While the microfinance sector has grown significantly in the
last five years, it is now facing a crisis for a number of
reasons. Microfinance institutions (MFIs) are under scrutiny
due to their alleged usage of coercive methods of recovery,
multiple lending, over-borrowing, ghost borrowers and high
Yet the undeniable fact is that the microfinance sector is
providing financial help to borrowers who are in dire need of
credit. Furthermore, their loans are at rates lower than those
of the ubiquitous local money lender, many of whom could put
Shylock to shame and are politically well connected. Along with
providing financial help, the sector has also created a broad
client platform which in the near future may be helpful in
providing other services such as insurance.
Reeling under public outrage and media sensationalism and to
curb alleged malpractices in the microfinance sector, the
Andhra Pradesh State Government passed an ordinance which was
later enacted in December 2010 as the Andhra Pradesh Micro
Finance Institutions (Regulation of Money Lending) Act.
The nature of the Act makes one wonder whether it is in fact
intended to benefit local money lenders. In a recent judgment,
the Supreme Court fined another State Government because the
then chief minister had prevailed upon the police not to file a
complaint against a local money lender turned politician. The
Act also seems retrograde and restrictive in nature.
With the aim of providing a national regulatory framework
for MFIs, the Reserve Bank of India formed a sub-committee (the
Malegam Committee) to study issues and concerns in the
microfinance sector. The Committee submitted its report in
It recommended that MFIs having 90% or more of its total
assets in the nature of loans qualified thereunder shall be
classified as a non-banking financial company-micro finance
institution (or NBFC-MFI) and be made to register with the
Reserve Bank of India; and that all MFIs be made to cap their
Other recommendations include:
(i) limiting the amount of lending to Rs25,000 ($550) for
(ii) limiting the number of loans that a borrower may take
from all MFIs to two; and
(iii) that a NBFC-MFI must disburse at least 75% of the
total loans for income generation purposes only.
Socialism through the back door?
The positive points of the report include that lending to
MFIs by banks should continue to enjoy priority sector lending
status. The report emphasises having a minimum net worth and
minimum capital risk adequacy ratio to improve MFIs'
efficiency. Realising that securitisation is one of the MFIs'
important tools for raising of capital, the committee has
recommended disclosure requirements for securitisation and
assignment (both with and without recourse).
Capping the interest rate without any control on the lending
rate may not be helpful for the development of MFIs, as the
interest rate charged by MFIs is directly linked to lending
rates. The recommendation to have a minimum net worth may also
severely hurt the prospects of small MFIs and those operating
in difficult circumstances.
The report and the Act have attempted to regulate every
business aspect of MFIs. The concern is that excessive
regulation may result in impeding the survival of a sector that
is still at a nascent stage.