India's MFI Transparency Gap: What Causes it and What Should be Done about it?

This paper argues that India's formal MFI accounting and reporting requirements do not foster transparency, and if left unchanged, could pose real risks to the sector. It also considers expert opinion that overburdening MFIs with excessive regulatory requirements risks stunting the sector's growth.The paper attempts to strike a balance between these two contrasting views by suggesting interventions that narrow the transparency gap at the lowest cost to both, the MFIs and the regulator. The study:

• Examines audited financial statements of 19 Indian MFIs to determine how Indian MFIs account for and report on various operational features;
• Determines which components of Indian MFI accounting and reporting contribute most to Indias MFI transparency gap;
• Identifies specific MFIs to be covered by formal data transparency regulation.

Finally, the paper suggests that instead of blanketing all Indian MFIs with formal transparency regulations, the regulator can tighten transparency regulation selectively. By tightly regulating the 20 or so large-scale MFIs which comprise an estimated 95 percent of India's microloans outstanding, and whose failure could pose serious risks to the country's goal of financial inclusion, the regulator would promote health and stability in the microfinance sector.