State of micro finance in India
and what lies ahead
What Micro finance should ideally be?
• Small loans are given to impoverished people to invest into
generating their own incomes.
– Lack of access to banking
• Mohammad Yunus Story
• 2005 “ The year of Micro credit”
• Mr Yunus said microcredit could create a world where poverty could
only be seen in a museum.
• How true is this claim?
Rise and Fall of MFI in India
• Came into existence in the early
1980's with the formation of self-help
• Grew at 90% on an annual basis from
2002-03 to 2009-10 was reduced to
just 7% growth in 2010-11.
• Poverty alleviation to money minting
Vikram Akula, Founder SKS Finance
• Everything was fine until the profit
mindedness and short termism of
private MFIs grew beyond limits.
Such practices include:
• High interest rates
• Lending highly indebted borrowers
• Lending for non income generating activities
• Undesirable collection practices
• Poor enforcement of standards by MFI associations
• In Andhra Pradesh, debt repayments
from the state's nearly eight million
micro-borrowers have dropped to
around 20%, prompted by a
government crackdown on the
industry after a number of suicides
allegedly linked to over lending
• Govt of AP eliminated further
lending or collection by MFIs.
• Total outstanding loans of
INR 6000 Cr
Farmers who commited suicide in Anantpur
SKS Microfinance: The company that got
•It raised Rs 230 crore from institutional investors last week, the largest capital
raising exercise for SKS since its IPO.
•SKS, says this qualified institutional placement (QIP) was over-subscribed and
that it equips it to meet the credit requirements of its four million rural
•Today the valuations are a pale shadow of what SKS commanded during its IPO
two years ago – Rs 75.4 a share in the QIP, compared to Rs 985 during the IPO.
•As banks and financial institutions stopped lending to
MFIs, SKS opted not to go in for the corporate debt
restructuring package, availed by others such as Spandana
and Share Microfin. It also repaid its Rs 3,800 crore debt
•It was exactly two years ago that SKS’ fortunes were at their
•It had concluded a successful IPO which raised Rs 1,600
crore, enjoyed margins that were the envy of every finance
company and was the poster-boy for the microfinance
•The company attracted well-known investors such as Sequoia
Capital, Goldman Sachs, Sandstone Investment Partners, DSP
Blackrock Equity Fund, as well as N.R. Narayana Murthy’s
Catamaran and angel investor, Vinod Khosla.
•First, the entire MFI sector was engulfed in widespread
allegations of harassment of clients by recovery agents
and borrower suicides in AP.
•The Andhra Pradesh Microfinance (Regulation of
Moneylending) Act 2010, placed checks on the interest
rates at which MFIs may lend, prohibited overlapping
loans and made prior local government approval
mandatory for disbursal of loans.
SKS also hopes to diversify its lending
to include financing of small
kiranas, loans for purchase of mobile
handsets and gold loans. Microfinance
is mainly a rural and semi-urban
Rani, a women’s group leader and a
client of SKS, hailing from the suburbs
of Warangal town, summarises the
situation well, saying- “Loans from
banks are always better because
nobody will coerce us for repayment
delays of one or two days and their
interest too is lower. We lost more than
what we gained in borrowing from
The future of MFIs will also hinge on the action that RBI takes with respect to
the sector. The new Microfinance Institutions (Development and Regulation)
Bill 2012 was tabled in Parliament in May. The Bill proposes to make the
Reserve Bank of India the sole regulator of the sector
What Caused The Fall
• Exorbitant interest rates: the M-CRIL Microfinance Review 2010 has
shown, interest rates in Indian microfinance are amongst the lowest in the
world. Microfinance yields of the order of 25%-28% are lower than the 35%40% of MFIs in Southeast Asia and far lower than the higher rates of 40%-60%
that are the norm in other parts of the world.
The number of MFIs with annual percentage rates (APRs, the theoretical
charge of the loan to the borrower on the MFI’s loan terms) in excess of 40% is
no more than a handful amongst the 60 leading MFIs in India.
This, in a country where even SMEs financed by the commercial banking system
regularly face APRs of the order of 18%-20% and where moneylender rates for
the poorest borrowers range from 36% in a few of the more prosperous regions
to 60%, 120% and more elsewhere.
• Client coercion:
For all the noise in the media about client coercion,
particularly in the state of Andhra Pradesh where the crisis started, MFIs
forcibly tried to acquire forcibly the physical assets of delinquent clients or to
harass them deliberately in order to force them to pay their loans.
• High growth:
In a country with an economic growth rate of 7-9% per
annum, and a relatively limited educational system, the most competent staff
had many other employment options and meant, for the largest MFIs, a staff
turnover ratio of the order of 30-40%. Imagine having to train some 4,000 staff
in order to replace those who leave plus another 10,000 because your ambition
extends to doubling the number of clients served in a single year.
• Multiple lending leading to over-indebtedness: The
industry’s quest for growth at all costs resulted in an over-simplification of its
relationship with clients cutting out all its social messages and focusing simply on
micro-money circulation; inducting clients for the sake of maximizing portfolio
size while ignoring the possibility that they already had loans from other
sources, and ignoring less developed parts of the country due to the well known
first mover disadvantage in mass market situations.
