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Indian microfinance warns of crisis after suicides
Rising skepticism about the effectiveness of using profit-making microfinance companies to extend credit to India's poor has led to a freeze on new bank funding for the $6.5 billion sector, which microfinance executives warn could turn into a liquidity crisis.

Microfinance -- initially designed to free the poor from usurious rates charged by moneylenders by giving them small, affordable loans -- has come in for increasing scrutiny as booming growth and profitability have complicated its founding ideals.

The government of Andhra Pradesh state -- which accounts for about a third of microlending in India -- is investigating 56 suicides that occurred over the past 60 days that were allegedly linked to high interest rates and aggressive loan collection tactics by microfinance institutions, principal secretary for rural development R. Subrahmanyan said Thursday.

The investigation should be completed next week, he said.

Those suicides prompted the state to issue an emergency ordinance two weeks ago that requires microfinance institutions to register with the state by Friday and bans loan collectors from visiting people's homes.

Andhra Pradesh's crackdown is rooted in the belief that poor borrowers should not pay a profit-making intermediary -- i.e. a microfinance company -- for access to credit, when the state already has 1 million self-help groups that bring funds directly from banks to borrowers.

That network last year brought 64.0 billion rupees ($1.4 billion) from banks directly to 10 million households, without relying on any profit-taking intermediaries, Subrahmanyan said.

"What microfinance institutions say is what banks are giving to self-help groups is not meeting requirements," Subrahmanyan said. "That may be so, but the solution does not lie in introducing another agent."

Andhra Pradesh is urging banks to provide more credit to self-help groups, he said, even as banks cut off credit to microfinance institutions.

Since the state's emergency ordinance, commercial banks -- which provide 80 to 85 percent of capital at most microfinance companies -- have stopped approving new loans nationwide, said Alok Prasad, chief executive of the Microfinance Institutions Network, a group of 44 of India's largest microfinance companies.

"For the industry, raw material is money. If my raw material suddenly stops, how do I stay in business?" Prasad said. "I'm not saying it's hitting anyone hard today, but it will."

At least one bank based in Hyderabad has asked the microfinance companies it lends to to account for client suicides, loan collection tactics and the use of middlemen, as well as to declare that their interest rates are reasonable.

Prasad said the 70 to 75 registered microfinance companies, many of whom he represents, are not the problem. He points the finger at the 500 to 800 unregulated companies, which he says are little better than loan sharks trying to dress themselves up as proper microfinance groups.

Prasad met with Reserve Bank of India officials on Thursday to urge them to assert themselves as the sole regulator of the industry.

"The central bank understands what we are doing, but the Andhra Pradesh state government doesn't," he said.

The central bank oversees only those companies, generally the largest, which are registered non-banking finance companies. They cover 80 percent of the business by loan volume, but constitute a small percentage of the total number of India's lenders, the Reserve Bank of India says.

The central bank encourages banks to lend to microfinance companies by classifying them as a "priority sector." All commercial banks in India, including foreign ones, must lend about a third of their book to priority sector enterprises.

However, the Reserve Bank seems uncomfortable with the profits reaped by microfinance companies, ordering a panel earlier this year to examine whether the "priority sector" designation should be revoked. That question is likely to be taken up by a committee formed last week to broadly examine microfinance oversight.

Prasad said his 44 member companies have pledged to bring down interest rates, with 70 percent reducing rates by 1 to 3 percentage points over the last 12 months.

On Wednesday, SKS Microfinance said it was cutting its annualized borrowing rate in Andhra Pradesh from 26.69 percent to 24.55 percent.

The company, India's largest microfinance lender, was the first to go public here. Its stock closed at 1,003.5 rupees a share Thursday, down 26.5 percent from its first day of trading.

An Andhra Pradesh police official declined to answer questions by phone.
Source :
Business Week
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