Microfinance in India has grown to serve millions of households in recent years, though this growth is still dwarfed by the immense need for financial services. However in recent months, microfinance has come under significant scrutiny in the Indian state of Andhra Pradesh, with concerns raised over the treatment of borrowers and the levels of interest rates being charged. Many commentators have accused commercial microfinance institutions – those organisations whose primary motive is making a profit on microfinance – of behaving irresponsibly, pursuing growth and commercial returns as they allow clients to build up excessive levels of debt. The controversy is also suggested to be, in no small part, a backlash toward the recent initial public offering by SKS Microfinance, India’s largest for-profit microlender, headquartered in the state capital.
The situation in Andhra Pradesh had an effect on the microfinance industry as a whole, including Opportunity’s socially focused partners who aim to help people out of poverty, not make a profit.
Andhra Pradesh – the centre of the concern
Late last year, local politicians instructed microfinance borrowers in Andhra Pradesh to stop making loan repayments until the microfinance institutions met certain regulatory requirements. This put at risk the sustainability of all microfinance institutions in the area – with social microfinance providers being affected as well as commercial. About 15% of Opportunity’s India Program portfolio operates in Andhra Pradesh, and Portfolio At Risk (PAR) for these partners has been affected in recent months.
Elsewhere in India – the need for bank lending
Outside Andhra Pradesh, client repayment rates have not been impacted. What is of concern however is the hesitancy of banks to lend to microfinance institutions in all states, not just Andhra Pradesh. This reduced funding affects a microfinance institution’s ability to expand its reach to people in need – those still waiting for much-needed financial services to help them start small businesses, earn incomes and provide for their families.
The need for microfinance in India remains massive – and Opportunity’s partners have a strong track record of serving poor communities with our social mission. Our partners remain capable of meeting the needs of the poor in India now and in the future, and the current lack of bank funding for microfinance is of concern. Consequently, Opportunity’s ongoing support of our microfinance partners is now more important than ever. It is vital that our partners have the resources they need to increase their effectiveness in the fight against poverty.
In India, Opportunity’s local subsidiary Dia Vikas Capital is playing an important advocacy role in the sector. Opportunity and Dia Vikas are constantly monitoring the situation in India and advocating on behalf of our microfinance partners to the Indian government and local banks. Recently Robert Dunn, CEO of Opportunity, and KC Ranjani, Managing Director of Dia Vikas, had a very positive meeting with the Deputy Governor of Reserve Bank of India to discuss the current situation. Positively, he reiterated that the Reserve Bank of India remains supportive of financial inclusion for the people of India, and the important role microfinance can play in bringing this about.
The Reserve Bank has in fact asked banks to keep funding the microfinance sector, but in a somewhat unstable environment, some banks are not rushing to do so. This could lead to a reduction in loan portfolio (and therefore the number of clients served) and could also reduce our partner’s ability to leverage donor funds (done to increase impact). Dia Vikas is continuing to help our partners obtain funding from local banks and is actively engaging with relevant stakeholders to advocate on behalf of our partners and their clients – reiterating our social mission and concern over microfinance practices that do not serve the best interests of the poor.
The Malegam Report and the future of the sector in India
With the situation in Andhra Pradesh raising broader questions about codes of conduct, transparency, profitability and the effectiveness of microloans, the Reserve Bank appointed the Malegam Committee to review the current climate and offer recommendations.
Its report was released in late January, with the aim to restrict the detrimental behaviours of some of the commercial MFIs operating in India and to offer some regulation for the sector. The review is welcomed by Opportunity International Australia, in as such as it provides an opportunity to refocus the microfinance industry on the needs of poor communities – those whom it was established to serve.
Significantly, the report confirms the Reserve Bank’s support for the microfinance sector as an important means of providing access to financial services to people living in poverty. We are encouraged that many of the recommendations of the Malegam Report are already in effect and actively practised by our socially-focused partners. Key aspects of the report include:
• The introduction of codes of conduct, outlining that no coercive methods are to be applied for recovery of loans, specifications about locations where recoveries can take place, the establishment of grievance processes and client protection charters (Client-focused principles, including the implementation of client protection charters, have been a key component of Opportunity’s India program since its inception. Already in 2011 we have held a workshop with our partners on how to strengthen their client protection charters).
• An emphasis on the transparency of interest rates and how they are calculated, including a recommendation for interest rates to be capped at 24% (Our partners explain the terms and conditions of loan products to new and returning clients, often within the context of a wider financial literacy program).
• Increased lending by banks to MFIs is encouraged and priority sector lending stays in place (priority sector lending is the requirement by the government for banks to lend a percentage of their funds to sectors the government wants to support, including the social sector – this is encouraging as the funding needs of MFIs remain as urgent as ever).
• Increased emphasis on skills development and training of microfinance clients (Opportunity’s partners provide a range of business and financial literacy training to their clients. In many cases, our partners have employed innovative and intensive approaches to building the skills of marginalised women. For an example, see here: http://www.opportunity.org.au/Resources/DVDs/Rope-Weavers-DVD.aspx)
Opportunity is confident of the crucial role that social microfinance plays in enabling poor people to transform their lives. We welcome and encourage developments in the sector that refocus attention on the needs of poor communities. Together with our supporters in Australia, we need to continue to support the excellent work of our microfinance partners in India. Your support is highly valuable, effective and needed now more than ever.
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