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A tsunami of debt is building up in Tamil Nadu – and no one knows where it is headed

G Venkatasubramanian trots out some astonishing numbers. Over the last 15 years, he and his fellow researchers at Pondicherry’s French Institute have been studying debt bondage among families in 20 villages in Tamil Nadu. Half of these settlements are in the coastal district of Cuddalore, and the others are in the adjoining district of Villupuram.

Their study is throwing up some puzzling changes in how much these families borrow – and how. In 2001, the average annual income of these families was Rs 16,000. Average debt was Rs 10,000. Come 2016, annual income has risen five-fold to Rs 80,000. Average debt, however, stands at Rs 250,000. This is a 25-fold increase.

How these families borrow has changed too. Earlier, only land-owning communities – Mudaliars, Chettiars or Reddiars – lent money. But now, said Venkatsubramanian, the Scheduled Castes are increasingly lending and borrowing among themselves. “A family will borrow Rs 50,000 and lend Rs 25,000,” he said. At the same time, communities that once looked down upon moneylending are entering the trade. The Nadars of southern Tamil Nadu, for instance, have begun lending in central and northern parts of the state.

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the bandhan experiment

early in april, the rbi surprised most financial sector watchers by granting a banking license to bandhan, a microlender with most of its operations in eastern india. in a story out today, my colleague atmadip and i take a closer look at this decision. and say that this is a high stakes experiment — for the rbi, which is looking for fresh ideas on how to deepen financial inclusion; for the mfis, which, given rising competition from banks, mobile companies and banking correspondents, are looking for new ways to survive and grow; and for bandhan itself, which has to pupate into a bank without losing its quick response times, but while guarding against mis-selling of financial products to its vulnerable client-base.

Yet more stand behind tiny counters and sell nimbu paani or bhelBSE -0.80 %. The nature of enterprise is local, small and on the edge of subsistence.

with the standing committee rejecting the mfi bill, old questions come back to haunt MFIs

and, after a long time, i write again on india’s search for regulatory mechanism for microfinance.

With the Standing Committee on Finance rejecting the latest avatar of the microfinance bill, old questions about the microfinance sector have resurfaced. Since 2010, when the controversial Andhra Pradesh ordinance made it all but impossible for Microfinance Institutions (MFIs) to operate in their largest market, the industry has been hoping that the passage of the bill would result in the removal of the ordinance.

But now, with the bill going back to the drawing board, says Mathew Titus, the executive director of industry association Sa-Dhan, banks will be nervous about the risk of further state-level interventions…

The other question is on how to regulate MFIs. After the 2010 AP Microfinance crisis, it seemed that a large part of the institutional response would take the form of this Bill — “The Micro Finance Institutions (Development and Regulation) Bill, 2012.” However, with the Standing Committee returning the Bill, that question is wide open again.

also, see these. on the draft bill. on the need for the states to have a stay in mfi regulation. another story on the draft bill. on how to regulate mfis – story 1, story 2, story 3. and the need for regulation: story one, story two, story three, story four and story five.

on vikram akula, sks and the mbts

on vikram akula’s attempt to get back into sks microfinance, by my colleague john samuel raja and me.

the case of the surprising amendment to the mfi bill

A last-minute change in the bill to govern microfinance institutions has sent banks and MFIs into a tizzy. The bill has raised the loan credit limit tenfold, a move that could alter the character of these lenders from tiny loan providers to the poor to financers of the relatively affluent.

yep. after all the reports of mfis overlending to the poor and pushing them into debt traps, the rbi had introduced a loan limit of rs 50,000 for each borrower. and now we find that the draft MFI bill which has just been introduced in the parliament has upped that credit limit to an incredible rs 500,000. today’s ET carries a (reassuring) story on this change and how it entered the bill.

there are other differences between this bill and its previous avatar — released for public comments last june. but on the whole, this seems to be a better bill than the previous one. better safeguards.

the transitions of indian microfinance

india’s beleaguered mfis are making a set of fundamental changes to their business models. in a bid to survive, one bunch is diversifying beyond microfinance into lending for cycles, vehicles, homes, tractors and whatnot. another lot is sticking to microfinance but making some significant changes within that — like who they lend to and how they lend.

in the process, they are all going through a bunch of massive transitions — from unsecured loans to secured loans, from group loans to individual loans, from the poor to those well above the poverty line. my latest story on the mfis discusses this transition and then talks about the issues this diversification poses before regulators.

(Usha) Thorat fears that if the NBFC arms lend the way MFIs did during the boom years of microfinance, there might be a surge in secured loans, but without enough due diligence into the end use of that loan, the borrower’s repayment capacity or the worth of the asset. For example, if a poor woman uses a loan to buy a house in a slum or an informal tenement, she won’t have a title. How can that serve as collateral then? There’s also the risk of priority-sector funds being used for other purposes. R Bupathy, former president of the Institute of Chartered Accountants of India (ICAI), says this risk is greater in a holding-company structure with many subsidiaries.

do take a look.

MFI Regulation, Part four. Why states should have a role

all right. so, here is something puzzling.

Microfinance practitioners insist their embattled industry should not be regulated by state governments. State governments, they say, do not know how to regulate financial organisations. Keeping microfinance institutions (MFI) under the purview of the state government, they add, will leave microlenders vulnerable to political pressures.

It is a set of arguments that has been accepted by an expert committee that wrote the draft microfinance Bill. The draft Bill, put up by the finance ministry, promises to override state laws. It also proposes that state advisory councils be set up to, among other things, monitor MFIs’ field-level conduct and give a feedback to the central government. Further, it says that if the RBI feels an MFI’s actions are hurting clients, it can issue orders to stop the functioning of the organisation.

It is not clear, however, if these measures can protect the MFIs’ poor and vulnerable borrowers.

think about it. the RBI is overloaded. and, even otherwise, incapable of monitoring field level conduct of MFIs with their poor borrowers. the state advisory councils are pointless. the bill is silent on how complaints will reach them, on how they will be investigated, and on how grievance redressal will take place.

all these are functions that only state governments can perform. they must have a role in regulating the mfis — at least their conduct with the borrowers. the whole argument, here.