Insights

Written by P. Raghavan | Updated: May 3 2011, 07:20am hrs
A policy response to the Indian micro-finance crisis

By Renuka Sane and Susan Thomas

Indira Gandhi Institute of Development Research,

Mumbai

April 2011

The crisis in the microfinance institutions in Andhra Pradesh and the report of the Malegam Committee has brought to the fore the issues related to the regulation of the sector. Delving into the issues, Renuka Sane and Susan Thomas from the Indira Gandhi Institute of Development Research,

note that the phenomenon has been widespread across the globe as the original goals of poverty alleviation, which was the primary goal of microfinance, clashed headlong into the profit maximisation goals of the financial institutions, who had helped scale up the business in more recent times.

The ordinance promulgated by the Andhra Pradesh government has almost frozen the activities of the microfinance institutions, thus bringing in an urgency to set matters right by forging a conducive regulatory framework that would push the lending activities back on track.

Looking at these issues in detail, the study points out that there are at least three areas where the government has to play a substantial role. These include the need to protect the rights of the borrowers who are the primary consumers in the sector, ensure prudential oversight of risk taking by the lending firms, and ensure the development of the sector. Apart from protecting the lender, the prudential regulations will ensure a smooth flow of information between financial institutions and micro financial institutions and between the MFIs themselves, which will ensure that the details of the quality of the borrower are available across the segments, thus providing well informed decision making and greater stability in operations.