MICROCAPITAL BRIEF: Industry Players Say Indian Microfinance Institutions Should Not be Crushed Even Though “Some MFIs Have Gone on the Wrong Path”

The Times of India, an Indian newspaper, recently reported on microfinance industry actors arguing that microfinance institutions (MFIs) should not be compromised by “the greed of a few big MFIs” and associated regulations such as the Andhra Pradesh Microfinance Act, which was passed in December 2010 to regulate MFIs following multiple suicides. Ela Bhatt, the founder of India’s Self Employed Women’s Association Bank (SEWA), was quoted as having stated, “We cannot be witness to slow death of the whole MFI movement, which is development oriented. Some MFIs have gone on the wrong path and should be punished but small and mid-sized NGO oriented MFIs, who are doing a good job, must not be allowed to die.”

Another concern regarding the potential decline of microfinance is the potential growth of money lending. Spandana Sphoorty founder and managing director Ms Padmaja Reddy reportedly stated that, “Nearly 70 to 80 percent of former MFI employees have started money lending as they are familiar with the MFI model. One of our former regional managers is giving loans of around INR 2000 (USD 44), for which INR 2400 (USD 53) has to be repaid in 12 weeks, a whopping 160 percent effective rate of interest.” On an optimistic note, Ms Padmaja Reddy adds that “now that RBI is to regulate the sector, no one will deviate from the law once new regulations are in place.”

By Carol Kim, Research Associate

About Self Employed Women’s Association Bank (SEWA): SEWA Bank is a cooperative that was registered in 1974 and operates under the supervision of the Reserve Bank of India (RBI), India’s central bank, and the state government of Gujarat. As of January 2011, SEWA Bank operates in the city of Ahmedabad and several rural districts of Gurjarat. SEWA Bank’s members consist of poor women from underserved, rural communities. The bank’s goal is to empower these women by providing them with access to financial services. As of December 2009, SEWA Bank reported to the US-based nonprofit Microfinance Information Exchange (MIX), total assets of USD 31.7 million, a gross loan portfolio of USD 10.4 million, return on assets of 0.52 percent and return on equity of 3.06 percent.

About the Reserve Bank of India (RBI): Established in 1935, the Reserve Bank of India undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies (NFBCs). The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in cases of banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. In 1979, the National Bank for Agriculture and Rural Development (NABARD) was formed at the behest of RBI to provide regulatory oversight to regional rural banks (RRBs) and to promote the development of agricultural lenders: tasks that had been the responsibility of RBI. While all microfinance institutions (MFIs) and non-banking financial companies still operate under RBI regulations, the responsibility for inspecting nonprofit MFIs, agricultural lenders, RRBs, state cooperative banks, district central cooperative banks and state cooperative agricultural and rural development banks was transferred to NABARD. RBI maintains these responsibilities for for-profit MFIs. Although RBI was originally the parent organization of NABARD, RBI reduced its stake in NABARD from 72.5 percent to 1 percent in October 2010.

About Spandana Sphoorty Financial Limited: Spandana Sphoorty Financial Limited provides microcredit and “credit-plus” services to low-income households in India. The company was founded by Padmaja Reddy in 1998 and receives its funding from development finance institutions and banks. As of March 31, 2010, Spandana had a gross loan portfolio of USD 787 million, 3.7 million borrowers, return on assets (ROA) of 8.99 percent and return on equity (ROE) of 55.7 percent.

Sources and Additional Resources:

The Times of India: “Do MFIs deserve a second chance?”, August 2011, http://articles.timesofindia.indiatimes.com/2011-08-01/hyderabad/29837712_1_mfi-sector-spandana-sphoorty-poor-borrowers

MicroCapital.org: “MICROCAPITAL BRIEF: Microfinance Institutions in India Continue to Struggle for Funding After Loan Recast, Adoption of Malegam Proposals”, July 8, 2011, https://www.microcapital.org/microcapital-brief-microfinance-institutions-in-india-continue-to-struggle-for-funding-after-loan-recast-adoption-of-malegam-proposals/

MicroCapital.org: “MICROCAPITAL BRIEF: Microfinance Experts Say “Microcredit Is Not The Enemy””, December 21, 2010, https://www.microcapital.org/microcapital-brief-microfinance-experts-say-microcredit-is-not-the-enemy/

MicroCapital’s Self Employed Women’s Association Bank (SEWA), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Shree+Mahila+Self+Employed+Women’s+Association+%28SEWA%29+Bank

MicroCapital’s Universe Profile: Reserve Bank of India (RBI), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29

MicroCapital’s Universe Profile: Spandana Sphoorty Financial Limited, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Spandana+Sphoorty+Financial+Ltd

Browse the MicroCapital Universe and add your entry to the wiki at https://www.microcapital.org/microfinanceuniverse/

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