The End May Be Nigh for Microfinance in India

Tuesday, June 7, 2011

Reserve Bank of India Governor Duvvuri Subbarao said a few weeks ago that “hopefully, sooner rather than later” there will be national rules governing microfinance institutions that would trump the law imposed by Andhra Pradesh last year that has gutted the business model of private microcredit companies.

Mark Stoleson, chief executive officer of Legatum, a Dubai-based investor in the industry, was in Delhi this week with a warning: Act now, or face what he termed a “Lehman Brothers at the bottom of the pyramid” because the vast amounts of Indian bank funds that have been loaned through microfinance companies will become uncollectible.

The Andhra Pradesh law effectively prevents private microlending institutions from operating in the state by vetoing most of the collection practices the industry currently follows. The resulting crisis is affecting the industry throughout India, he adds, because companies are collecting debts in other states to pay off their banks without re-lending to borrowers, crimping the flow of funds to those among the nation’s poor who have come to rely on a steady stream of microcredit at cheaper terms than informal moneylenders offer.

Source: Wall Street Journal - India Realtime (link opens in a new window)