Runaway commercialisation and too rapid a growth, followed by a clampdown by the Andhra Pradesh government, has led to the mess the Indian microfinance sector currently finds itself in. A total disconnect between microfinance institutions, or MFIs, and their borrowers, near absence of regulation to check fly by night operators and lack of product innovation, have added to the crisis.
"The sector needs fresh thinking and significant reorientation. There should be a clear focus on demand profile and proper designing of products," says Vijay Mahajan, founder of BASIX, a leading microfinance and livelihood institution.
"Microfinance in India was appreciated for its edge over banks in handholding and supporting poor borrowers," says Vijayalakshmi Das, industry expert and formerly CEO of Friends of Women's World Banking, India, an organisation which assisted most of the leading MFIs in their early days. "It took 15 to 20 years to build the reputation. Because of commercialisation, it has been lost."
Mahajan, who set up one of the earliest MFIs in the country, in 1996, blames all the stakeholders in the sector. Those entering the fray sought to emulate the 'grameen' model - after the Grameen Bank in Bangladesh, started by Nobel prize winner Mohammed Yunus, the father of microfinance. "Just replicating this model without forethought and looking at weekly repayments in a country where 66 per cent of the rural India is dependent on agriculture is unworkable," he says.
But even Mahajan is unable to suggest any alternative model. One method could be "individual collaterarised loans", which seek collateral from borrowers, he says, but this "would filter out the poor who cannot provide any".
Last October, following numerous reports of suicides by small borrowers in Andhra Pradesh - the hub of microfinance in India - allegedly due to the coercive loan-recovery methods used by some MFIs if the borrowers defaulted, the state government passed a sweeping law to curb such excesses, making it mandatory for MFIs to stop weekly collections, furnish their list of borrowers to the government, specify their area of operations and interest rates.
The Reserve Bank of India, or RBI, too, got into the act and set up a committee of its central board of directors headed by Y.H. Malegam to study the sector and suggest ways of making it accountable. The Malegam report, urging a cap on interest rates MFIs could charge, a total ban on coercive recoveries and much else, was submitted in January this year, which the RBI has broadly accepted. "I would now expect some sort of consolidation. Only big players who have the technology and the systems may be able to survive," says M.S. Sriram, former professor at IIM Ahmedabad, who has been tracking the sector.
MFIs are upset, but there is little they can do. "All these regulations are like saying to us 'We will not kill you, but we will make it difficult for you to breathe,'" says an MFI representative, seeking anonymity.
What of the future? Puli Kishore Kumar, Managing Director of Trident Microfin, an MFI, says: "Now with the RBI policy in place and with MFIs clear on rectifying some of their practices and policies, we hope that the banks will regain their confidence in the sector in the next two to three years." As for Andhra Pradesh, he says: "There will be consolidation and those focused only on that state may find it difficult to survive."