• Conflict of interest – government as competitor and
regulator at the same time: This too was a main cause for the
failure of Micro Finance Sector in India.
The Grameen Bank and Indian
• The microfinance schemes in India is that they have unabashedly copied
the Grameen Bank model. The model revolves around weekly payments
and self-help groups. I give you a loan and you pay me in Equated
Weekly Instalments (EWIs).
• The simple fact is that in rural India, the major demand for loans comes
from agriculture, which involves large negative cash flows up front and
(hopefully) large positive cash flows a few months down the line and the
microfinance institutions here barely seem to understand this.
• One of the fundamental principles of finance is that the cash flows of the
source of funds should approximately match the cash flows of the
application of funds. What Equated Weekly Instalments implies is that if
I give you a loan at the beginning of the crop cycle, I expect you to pay
me a large part of it before the completion of the cycle! And the only
way (in most cases) that you can make such payments is by going to the
local moneylender, thus getting stuck in a debt death spiral.
The reason the model has worked
so successfully in Bangladesh is
because there the loans are not for
agriculture. They are doled out to
women so that they can start their
own small businesses, which
usually yield steady weekly cash
flows. The cash flows from the
business are in tune with the cash
flows from the loan.
The Indian Micro Finance Sector
should be more open to
experiment, and large banks
(especially PSU banks) should
probably take a little more risk in
the initial years to try out new
Grameen Bank Muhammad Yunus
Who Should Regulate Indian MicroFinance
“In its report ‘Trend and Progress of
Banking in India 2010-2011’, The
Reserve Bank of India (RBI) states that
If State Governments start enacting
their own legislations to regulate
including the ones regulated by the
Reserve Bank, there will be plurality of
regulation leaving scope for regulatory
Bill, 2012, will take MFIs outside the
legislation, including the controversial
Andhra Pradesh law that saw the asset
base of the microfinance industry
shrinking and led to a drastic increase
in bad debts due to restrictions on
collection practices. 23/05/2012
The Microfinance Institutions
(Development and Regulation) Bill, 2012
• Those MFIs registered with the apex bank won’t be treated as
moneylenders, thereby keeping them out of the purview of the Andhra
Pradesh Micro Finance Institutions (Regulation of Money Lending) Act,
• The Bill proposes the setting up of a microfinance development council
with members from various central government ministries, including
finance and rural development, RBI, the Small Industries Development
Bank of India, the National Bank for Agriculture and Rural Development,
the National Housing Bank and another four independent members.
• The council will advise the central government on the formulation of
policies for the sector and will have a non-government official with
relevant banking experience as chairman.
• the Bill also proposes the setting up of state development councils with
representatives from state governments.
FAQ’s About MFI’s
• Why was micro-finance a success in AP?
• Why is there such a heavy default in loan
payment by farmers?
• Why credit availability of MFI’s get crunched?
• Why MFI’s and not banks?
• What is the government doing to change the
• Suggestions made by us apart from the bill
• Involving big financial institutions in MFI.
Success in AP…
• 1/3rd of the micro loan is from this state.
• The reasons for success in AP is
Both Chandrababu Naidu & Y S R Reddy believed in fighting
poverty by providing loans to poor women.
Put tax payers and world bank’s aid in the improvement of
Strong encouragement for the poor to take unsecured micro
It did not believe in “pushing the loans” instead it actively
“encouraged” micro credit facilities.
State gave a subsidy to the self help groups who repaid on
time by charging only 3% instead of 12%.
Doorstep service, ease of paperwork, much less
bureaucracy, innovativeness and an NGO philosophy
combined with missionary zeal, which made the MFIs so
Heavy default in loan repayment..
• Default in scrutiny by MFI employees.
• Training to the MFI employees.
• Engaging retired and youngsters with not so high
educational qualification for work.
• Group credits to be encouraged which were the crux
of the success of Grameen Bank, Bangladesh.
• Concentration on Self Help Groups (SHG)
• Proper training of mentors in MFI’s.
Why not Banks?
• Huge waivers given by government instead
suggesting reasonable steps to encourage continuous
flow of money. In 2008 government gave a waiver of
Rs 60000 crores.
• Cumbersome paperwork and formalities.
What can government do?
• Setting sound macroeconomic policy that provides stability
and low inflation.
• Avoiding interest rate ceilings - when governments set
interest rate limits, political factors usually result in limits that
are too low to permit sustainable delivery of credit that
involves high administrative costs—such as tiny loans for poor
people. Such ceilings often have the announced intention of
protecting the poor, but are more likely to choke off the
supply of credit.
• Encourage competition, capacity building and innovation to
lower costs and interest rates in microfinance.
• Support autonomous, wholesale structures.
• Adjusting bank regulation to facilitate deposit taking by solid
MFIs, once the country has experience with sustainable
• Creating government wholesale funds to support retail MFIs if
funds can be insulated from politics, and they can hire and
protect strong technical management and avoid disbursement
pressure that force fund to support unpromising MFIs.
• Promote microfinance as a key vehicle in tackling poverty, and
as vital part of the financial system.
• Create policies, regulations and legal structures that
“encourage responsive, sustainable microfinance.”
• Encourage a range of regulated and unregulated institutions
that meet performance standards