This document proposes policy recommendations to address issues in India's microfinance sector. It summarizes that while microfinance in Bangladesh has been successful in alleviating poverty, it has failed to have the same effect in India due to cut-throat competition between MFIs over a small area. This has led to problems like multiple lending, over-indebtedness, lack of transparency and coercive loan recovery practices. The document then outlines specific policy recommendations to address issues like multiple lending, coercive collection practices, improving transparency and flexible repayment cycles.

1. Introduction:
Grameen bank in past 37 years has uplifted
millions of people from the clutches of poverty. As the
proverb goes, it has taught Bangladesh how to fish!
Despite having 2nd highest entrepreneurial activity and
possessing demographics similar to Bangladesh,
microfinance has failed to have the same uplifting effect
on India’s poor.
Digging deeper, we observe various MFIs (Microfinance
Institutions) engage in a cut-throat competition over a
miniscule percentage of Indian rural landscape. This not
only cuts out a large section of poor from the folds of
microfinance but also leads to problems such as multiple
lending, over-indebtedness, less transparent practices and
worst-of-all extortionary practices to recover loans.
Methodology:
The action plan breaks down various aspects of the
far-from-ideal competition existing between various
microfinance institutions, and then goes on to propose
policy recommendations to fix each of them one-by-one.
Ideas have been sourced from literature by national
economic think-tanks, reviewing succesful models around
the world, and from author’s personal experience as an
intern at Grameen bank, Bangladesh.
Acknowledgments:
The author indebted to Grameen Bank’s International
Training Program, for providing author with invaluable
insights into working of an microfinance institution in
general and GB in specific. Next, author would like to
thank Colin Purrington for his expert guidance on
conference poster designing. Lastly, author would like to
credit Deepanshu Agarwal for taking the photograph used
as the the background for this poster.
Issues and action plan:
Inspite of microfinance sector going through turbulent phase, it grew
steadily in the past decade, leading to positive investor sentiment. When
SKS microfinance went public in 2010, its IPO was oversubscribed 13
times. Through after a harrowing report by Associated Press held SKS
employees responsible for multiple suicides in the state of Andra
Pradesh, the façade came falling down.
“An 18-year-old girl drank pesticide after she was forced to hand
over Rs.150 (~$3) meant for an exam fee, leaving a note, “Work hard
and earn money. Do not take loans.””
- Associated Press Report
Growth index of MFI sector in the past decade
The whole SKS-AP incident highlighted that the neo-liberal theory of
free market fails in microfinance, atleast to some extent. Following are
some of the specific issues and steps that can be taken to address them:
§ Multiple lending and over-indebtedness: Borrowers are able to
procure loans from multiple sources, resulting in more borrowing
than they can pay back. Steps to tackle this situation:
• Credit Information Bureau(CIB) and Management
Information Systems(MIS) to be set up.
• These would help MFIs to clearly identify which individual
are most likely to default.
• Based on credit history, max permissible lending to an
individual must be capped.
§ Collection Practices: To stop a similar episode from repeating in
future
• Sanctioning and distribution of loans at a central location.
• Loan collection to be done in groups, rather than individually
• Agents forbidden to meet borrowers at there residence.
• Peer assessment among loan recovering agents.
§ Documentation and transparency: MFIs often disguise there
effective interest rates by including like of service charge and
processing fee in their loan offerings. For a barely literate
borrower, this severely limits their bargaining power. Steps to be
taken include:
• A standard format for loan document should be chalked out.
• EAR to be displayed in all offices and relevant literature.
• Borrowers to be provided with loan card containing all the
necessary details about their personal loan.
§ Cluster formation: MFIs restrict their operation to established
markets because of high cost of entering a new one. This leads to
cluster formation. Also, nationwide uniform interest rate cap
makes it unfeasible to operate in specific areas:
• Subsidiaries should be provided to facilitate entering an
unexplored market.
• Interest rate cap should fixed and revised locally
§ Accepting deposits: Unlike most of the successful MFIs around
the world, MFIs in India are forbidden to accept deposits, can
makes it hard for them to generate equity without external funding
or go public by converting into a for-profit organization. Hence,
they should be allow to accept deposits from the borrowers.
§ Financial training programs: Borrowers need to be trained to be
able to read and interpret loan proposals, and not just to sign.
MFIs should therefore be required to provide proper training
programs for borrowers.
§ Flexible payment cycles: Currently, payments are scheduled on
regular and short interval basis. Flexible payment cycles should be
provided depending on the need of the customer. For example, for
a farmer it would make more sense to collect payment at the end
of the cropping season.
Conclusions:
Microfinance has the potential to uplift millions of world
poor economically by freeing them from oppressive
conventional money lenders, and putting them into a
position to control their finances effectively. That being
said, AP-SKS episode illustrate how things can go wrong.
Microfinance are set up with primary objective to
bring about social benefit, rather than financial benefit.
Though in current Indian scenario, turbulent grow and
lack of regulations make it hard to keep track of their
objective.
Therefore, it is incumbent to chalk out regulations
to reap full potential benefits of microfinance and to
promote cohesion between different MFIs for greater
social good.
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“...poor people are just as human as anyone else. They
have just as much potential as anyone.”
- Md. Yunus, Founder, Grameen Bank
Vaibhav Gahlot, Student at IIT Delhi, Indian, vaibhav.gahlot@gmail.com
Literature cited:
1. Status of Microfinance in India, 2012, NABARD,
http://www.nabard.org/departments/pdf/Status%20of
%20Microfinance%202011-12%20full%20book2.pdf.
2. Kenny Kline and Santadarshan Sadhu, “Microfinance in India: A
New Regulatory Structure”,
http://www.centre-for-microfinance.org/wp-content/uploads/
attachments/csy/1602/IIM%20Regulation%20V11.pdf.
3. Vishal Vivek Jacob, “Microfinance: Current status and Growing
Concerns in India”, Avant Garde, October 1, 2011,
http://www.iitk.ac.in/ime/MBA_IITK/avantgarde/?p=475.
4. Peg Ross, “Learning from the Indian Microfinance Crisis” CGAP,
December 15, 2010,
http://www.cgap.org/blog/learning-indian-microfinance-crisis.
5. R Srinivasan, “Measuring Delinquency and Defaults in
Microfinance Institutions” March, 2007,
http://www.iimb.ernet.in/microfinance/Docs/
MFIDelinquencyWP.pdf
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Proposal
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89