May 22, 2011

Microfinance Institutions in Trouble

Present Scenario:

Scenario 1: Recent turmoil in the microfinance industry in the Indian state of Andhra Pradesh (AP) and the implications of the state government’s response, namely the Andhra Pradesh Microfinance Institutions Act (AP Act) that was issued in late 2010.

Scenario 2: In mid-2010, Kishore Kumar Puli, managing director of Trident Microfin, was looking to double its loan portfolio of Rs 144 crore. Forget growth. He's now chasing recovery, and failing.

Scenario 3: In October 2010, after Andhra introduced a law to protect borrowers from MFI sharp practices, women borrowers stopped repaying. MFIs like Trident, 70% of whose portfolio was in Andhra, were the worst hit. By January, only 5-8% of its Andhra customers were repaying.

Results: The Asian Development Bank’s (ADB’s) backing for bank loans to microfinance companies in India.
The sector faced regulatory scrutiny after reports that MFIs were charging high rates and using coercive recovery methods. This clearly goes to say that we can neither increase the interest rates nor can accept premium for two years as it will be a burden for the loan seekers. RBI has now issued guidelines to regulate the sector.
RBI, in its monetary policy statement for 2011-12, picking up from the recommendations of the Malegam Committee a panel headed by its board member, Yezdi H Malegam, to look into the operations of MFIs, placed restrictions on MFIs to access priority-sector loans. The raft of changes translates into a smaller playing field for MFIs and lower margins.

Information: SKS Microfinance, India’s only listed MFI.

Solution to the concern: Multiplicity of laws on microfinance is creating many unwarranted situations. Although RBI guidelines will resolve this out, but still the question remains the same, i.e. what if people do not repay..? Considering various successful MFI, we can state that as in practice, First loan amount should be given very minimal I.e. Rs.5000 or Rs. 10000.  As the small risk can be taken in relation to large risk. When the individual/group returns the same amount with interest, then the limit can be increased. As these are unsecured loans so precaution should be taken in order to prevent a huge damage.

Considering section 16 of the Contract Act 1872, at a time when there is stringency in the money market/scenario, the banker may declines/put some term and conditions/put high rate of interest. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence.

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