BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Is The Microfinance Sector In India Headed For a Crash?

Following
This article is more than 10 years old.

SKS founder Vikram Akula

Shares of microfinance institutes and banks active in that space in India continued their downward spiral amidst news reports that nearly all borrowers in one of India’s largest states have stopped repaying their loans.

The New York Times reported today that almost all borrowers in the state of Andhra Pradesh--the hub of microfinance in India--had abandoned their loan repayments and were being encouraged to do so by politicians who accused the industry of obscene profits at the expense of the poor. As per the report, Indian banks have about $4 billion tied up in the industry.

SKS Microfinance, India's largest, has seen its stock price crash from a high of Rs 1,404.85 in mid September to its current Rs 639.40. In the past day alone it has dropped 20%. Axis Bank, another lender in that space, has seen its stock dip from a high of Rs. 1,588.75 a month ago to its present Rs. 1,426.

"There has been a push for growth in India recently," says Camilla Nestor, vice president for microfinance programs at the Grameen Foundation, "and the push for social growth has been lost in the push for profit." The current crisis in India, she adds, "is not about the basics of microfinance but how different groups have conducted themselves." (In the past Grameen and SKS founders, Nobel laureate Muhammad Yunus and Vikram Akula, have had heated exchanges on this.)

The current crisis started last month when the government of Andhra Pradesh came up with new, strict regulation on the basis of news that 30 people in the state had committed suicide in 45 days because of the coercive methods of MFIs.

Nestor says the industry needs to get back to the basics and offers tools that can help it do that. The Indian sector, she says, has not been innovative in this at all. One tool that she thinks can help MFIs going forward is Social performance tool/social impact tool. It allows MFIs to determine the poverty levels of their clients and to track their movement out of poverty and fine tune the loan packages accordingly to client needs.  This is basically a list of 10 questions of observable indicators that loan officers can use when they are screening clients and includes indicators like what material is the roof made of, is the floor dirt, are their in/out-house facilities, are the kids in school. The are easily observable and can be measured in line with the poverty levels of the country. Many MFIs couple this with their own mechanisms to educate their clients, she says.

Another important addition can be to find ways to couple financial services with training and skill building that help borrowers in their respective entrepreneurial initiatives.

"Not all MFIs in India are at fault," she says. "Our concern is that the current situation will hurt the others that are doing the most good."