NEW DELHI -- Despite last year's global financial meltdown, the
microfinance industry has continued to boom in India because of an
influx of private equity and bank funding, according to a new study.
In contrast, the formal banking system in India recorded 15% growth
over the same period in the number of poor and underserved clients it
serves, expanding its reach to 54 million clients from 47.1 million
clients, according to the study. For the last 15 years, the formal
banking system has been partnering with nongovernmental organizations
to deliver loans to people living below the poverty line (around 20,000
rupees a year, or $430) and people who live in remote areas.
At the current growth rate and with larger loan sizes, microlenders
might outstrip the formal banking sector in lending volumes within a
few years, said N. Srinivasan, the author of the study.
The surge in microloans has been fueled by a brisk flow of funds in
the third quarter of this year, with about $130 million in global
private-equity funds funneled into Indian microfinance institutions,
according to the Center for Microfinance in Chennai.
"In the middle of last year, we thought for a while the meltdown
would strike this sector, but we've seen that it's been largely
unscathed," said Vipin Sharma, chief executive of Access Development
Services. "Growth is as frenetic as it was before."
Mainstream banks, in both the private and public sectors, are
increasingly considering channeling funds into microfinance banks
rather than directly to India's poor. Four public-sector banks and
three private-sector banks entered microfinance this year, making for a
total of roughly 30 banks invested in Indian microfinance. Total bank
funding for microlenders nearly doubled to $2.526 billion from $1.281
billion in the year ended March 31 from the previous year.
Some foreign banks have reduced their exposure to microfinance in
response to the global economic downturn and less liquidity, and
smaller regional microlenders are having a hard time accessing bank
funds because of a recent loan repayment revolt in the southern state
of Karnataka, Mr. Srinivasan said. Borrowers in two rural districts
stopped repaying their loans en masse at the urging of local religious
authorities who felt that microfinance had taken too strong of a hold
in their community.
But several state banks and major Indian lenders stepped in to fill
the gaps. At the same time, a number of major microlenders have pooled
28 million rupees to form Alpha Microfinance Consultants, which will
set up a credit bureau to reassure investors and to prevent future
repayment crises like the one seen in Karnataka.