Microfinance Industry in India

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Excerpts

By early 2010, the Microfinance industry in India started facing several allegations regarding their business practices. The MFIs were accused of resorting to unethical and illegal means to recover loans from their borrowers. The borrowers of some MFIs committed suicide as they couldn't repay their loans. The MFIs started running into trouble in Andhra Pradesh where most of their business activities were concentrated. The government of Andhra Pradesh accused the Microfinance industry of charging extremely high rates of interest from the borrowers and resorting to strong-arm tactics to recover the loans.....

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The crisis hit many MFIs in the country hard. Some MFIs which had their operations concentrated in Andhra Pradesh like SKS and Spandana suffered massive losses due to non-recovery of their loans. They had to stop or severely limit their operations in the state. Some MFIs had to shut down some of their branches and sack employees just to stay afloat. SKS, the only listed MFI in India, saw significant erosion in its market capitalization due to the crisis. The Andhra Pradesh government's ordinance led to a total overhaul in the top management of big MFIs like SKS....

However, the MFIs were quick to respond to the crisis. They took several steps to come out of the crisis and move ahead. Some MFIs started adjusting to the new regulatory setup under the RBI's control and win the confidence of investors. Responding to the crisis faced by the Microfinance industry, the RBI issued new guidelines for the industry in December 2011. According to the new guidelines, the total indebtedness of a borrower of an MFI should not exceed Rs 50,000 and if the loan amount exceeded Rs 15,000, the repayment tenure should not be less than 24 months...

With the policy uncertainty likely to persist for some more time, one of the key strategies that MFIs started to follow to overcome the crisis was to diversify into other related financing areas. The main idea behind diversification was that it would reduce the risk in their portfolios and spread their revenue sources. The lead in the diversification was taken by big MFIs like Spandana and SKS. Spandana started lending to farmers for buying tractors. It started tractor financing in a small way in August 2009 but later started to aggressively expand that business stream...

While MFIs operating in the southern Indian states had to undergo significant losses, other MFIs like Bandhan which operated in other parts of the country (where the Andhra Pradesh government's ordinance did not hold good) prospered. Many MFIs which were operating in the northern and eastern parts of India continued to grow even during the times of the crisis. While the Microfinance industry in Andhra Pradesh experienced near zero percent growth rates in 2012, other Indian states where the crisis did not have any impact grew by 10 to 15 percent in the same year...

Slowly recovering from a crisis which had nearly choked the industry, the Microfinance industry in the country was awaiting the passage of the Microfinance Institutions (Development and Regulation) Bill (MIB) in the Indian parliament. The new bill was based on the recommendations of the Malegam committee which was constituted by the RBI to address the problems faced by the Microfinance industry in India since 2010 ...

Exhibit I: Stalled Growth
Exhibit II: Sources of Credit for Rural Poor after the Crisis (In Percentage)
Exhibit III: Loans Disbursed by Banks to MFIs (Figures in Rs. Billions and Millions)
Exhibit IV: Highlights of the Micro Finance Institutions (Development and Regulation) Bill, 2012