See how microfinance in India has evolved

The banking system was standing on its head, we just put it back on its feet says Mohammad Yunus, founder of Grameen bank, Bangladeshi Economist, Banker and Nobel peace prize winner in his TED talk, talking about the microfinance industry. The subcontinent has now forced the system not just to stand on its feet, but also to start walking. The Indian microfinance industry has come a long way.

The collapse of Indias first microfinance bubble in April 2010 taught a growing system a number of lessons. Microfinance borrowers at Krishna, in Andhra Pradesh were encouraged to stop paying back to the companies. There was a growing resentment against the microfinance institutions (MFI). This was a result of mismanagement by some MFIs which were charged of unethical collections, high interest rates and profiteering.

This showcases how politics and emotions could heavily influence the microfinance system.It created the need for more regulation in this industry. The governments setting up of the Malegam Committee to look into the regulatory aspects of micro finance was an importantincubation step in a fast growing industry with teething problems.

The MFIs operating as NBFC (Non banking financial company) form a majority of the MFIs in India with about 50 NBFCs responsible for 80% of all outstanding microfinance loans¹. With the new Malegam committee came in some new regulations. The NBFCs and MFI-NBFCs were now more regulated than before. Stringent rules were introduced which specified the debt and equity investments that NBFCs can receive and the FDI that is allowed.

RBI accepted the Malegam report largely and specified more detailed rulesand guidelines for priority sector lending. But there were still issues that needed addressing. With more improvised drafts and recent bills, many loopholes in the system are being plugged. The Microfinance Institutions (Development and Regulation) Bill 2012 proposed in May, makes the process of regulation in microfinance even more stringent and specific.

The constitution of a Microfinance Development Council, the regulation at a state, central and district level, more RBI regulation on microfinance are some features of the new bill.

From this bill on, RBI can set the maximum interest rate that can be charged by lenders and it can set performance standards to ensure that MFIs use fair and reasonable methods for loan recovery. Parallelly, there are also organizations like the MFIN, which are self regulating microfinance bodies, which discuss their growth, development and issues, bringing all the MFIs on a common platform.

India is beginning to see the emergence of a parallel, sophisticated banking for the people who cannot meet the minimum requirements of main stream banking. But the larger question is, if the consumers of microfinance can be subsumed into main stream banking, or if they will remain as micro finance borrowers.

Of course, it will require that the individuals that use microfinance must begin to use it for income generating activities apart from using it for pure consumption
activities. India’s great population of little economic consumption people can drive the nation to its economic heights.

Proper financial education and advice to the MFI clientele can go a long way in this new journey. We are finally beginning to understand little money. A lot of little money, makes a nation wealthy, indeed.

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¹Microfinance in India: A new regulatory structure, Kenny Kline and Santadarshan Sadhu