Microfinance: No Smoke Without Fire
This paper discusses the need for reforms in India’s microfinance sector against the backdrop of the microfinance crisis in Andhra Pradesh.
The emergence of the microfinance industry in India was seen as a positive step towards financial inclusion. The rapid growth of the industry, however, has raised several questions on corporate governance and the viability of the microfinance business model. Following the recent crisis in Andhra Pradesh culminating in a series of suicides by borrowers, the state and union governments stepped in with regulatory measures. These included:
- State government ordinance imposing restrictions on MFIs and threatening criminal proceedings against coerced recovery;
- Finance ministry order to state-run banks to cap interest rates of MFIs;
- Institution of RBI panel to investigate MFI policies and practices;
- Investigations into questionable practices by MFIs.
The prospect of new regulations is likely to delay the IPO plans of several MFIs in India. The paper concludes that the new rules may bring down interest rates and curtail aggressive lending and collection practices, making the industry more transparent and accountable.
