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Microfinance Under the Scanner
Scrutinizing recent developments in Indian microfinance
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This article analyzes developments related to the microfinance crisis in Andhra Pradesh.
The microfinance movement in India began with the emergence of self-help groups. The sector gained momentum after February 2000 when the Reserve bank of India gave priority status for bank loans to MFIs. The article identifies major factors that led to the 2010 crisis. These include:
- Unfair business practices of profit-driven MFIs;
- Entry of private sector companies in microfinance;
- Misuse of microloans by entrepreneurs;
- Initial Public Offering by SKS Microfinance, leading to pressure from shareholders for profit;
- Quest of MFIs for faster growth to bridge demand-supply gap for microcredit.
The article states that microfinance has been a lifeline to about 30 million financially excluded Indian households. The operating cost of MFIs justifies their high interest rates. The recent developments underline the need for strong formal regulatory mechanisms in the sector.
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