Microfinance Crisis in India

The recent crisis in Andhra Pradesh regarding the Micro Finance Industry being in trouble has been creating ripples in the entire business world. The origin of the situation can be traced back to its history. The government and NABARD conceptualized SHGs (Self Help Groups) especially for women, as a low cost means of providing banking facilities to poor with a program widely known as SHG-Bank Linkage program. This mainly aimed at financial inclusion of the physical remote areas especially the poor corners of the country which were getting left out because of various reasons, including low income areas, smaller loan amount, lesser penetration of banks, problems in repayment because of fluctuating income etc The Andhra Pradesh government was one of the first to adopt the policy. It even declared its target of disbursing a loan worth INR 100,000 crores till 2014 to the residents.

Micro Finance Institutions (MFI) were also formed by the private commercial players with an aim similar to that of the government. But the intention might be more commercial than social. Andhra Pradesh boasts of having the maximum number of MFIs in the country including 4 of the biggest in the country and several other mid-sized MFIs. With improved services like door to door service, easy credit, group guarantee etc. they were getting more popular in the state despite the higher rates of interest. The government was getting sceptical of the phenomenon and also noticed that the repayment rate is higher for these private players. The MFI-state conflict which originated out of sheer scepticism reached a high pitch and the government passed an ordinance on October 15, 2010 defining certain mandatory clauses for the MFIs in the state. The ordinance was based on 4 major premises by the government:

1.    Usurious interest rates

2.    Coercive collection methods of collection

3.    Commercial profitability of the institutions sans social goals

4.    Several cases of suicide cases due to malpractices for collection

The reasons above do clearly state the government’s intentions to safeguard people’s interest but there might be reasons further deep down relating to stalling of government plans by the MFIs. This was the only way the growth of MFIs in the state could be stopped since the attraction of people towards the well organized private commercial institutions and their luring policies was obvious. The allegations against the MFI sector have created awe in the entire industry. The sector being one of the most profitable and growing in India was the largest in the world. The clauses included in the ordinance are bound to completely throw off the MFI base from the state. The ordinance lays the following points:

1. It is mandatory for any private micro-lending institution to get registered with one of the registering authorities (as stated in the ordinance) before November 15, 2010

2. Each such institution has to specify its area of operation, rate of interest, system of operation and recovery methods

3. No security from the borrower can be sought

4.  The registering institution can cancel the registration at its own will, after assigning sufficient reasons

5. All the repayment collections will take place at the panchayat offices.

These clauses clearly imply the eradication of the MFI sector. Examining them point by point we can assume such impacts as the abuse of power at the hands of government, hampering the smooth functioning of the institution and lack on interest of new MFIs to invest in the state. The government claims to be a regulating authority in the sector while the fact is there have been various regulating authorities already existing in the sector from time to time since its inception. Apart from the self regulatory authorities like MFIN, Sa-Dhan etc., RBI also has certain regulatory power over the authorized MFIs.

Regarding transparency issues, MFIs clearly indicate that apart from the interest rates there will be other conditions applicable such as miscellaneous charges, premiums etc. This might be marketing tactics by twitching the published rates and interests but it is the same with government banks as well. There definitely is a suspected flaw in the method of collection and repayment rates, but shaking the whole sector because of the malpractices followed by few is definitely not an intelligent move. There should rather be an inspection of these particular institutions and the cases involved.

The MFI sector has also been accused of being completely lacking social concerns while in reality they did refine their policies from time to time making it more suitable for the rural and poverty stricken areas. They even mention the goal of ‘complete financial inclusion’ in congruence with government goals.

Micro finance crisis have frequently been compared to the sub-prime crisis, since the symptoms were very similar. With a huge amount of investment and aggressive pursuance of the sector, it was being predicted that a crisis is bound to fall on them soon. But the reasons of MFI crisis are completely dissimilar.

The Micro finance sector has been lacking certain measures which would have helped it to avoid this situation such as lack of defined guidelines and benchmarks, lack of knowledge of stake holders and maintaining relations with them(government in this case), excessive private investments and absolutely no media liaison.

Media which has become cognitive of this sector only after the crisis should have been kept involved with the reforms of the sector periodically so that in times such as these they might come handy. All the elements are with the government right now but a closer analysis of the situation reveals the fact that the reasons of suicide and other accusations put on the MFIs may be many and predictable which might have been intentionally ignored.

MFI sector accounts for a huge part of the Indian finance industry and was being looked up at as a hope for not only the huge profitability but also for its reach to the remote and rural areas which definitely is a huge step  in bringing the nation closer to the target of complete financial inclusion. This would bring a blow to the huge investments in the micro finance sector including reduction of overseas investors which in turn will have an adverse effect on the economy.

The state should not discard the sector as being completely useless, which is obvious from the ordinance, but rather find a middle way so that both the government and the private institutions can work in harmony for a national objective. There is a need for the associations like MFIN, Sa-Dhan to be proactive in this issue. The micro finance industry should take a lesson from this event and be more introspective to avoid any such crisis in future. The issue should not be left at the hands of the government or the ordinance rather should be properly thought about and measures taken for a common national good.

Seema Dahiya

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