Microfinance: To hell and back
In a nation where half the population isn't served by formal banking system, microfinance industry acquired a halo in the early part of last decade. And then, Andhra Pradesh crisis happened.
Alok Prasad, chief executive officer of Microfinance Institutions Network (MFIN), a lobby group for the Indian microfinance industry that recently got the status of a self-regulatory organization from the banking regulator, says “we did not waste a good crisis", on the fourth anniversary of the microfinance crisis that originated in Andhra Pradesh.
This statement is generally attributed to Rahm Emanuel, a former White House chief of staff, in response to the Wall Street meltdown, but actually comes from a comment made by Niccolo Machiavelli, a well-known Italian political thinker of the 15th century, who wrote, “Never waste the opportunity offered by a good crisis."
“That’s exactly what the microfinance industry has done. It took a hard look at itself; it reformed and moved on, doing what it knows best—providing micro-loans to low-income households," Prasad told me, sitting at his Gurgaon office. In a nation of 1.2 billion people, half of whom are not served by the formal banking system, the microfinance industry acquired a halo in the early part of last decade. A highly successful listing of SKS Microfinance Ltd in July 2010, and strong all-round growth of loan assets created a situation when new funding was on demand in an industry that was then lightly regulated by the Reserve Bank of India (RBI). Then in October 2010, the cookie crumbled, with the Andhra Pradesh government promulgating an ordinance to curb the activities of microfinance companies. The provocation was allegedly the coercive collection policy of microfinance institutions (MFIs) that drove many borrowers to commit suicide. It mandated MFIs to specify their area of operation, rate of interest and recovery practices. It also became mandatory for MFIs to seek the state government’s approval before issuing any fresh loans.
That said, it is absolutely critical for microfinance firms, particularly those MFIs that operate as non-banking financial companies (NBFCs), to be continuously on guard and not succumb to the greed of expanding business at any cost—something they did to keep their private equity investors happy before the Andhra Pradesh crisis broke out. There are around 50 such companies, less than one-fourth of the MFIs that exist in India, but they account for at least 90% of the business. Rapid growth always carries high risks and the industry will not be able to live through another crisis, if that happens. Responsible lending has to be the mantra, now and always.
As of 30 June 2014, NBFC-MFIs had a client base of at least 28 million, with the base growing 23% in the first quarter of the current fiscal year from a year earlier. The aggregate gross loan portfolio in June stood at ₹ 27,000 crore, a growth of 44% over the first quarter of 2013-14. Disbursements of loans in the first quarter of the current fiscal year increased by 48% and the number of loan accounts grew by 34%. The good news for the industry is that the political risks seem to be diminishing, with states including Assam and Kerala accepting RBI as the sole regulator for the industry. Unlike in 2010, microfinance today is a highly regulated industry with the segment of clients, size of loans, purpose and even price being regulated. Microfinanciers are in dialogue with RBI for relaxation of the tight framework of rules and regulations, but it should take a while as the central bank needs to be convinced about the maturity that the industry claims to have attained.
Original Source: LiveMint