing in an act to regulate the MFI activity,” Andhra Pradesh’s Rural Development Minister Vatti Vasant Kumar publicly said. “Considering the urgency of the issue, we will look at bringing in an ordinance and introducing the bill in the coming Assembly session.”

The planned act parallels a consideration by the Reserve Bank of India to instate a 24% interest rate cap. Leading MFIs claim to borrow their own capital at an 11-15% rate, and often charge their borrowers 28-30% to cover the costs. The average size of each loan is $250.

In the meantime, officials have mandated that MFIs register in every community where they conduct business to continue collections. MFIs are then expected to disclose specific operations, intended interest rate, and due diligence and collection methods. It will take some time before authorities institutionalize protocols, but already the news has led analyst to forecast a spike in NPLs.

“There will be short-term effects related to this, but I think that it’s good legislation and it will help microfinance firms to understand that, just as other finance companies are already regulated, this is lending to the farmers, and they can’t make unreal profits,” said an Indian PE source.

Indian banks such as ICICI and HDFC reportedly expressed concern that the rules would hinder their own repayments from MFIs. And the legislation has already had an effect: shares in SKS Microfinance dropped some 7% Monday morning, attributed to both the recent ousting of its CEO, Suresh Gurumani, and the changes in Andhra Pradesh. SKS Microfinance – which made its $350 million market debut two months ago – saw one of its borrowers reportedly commit suicide last week.

Yet, AVCJ's source predicts that India’s microfinance industry will regroup and remain effective. While microfinance had long been likened to a charitable endeavor, he does suggest that institutions will be viewed more objectively now – somewhere between a charitable organization and a moneymaker. “The microfinance model will for sure continue. India is a very big country so we need financing on every level,” he says. “People will still be putting money into these firms, and there wouldn’t be any aversion.”

Further reading

Indian regulators consider legislation to curtail microfinance debt-collecting

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Aavishkaar makes partial exit in microfinance holdings, refocuses on social enterprises

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IFC may take 20% of microfinance firm Ananya

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• South Asia
• Financials
• Regulation