FE Editorial : Reviving microfinance
It is no secret that, in the last two years, microfinance in India, especially after the Andhra government’s legislation (that heavily regulated the sector), has suffered. According to the recent State of the Sector report by Access Development Services, the customer base for the industry has shrunk from a peak of 76.7 million in 2010-11 to 68.2 million in 2011-12, whereas the outstanding loan portfolio for the industry, which grew four times between 2007-08 and 2010-11 to 21,556 crore, has declined to 20,913 crore in 2011-12. In 2010, a spate of suicides allegedly triggered by excessive indebtedness in rural Andhra Pradesh had Andhra’s government acting populist by forbidding MFI officials to visit households to recover loans, and by requiring MFIs to register each of the operations with a local authority. This led to massive difficulties in recovering loans, as numerous borrowers took advantage of the law to refuse repayment, in a state which was responsible for almost a third of the industry’s $5.3 billion loans. And it didn’t help when RBI followed suit by recommending a cap on interest-spreads.
So, is the industry, which promised to empower women and unleash the entrepreneurial energy of large swathes of poor in South Asia, a failure and all set for a stop? Perhaps not, because micro-credit continues to hold definitive advantages. For one, lending to the poor from an MFI is more preferable than lending from the only other alternative for the poor—local moneylenders and loan-sharks, who, thanks