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News tagged as "India"
November 20, 2012

The Indian microfinance sector is back on track

Tags: India, microfinance | by Agustín Vitórica, Ambers & Co Microfinanzas

 

Author: Agustín Vitórica -  Ambers & Co Microfinanzas - remEX Founding member

The microfinance sector in India covered many front pages of international media in late 2010 and 2011 when Andhra Pradesh, the state that had been the hub for microfinance in India, imposed in an act tight regulations on micro-lending firms, citing usurious interest rates and the use of coercion to recover loans. Now, efforts from the Federal Government and the central bank are beginning to produce results and the sector is starting to grow again in a country where financial inclusion is tremendously needed. The Indian census released in March 2012 confirmed that 48% of the Indian population lacks access to financial services, which represents nearly 500 million people. So far, microfinance institutions are only serving 35 million people and except for the State of Andhra Pradesh, overindebtedness is practically non-existing according to data provided by the credit bureau High Mark.

The policy that is being implemented by the federal authorities has pivoted around three main areas:

  • A new regulatory framework: following the start of the Andhra Pradesh crisis, the Federal Government decided to set up a Committee to study all the issues claimed by the Andhra Pradesh government, called the Malegam Committee as the chairman of the committee was Shri Y H Malegam, a senior member on the Reserve Bank’s Central Board of Directors. The Malegam Committee issued in January 2011 a report with recommendations to the Reserve Bank of India (RBI) that would result in a new regulatory framework for the sector. The recommendations where included in a new microfinance bill that has been tabled for approval in the Indian Parliament. In the meantime, the RBI has effectively implemented all the regulations that are included in the new bill in its 2011 and 2012 circulars. A new category of Non Bank Financial Companies (NBFC) has been created called NBFC-MFIs implying a strong support from the RBI to financial inclusion. In addition, the new microfinance bill will bring one important addition to the regulatory framework: it will reserve to the RBI the regulation and supervision of the microfinance institutions, not letting Indian States to issue new acts that affect the microfinance institutions.
  • Client protection: the new framework is very strong in client protection. The new bill and the RBI circulars impose caps to the maximum interest rates that microfinance institutions can charge their clients, caps on the maximum loan amount, caps on the client’s total permitted indebtedness and limits to the maximum tenure and the profit margin that the microfinance institutions can obtain.
  • Limit on the number of players: The Indian microfinance sector had an excess of players servicing the same clients that can result in overindebtedness. The limitation in the number of credits that one client can take along with the 10% margin cap imposed by the RBI to microfinance institutions will force consolidation in the sector and will push institutions to professionalize and centralize their internal credit processes as only large institutions will be able to cover all their operating expenses in the 10% margin cap that the RBI has imposed.
  • Strong microfinance credit bureau: an essential factor that caused the Andhra Pradesh crisis was the absence of a credit bureau where information was available for microfinance institutions about the number of loans already taken by clients and their credit history. Following the RBI regulations a strong microfinance credit bureau called High Mark is already in place. 98% of the NBFC-MFIs report already to the bureau, including both positive and negative information. Information shows that there are only 35 million unique clients and only 30-40% have more than one loan. The credit bureau is currently working to include information from the Self Help Group programs offered by the local state governments.

Ambers&Co Capital Microfinanzas team with Indian women clients in a recent trip to India

Ambers & Co Capital Microfinanzas team with Indian women clients in a recent trip to India.

As a result of all these changes, lending has returned to the microfinance institutions in India from commercial local banks and international microfinance funds. Additionally, international and national microfinance funds have joined forces to large international social investors and multilaterals to inject more equity in microfinance institutions. Both equity and debt funding are essential to finance the much needed growth of microfinance in India in order to extend financial inclusion among the poor Indian population.

Initiative financed by: Initiative financed by AECID
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