Lack of Funding Still Plagues India Microlenders

Thursday, March 17, 2011

Six months after the state of Andhra Pradesh slapped restrictive laws on India’s microlenders, availability of funding continues to plague the once-thriving lenders to the poor despite official encouragement.

Confidence building is needed to revive financing for microfinance operations, said Mathew Titus, executive director of Sa-Dhan, an industry body.

“You need somebody to step up and say the industry is fine,” Titus said on the sidelines of a conference organised by Sa-Dhan, which represents about 250 non-profit Indian microlenders.

The industry suffered a setback last year when Andhra Pradesh, which had the largest microfinance market in India, enacted legislation to regulate the industry following complaints about high interest rates, aggressive recovery practices and overextended borrowers.

Since then, India’s central bank and finance ministry have sought to allay concerns and encourage funding.

While some lenders including state banks and investors have resumed lending, a lack of funds has hurt smaller institutions, which typically have higher operating costs.

“Funding is the biggest problem. The cost of delivery is too high due to communication problems, and weekly repayment schedules,” said Biplab Saharia, who manages loans for Satra, a non-profit that serves far-flung customers in the northeastern state of Assam.

However, investors remain wary and borrowers are confused about the future of microfinance, which has attracted for-profit players into an industry that some critics argue has strayed from its social mission to help alleviate poverty.

Loans in India’s $4 billion microfinance sector average about $150, and are mostly to women.

Jayant Sinha, chief general manager of State Bank of India (SBI.BO), India’s largest lender, said banks need to exercise caution in lending to microfinance firms.

“We have to be careful … ultimately we are responsible for our lending,” he said.

The reluctance of domestic lenders is a deterrent for international investors, said Richard Weingarten, managing director of the Norwegian Microfinance Initiative, an investor in Indian MFIs.

Source: Reuters (link opens in a new window)