Intellectual Thoughts by Sanjay Panda: Indian Microlenders Face Collapse, Warns Agency

Indian Microlenders Face Collapse, Warns Agency

The Indian government may be forced to step in to save the country's $6.7-billion microfinance industry from collapse warns  a leading industry ratings agency. The Microfinance Institutions Network or MFIN, which represents 44 leading Indian microfinance lenders, has said commercial bank loans to the sector are drying up and borrowers are reneging on their debts. India's microfinance industry, which surged to prominence when George Soros-backed SKS Microfinance raised $358 million in an IPO, faces a regulatory clampdown that could erode profits and hurt growth.

Reports of dozens of suicides by poor borrowers in Andhra Pradesh, the hub of India's microfinance sector, prompted the state to enact rules against aggressive recovery practices by lenders who make loans that average about $150 to poor customers at interest rates that can go up to 36 per cent. Lenders were accused of aggressive debt collectors who were blamed for over 30 suicides. Andhra Pradesh's share of outstanding microfinance loans accounts for around 35 per cent of the sector's total $6.7-billion portfolio. Before the crisis, the sector boasted loan repayment rates of 99 per cent.

The finance minister said this week that he expects the industry to develop a code of conduct on interest rates and recovery practices, while the central bank recently set up a panel to study issues surrounding the sector. The Andhra Pradesh government had introduced a measure aimed at halting "harassment" of borrowers, imposing penalties of up to three years in jail and Rs 100,000 ($2,000) in fines for attempting to coerce borrowers.
The rise of for-profit microfinance has made billions of dollars in credit available to millions of poor people in India and elsewhere, but it has also spurred controversy. India is home to roughly 400 microfinance lenders with a combined Rs 207 billion ($4.6 billion) in outstanding loans to 70 million poor people. The 10 largest players account for roughly 80 per cent of the industry. With a potential base of 120 million unbanked homes, microcredit demand in India has the potential to rise sharply. New rules are expected eventually to bring down interest rates, and reduce aggressive lending and collection practices, potentially squeezing out smaller players. Ultimately, that could make the industry more transparent and accountable, if less profitable. Critics are uncomfortable with high profit margins earned from poor borrowers, and worry that the social mission of microfinance has been sidelined in favour of profits. 

 (extract from BW)

1 comment:

Rajan Alexander said...

Micro-Finance to Face Slow Painful Death. SKS Share to enter Free Fall. Sell, Sell, Sell!

SKS, the Indian micro-finance giant’s IPO was supposed to signal the coming of age of the micro-finance (MF). Instead, it contained the seed for the destruction of the entire industry. Their Rs 10 share on listing attracted a premium of Rs 975 and such was the investor confidence, it touched a high of Rs 1,490 in a matter of days. Then hell broke loose with the industry hit by charges of them profiteering and causing farmer suicides. Its reverberations were so strong that it had been felt by the industry all over the world. The stock plunged to Rs 890 before recovering to be a tad over its listing price and hovering around this range for the last one week. We expose the dark underbelly of a Frankenstein unleashed by NGOs.