Home > Finance > Microfinance in India Growing Fast Again: Should We Be Concerned?

Microfinance in India Growing Fast Again: Should We Be Concerned?

154 Views
largest microfinance company in India

Are we staring at a repeat of 2010 crisis? If industry analysts are to be believed, yes. The 2010 crisis was spurred by the incessant rise in the microfinance sector and alleged multiple lending that went hand in hand. The multiple lending culminated into overleveraging of customers, which led to a downward financial spiral for several microfinance institutions (MFIs). Overburdened by debt, MFIs failed to meet their operating expenses and interest payments. 

The cookie crumbled in an uncanny way, driving several borrowers from the disadvantaged groups in Andhra Pradesh, the epicentre of the crisis, to commit suicide. Plus, the state government enacted laws to restrict and regulate the activities of MFIs. The MFIs were mandated to make public the area where they will operate, the applicable interest rates and recovery policies. Despite the setback, the microfinance sector recovered and how.    

Statistics

Per the data collected by Microfinance Institutions Network from the top microfinance in India, the loan portfolio rose significantly by 84% while loan disbursements increased by 45% in the Financial Year 2015-16. In the same duration, the branches and workforce grew by 22% and 38% while the number of clients and loans went up by 44% and 45% respectively. This oddity in the growth of loan portfolio and disbursements compared to other indices signals a situation.

The possible crisis

The loan portfolio outgrew branches, workforce and customers considerably, which suggests the chunk of the loan going to the same client segment. This, in turn, indicates the overleveraging of clients and the associated consequences like mass default. Moreover, the disparity in the loan portfolio and the number of employees means each employee handles more customers with high loan value. Thus, the doubts about the nature of the growing loan portfolio are apparent.  

Possible scenarios

Now, there are a few possible scenarios, each representing a grim reminder of a crisis. In wake of large scale defaults localized to the largest microfinance company in India, the issue can be nipped in the bud. However, other MFIs might feel the heat, if the offerings are hard to differentiate. The risk of stress generating in a geographical area and spreading to other regions with a domino effect runs deep. It’s a precursor of a crisis and needs to be dealt with effectively.     

The conclusion

Microfinance has come a long way since 2010 with the introduction of effective customer protection and creditworthiness measures. Although it is now more poised to absorb the stress, the possibility of a disaster cannot be ruled out outright. It’s time to worry but not to panic.   

TAGS
Business Module Hub