India’s Reserve Bank puts the ‘micro’ back into microfinance

Protesters participate in Khammam, Andhra Pradesh, against microfinance. The MFIs have not been successful in staying the operation of the ordinance but the A.P. High Court has allowed them to continue with their business after registering themselves. Photo: The Hindu/G.N. Rao

From 2010 September, the microfinance sector in India and South Asia has been questioning the basis of ‘growth’ in the sector and suggesting (at times strenuously) that the fundamentals be re-examined. India-based social business advisory firms such as Intellecap had analysed the build-up to the microfinance crisis in Andhra Pradesh, India. Microfinance companies have had to balance their commercial interests with the social and moral expectations of a wide variety of stakeholders.

Muted before the crisis, the allegations became loud and threatening during – of coercive practices, lack of transparency, and usurious interest rates which had led to suicides by borrowers in Andhra Pradesh. The sector had advised against knee-jerk ordinances in response to the crisis as being more damaging to borrowers than punitive to irresponsible or criminal lenders. The solutions they sought are stronger ethical practices, reporting and compliance rules and transparency.

The new Reserve Bank of India measures – now heavily reported and commented on – are the first step towards those solutions. India’s Reserve Bank has released a report to study the issues and concerns in the microfinance sector, which has gone through a major crisis in 2010. The Report of the RBI Sub-Committee of its Central Board of Directors to study issues and concerns in the micro finance institutions (MFI) Sector is summarised here [pdf].

Victims of MFIs display their daily payment cards in Visakhapatnam, Andhra Pradesh. The Reserve Bank of India has appointed a sub-committee to look at governance issues. Photo: The Hindu/C.V. Subrahmanyam

The RBI said: “Credit Support to Micro Finance Institutions (MFIs). The Reserve Bank of India had held discussions with select banks on December 22, 2010 to get an assessment regarding the ground level situation in the microfinance sector in Andhra Pradesh and other States and the need for any interim measures. The banks informed that collections by MFIs in Andhra Pradesh had deteriorated considerably and there were some incipient signs of contagion spreading to other States. Subsequently, IBA based on the feedback received by them from banks had come up with a proposal that there is a need for extending certain relaxations in the restructuring guidelines of RBI for the MFI sector.” The Sub-Committee statement is here [pdf] and RBI’s credit statement is here [pdf].

The financial press has reported the RBI’s intervention extensively.

“S. Bhanu, 48, who runs a tiny textile business in Godavarikhani village in the Karimnagar district of Andhra Pradesh, doesn’t know much about the crisis that has gripped India’s `20,000 crore micro-lending industry,” reported The Mint. “But Bhanu can tell you about how much more she owes the local moneylender in the past two months.”

“India’s central bank Wednesday allowed a special relaxation to banks in restructuring loans to microlenders, a move that will give lenders temporary flexibility in providing credit support to the cash-strapped institutions,” reported the Wall Street Journal.

The Reserve Bank of India (RBI) has asked banks to go easy on microfinance institutions (MFIs) by relaxing certain norms regarding loan restructuring. Banks can now restructure loans extended to MFIs even if they are not fully secured, Business Standard reported.

The Economic Times reported that under the new rules, restructured loans to the microfinance sector, can be classified by banks as standard assets, even though such loans are typically unsecured. The temporary relaxation of asset classification rules for bank loans to the microfinance sector is a move that it said will allow them to continue lending to the industry.

The Hindu reported that to revive the crisis- ridden micro finance sector, a Reserve Bank of India Committee on Wednesday suggested that micro finance institutions (MFIs) be allowed to charge a maximum interest of 24 per cent on small loans which cannot exceed Rs.25,000.

Members of All India Democratic Womens' Association protest against MFIs in front of the Reserve Bank of India office in Hyderabad, Andhra Pradesh. Photo: The Hindu/G.Krishnaswamy

A year ago, in his study ‘Microfinance India: State of the Sector Report 2009′ (published by Sage Publications India, 2009), N Srinivasan of Access Development Services, wrote: “Micro finance sector seems to grow and with no full stop in sight. The sector performed creditably in a year that experienced a widespread liquidity crunch. The Self Help Group (SHG)–bank linkage programme made remarkable progress during the year; provisional data2 indicates that credit to more than 1.716 million SHGs would have been made available during the year. The outstanding SHG loan accounts were 4.14 million representing an estimated membership of 54 million.”

“The MFIs too have recorded an impressive increase of about 8.5 million clients during the year registering a growth of 60 per cent over the previous year. The data collected from 230 MFIs by Sa-Dhan reveals that despite liquidity constraints faced by some MFIs, expansion in client outreach and loan portfolio was vigorous. The MFIs reported a total client base of 22.6 million as at the end of March 2009. The overall coverage of the sector as narrowly defined (outstanding accounts of members of SHGs and clients of MFIs) is estimated to have reached 76.6 million against 59 million last year.”

There’s more on the RBI statements and longer extracts from the reportage here.