Crisis in the Indian Microfinance Industry
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Crisis in the Indian Microfinance Industry
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Home Page > Finance > Banking > Crisis in the Indian Microfinance Industry
Crisis in the Indian Microfinance Industry
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Posted: Oct 30, 2010 |Comments: 0
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Microfinance has played a major role in taking the financial services to the bottom of the pyramid in many regions of the country, especially in the southern and eastern parts of India. The Indian microfinance industry has outstanding loans worth USD 4.6 billion to 70 million borrowers. This industry has helped the poor borrowers of the country by providing them access to loans at a rate lower than being offered by the money lenders.
The failure of the banking industry to reach the rural areas has led to the emergence of Microfinance industry in India. The microfinance lenders borrow money from the banks at interest rates of 9-14% and lend at 24 to 30%. The high interest rates and success of some of the microfinance companies has made the industry highly attractive to commercial players, who might sideline the social mission of the industry in pursuit of high profits.
Most of the microfinance institutions started as non-profit organizations, however some of them are moving towards becoming for-profit organizations. SKS Microfinance, the largest microfinance company in India moved from being non-profit to for-profit organization and completed its IPO recently. But the subsequent sacking of the CEO and issues of governance & transparency in this company has brought forth the major issues & incorrect practices in the microfinance industry. Several erroneous practices such as aggressive lending strategies, absurdly high interest rates, dubious HR practices, callous recovery methods etc are coming out in the open, painting a disgraceful picture of the industry.
The Andhra Pradesh government has recently passed an ordinance against the use of forceful collection methods. It also stipulated the suspension of collection until the microfinance institutions registers itself with the local authorities. This is a result of spate of suicides in the state, allegedly due to the forceful recovery methods used by the microfinance lenders. These regulations will increase the operating costs for the industry and may also bring in bureaucratic hurdles.
The central government is proposing a bill to make NABARD as the regulator for microfinance institutions in the country. The government is planning to fast track the bill to avoid any further crisis in the industry and also to avoid any increased regulation from state governments. The government should also make sure that there is not too much regulation & price controls on the industry, which sometimes may bring in bureaucracy and corruption putting brakes on the growth of the industry.
There are no empirical results on the impact of the microfinance industry on the poverty levels in the country. However, the microfinance industry has improved the access to capital for rural entrepreneurs. The industry has a lot of scope for growth and should reach out to many more poor people, especially in the rural areas and provide them with financial inclusion. However, to survive in the long run, the industry should change its practices such as charging high interest rates, loan recovery tactics, aggressive marketing of loans etc
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