Leading the argument that small money is big profit are India’s many microfinancing out-fits. With a rollercoaster ride for an image they went from big boom to big bust and are now enjoying a resurrection. Microfinance is now a secure option that allows for financial inde-pendence and leadership in this field is rising steadily.
India being a perfect example of a textbook case for microfinance, there was a slow beginning in the 70s, but then somewhere in the 80s there wasn’t much heard about it. In the 2000s it came into its own, and in 2010 when SKS, India’s then largest microfinance company with a USD 1.2 billion loan book went public, there was a sense that microfinance had edged towards the mainstream. But unfortunately, things went sour pretty quickly after that, as the Andhra Pradesh government accused the company and the industry of strong-arm tactics to collect from the poor, that lead to farmers committing suicide. The state then tightened the rules, most of the loans were written off and everything came to a near standstill.
In 2015 the outlook seems to be improving. In a sort of redemptive move, SKS reduced interest rates from 23.55% to 22% with effect from 1 July 2015. India’s sole listed micro lender says that this is in keeping with the company’s policy of passing on cost advantages to its borrowers, which accrue from reduction in the cost of borrowing, economies of scale and operational efficiency.
While that is, at its core, the true benefit of microfinance, given SKS’s somewhat rocky image in the past, pundits are quick to point out the underlying reason. MFIs were compelled to pass on the benefit of lower costs to its borrowers as the Reserve Bank of India (RBI) had imposed a margin cap of 10% for MFIs with a loan book of USD 15.63 million and above (at June 2015 exchange rates)
Slowly but surely micro lenders are garnering capital once again. Over USD150 million of equity was pumped into microfinance groups in 2013-2014 as per Grameen Capital India, a social-investment bank. 2015 is seeing India’s MFI increase its total loan portfolio 61% over the last year, to reach USD6 billion. This is clearly a boost to an industry that nearly collapsed just five short years ago. India’s poor and working-class Indians, who cannot access mainstream banks for their business and survival, are also beaten at the hands of non-regulated, unethical moneylenders. For them, it’s clear that the MFI route, even with its own limitations, is the answer and that demand is what has driven growth over the past two years.
2015 is seeing India’s MFI increase its total loan portfolio 61% over the last year, to reach USD6 billion. This is clearly a boost to an industry that nearly collapsed just five short years ago.
So high is the demand that the RBI currently has about 17 applications from micro lenders on its table, to seek licences that allow them to operate as small finance banks. This is due to the new bank licence specially crafted by the RBI to promote regulated, safe financial services for the lower end of India’s markets. So far the licence has been granted to Bandhan, a Kolkata based micro lender.
The fear of the 2010 crisis looms large though. The sudden and rapid surge of MFIs clambering up to seek licences is dangerous, according to industry experts who say it would be wise to pause and assess the long term situation more carefully. Indian MFIs have 30 million individual borrowers with a loan size of USD250. If the industry is to prevent another tailspin and crash, then ideally, the pace of expansion should be slightly tempered.
Vikram Akula, the Indian MFI poster child is no stranger to the ups and downs of microfinance in the country, having been in the eye of the storm in 2010. When he left SKS, the accused company that started the trouble, in 2011, there was plenty of time for contemplation. As head of his new company Vaya Finserv, he continues provide financial services for the poor and the company has applied to the RBI for its own banking licence. Akula claims that he is now careful about the kind of investors and management he includes in his financial inclusion service. The new company is now effectively operational as an agent of a bank so all loans are more carefully screened. Operating out of Maharashtra (where farmer suicides have been at an all time high over the last thee years), Bihar (stricken by severe drought) and Karnataka, he also plans to expand to Jharkhand and Oris-sa. The aim, as per Akula’s list of ambitions is to model it in India, as successfully as the Philip-pines and Kenya.
A July 2015 report in the Times of India states that while normal banks struggle for profit and growth, microfinance institutions have seen their gross loan portfolio grow by an impressive 61% to Rs 40,000 crore (or approximately USD 6263 million)
The trend for microfinance is up, up and up. With a country that has seriously high expectations in the world for raising its economic profile, microfinancing leaders have shown great vision and con-fidence in the Indian economy and the average Indian worker to grow these numbers successfully towards mainstream competition with banks.