Transforming Downward Spiral of Microfinance in India

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The Economic Intelligence Unit of The Economist group has published their report Global Microscope on the Microfinance Business Environment 2011. India’s position has been downgraded compared to previous year. The industry in global perspective is on maturing stage, while in India it is facing the threats of existence.

Overcoming the increasing number of Non Performing Loan (NPL); Peru again stands at the top for the third consecutive year for its excellent legal mechanism, sophisticated regulators and most significantly government’s commitment to use microfinance for financial inclusion. Bolivia did excellent job in price transparency and disclosure rules and bagged the position of second top country in respect of business environment, regulatory framework and institutional support for microfinance. Surprisingly, neighboring country Pakistan stands among the top three countries in the list. And, India is on 27th position in world ranking.

M-CRIL, a rating agency stated in their report that India’s microfinance growth has been slow downed to a alarming stage, in FY 2010-11 the growth of borrower base has been decreased to 7.5% from 43% and growth rate of loan portfolio size decreased to 7.2% from 76% comparing to previous financial year.

India is next to Yemen where microfinance declined significantly during last year. The political unrest in middle-east had a greater impact on microfinance operation in Yemen. And in India, Andhra Pradesh microfinance crisis has rung the alarm bell for the whole industry.

Andhra Pradesh crisis can’t be marked solely as the failure of Microfinance Industry. There were many factors which are responsible for the crisis.

Let’s have a look – Chronologically

Chief Minister Chandrababu Naidu had introduced a rural lending model called Velegu in 2000. Society for Elimination of Rural Poverty (SERP) was empowered to run the project. It used to form groups having 10-15 women on group guarantee concept and assured them to access bank credit. Bank provided the loan at 12% interest. But during 2004-05 assembly election congress promised to provide loan at 3% and remaining 9% would be refunded by the state government. It was proved as a game changing idea! Rajshekhar Reddy became the chief minister.

The project had itself some major drawbacks:

i) Rs. 50000/- were given to a group for first year, if group successes to repay the first cycle loan, were eligible for a loan of Rs. 500000/- for five years, no top up loans or emergency fund’s provisions were not made available in the project.

ii) Bank hardly released 50% or less loan amount comparing to their eligibility.

iii) The project also didn’t cover-up poorest of the poor of the state. Ultimately they were bound to rush to the MFIs in a large scale. Secondly, banks were more interested to lend MFIs rather lending to SHGs as lending to MFIs were more secure and cost effective. Rs. 2 cr. can be given to single MFI but to 500 SHGs! MFIs became the last resort for the credit hungry poor.

More and more MFI came to Andhra Pradesh; profit maximization became the main motto! The market penetration increased to 823%, each household was serving 8 loans! Credit culture was also intoxicated by ghost loan, benami loan etc. As per the MIX Market report, MFIs relationship with customers became more transactional; while one staff was handling 331 borrowers in 2005 and 436 in 2009.

The Blind watchdog – RBI

RBI, the so called watch dog of financial sector completed its duty by merely warning the MFIs on periodically, no strict step was taken against the greedy MFIs and money lenders. Being the major funding house SIDBI also kept mum! The rapid growth of microfinance had also reduced a local politician’s ability to use rural credit as a tool of patronage and put MFIs in the firing line. Finally the politics triggered the gun; when suicide case was reported by news channels TDP again saw a chance to win the election, in the meanwhile, congress passed the ordinance before the opposition cashes on the matter. Microfinance industry as a whole becomes the scrap goat!

Contribution of microfinance in India can’t be under-estimated. As a whole 30.9 million active borrowers are served by MFIs in India and total outstanding loan amount is $5.1 billion. Microfinance companies are not only providing loans, they are also providing allied services for poverty elevation and livelihood development. According to the report of Micro-credit Summit Campaign, nearly 9 million Indian households, or about 45 million family members, involved in microfinance, saw their daily income rise above the threshold of USD 1.25 between 1990 and 2010.

The road ahead – for Indian Microfinance

The Microfinance (Development & Regulation) Bill has been pending in parliament since 2007. Now the bill is modified and expected be tabled during next session of parliament. The modified bill has provisions to bring the sector into the ambit of organized financial services and other positive changes. Still it has some negative provisions i.e. product cape, margin and interest cape, credit limit case etc.

RBI credit policy in March’2011 capped household income at Rs. 120000/- and credit limit at Rs. 50000/- for all MFI customers, does it reflects the current inflation rate? If RBI doesn’t verify the ground reality, if RBI also follows the path of planning commission (Rs. 32/- as bench mark for BPL), no doubt MFI industry will collapse very soon.

Government speaks about inclusive growth, financial inclusion but in works, there is a big zero. RBI itself estimates that 50% of Indian families don’t have bank accounts. Dr.Ela Bhatt, a Gandhian and lawyer, and referred to as the Mother of Microfinance (she founded Self Employed Women’s Association or SEWA in 1972), was recently appointed to the Board of RBI. Dr. Ela Bhatt says in her speech on 100 miles principle at UNDP meeting- There are six things one needs: roti (food), kapda (clothing), makan (housing), primary health, primary education and primary banking. She also admits the non-availability of primary banking and financial facilities.

Hope to see some positive regulatory changes to rescue the sinking industry!

Published in on 18/11/11

2 thoughts on “Transforming Downward Spiral of Microfinance in India

    Abdul Kalam Azad responded:
    October 25, 2011 at 3:37 pm
    Manju said:
    October 25, 2011 at 4:07 pm

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