The demand for microcredit loans in India is estimated at about Rs600bn ($13.5bn), four-fifths of which is met by informal finance or money lenders. With about a third of its billion-strong population still living in poverty, India is one of the largest markets for microfinance.
There are no firm estimates, but the Indian commercial banks, which are the main source of funds for microfinance institutions (MFIs), have about $2bn in loans outstanding.
With growing demand for their services, several large MFIs want to be allowed to tap public deposits and this has raised the issue of their regulation. There have also been instances in which the MFIs have been accused of charging usurious rates of interest, most recently in the southern Indian state of Andhra Pradesh, where the state government barred a few MFIs from lending last year.
A new law to regulate the sector is currently before parliament. Regulation is a step in the right direction, but it should not focus on prescribing the cost of credit, says Mathew Titus, managing director of Sa-Dhan, an association of MFIs, “Some MFIs lack equity capital; issues like the concentration of risk, particularly geographical, in some others, which must be looked into,” he says.
Getting regulation right will be a challenge. “Putting a cap on interest rates that MFIs charge their customers will result in denial of access to credit. Competition between MFIs, credit bureaus and financial education address those concerns in a much better way. Likewise, only the large well-capitalised entities must be allowed to take public deposits,” says Nachiket Mor, deputy managing director at ICICI Bank. What the sector desperately needs is investment in back-end infrastructure – more currency chests, an electronic system that enables digital transactions and unambiguous customer identification – to bring down the cost of credit delivery, he adds.
ICICI Bank has 2.5 million microcredit loan customers and a loan portfolio of Rs25bn ($565m). About 40% of its borrowers take loans to buy a buffalo, while others use the money to set up grocery stores, small eateries or home-based craft shops. The bank works with 200 MFI partners on a model by which profit earned is retained by the partner while losses up to a limit are covered by the bank. The bank cannot find enough MFIs to lend to, says Mr Mor. If there were more, there would be no shortage of money available to the sector.
The new law will identify who should regulate MFIs. The central bank may not be given the task considering that it already supervises a large number of financial intermediaries. The task may be given to the National Bank for Rural Development, a government refinance agency, or a new regulator.
