OPINION: Microfinance in India: To hell and back
Monday, October 20, 2014
Alok Prasad, chief executive officer of Microfinance Institutions Network (MFIN), a lobby group for the Indian microfinance industry that recently got the status of a self-regulatory organization from the banking regulator, says “we did not waste a good crisis”, on the fourth anniversary of the microfinance crisis that originated in Andhra Pradesh.
This statement is generally attributed to Rahm Emanuel, a former White House chief of staff, in response to the Wall Street meltdown, but actually comes from a comment made by Niccolo Machiavelli, a well-known Italian political thinker of the 15th century, who wrote, “Never waste the opportunity offered by a good crisis.”
“That’s exactly what the microfinance industry has done. It took a hard look at itself; it reformed and moved on, doing what it knows best—providing micro-loans to low-income households,” Prasad told me, sitting at his Gurgaon office. In a nation of 1.2 billion people, half of whom are not served by the formal banking system, the microfinance industry acquired a halo in the early part of last decade.
A highly successful listing of SKS Microfinance Ltd in July 2010, and strong all-round growth of loan assets created a situation when new funding was on demand in an industry that was then lightly regulated by the Reserve Bank of India (RBI). Then in October 2010, the cookie crumbled, with the Andhra Pradesh government promulgating an ordinance to curb the activities of microfinance companies. The provocation was allegedly the coercive collection policy of microfinance institutions (MFIs) that drove many borrowers to commit suicide. It mandated MFIs to specify their area of operation, rate of interest and recovery practices. It also became mandatory for MFIs to seek the state government’s approval before issuing any fresh loans.