Shakila Banu, 35, struggled to make ends meet after her husband deserted her a few years ago. She had to singlehandedly support their two children and her old mother. With the help of some friends she then joined a skill development centre in Jaipur run by Access Development Services, a not-for-profit company that helps poor people get loans from microfinance institutions (MFI). The centre trained Banu and nine other women in making lac bangles, which helped her get a loan from microfinance firm Ujjivan Financial Services to start her own bangle-making venture. "The interest rate is a lot lower than what the local moneylender would charge," says Banu, who took on a loan of Rs 15,000 for a year.
Initiatives such as the one that helped Banu have kept alive the microfinance industry in India after the severe below it suffered three years ago. The MFI industry grew rapidly in the first decade of this century. Its gross loan portfolio jumped to Rs 21,200 crore in 2010/11 from Rs 839 crore in 2004/05, according to data from the Microfinance Institutions Network (MFIN), an industry group.
Then the bad times started. In October 2010, the Andhra Pradesh government issued an ordinance to rein in MFIs after reports that coercive collection tactics had led many borrowers to commit suicide. MFIs denied the allegations. The state was the biggest market for MFIs at the time and the law crippled the industry. Loan repayment rates plunged, money flow from banks slowed, and the gross loan portfolio dropped to Rs 18,510 crore in 2011/12.
The industry is now bouncing back. The loan portfolio climbed to Rs 21,245 crore in 2012/13. The resurgence began when the Reserve Bank of India announced in 2011 a series of measures, including a cap on interest rates MFIs charge borrowers, to govern the hitherto unregulated industry. The central bank created a new category of non-banking financial companies, called NBFC-MFI, for the industry. This gave a new lease of life to the industry as banks resumed lending to MFIs.
Equity investments have also resumed. During 2012/13, at least 10 MFIs got funding from financial institutions such as International Finance Corporation, the World Bank's private-sector lending arm, and US-based non-profit Accion International, according to MFIN's annual report. IFC introduced initiatives to disburse loans with adequate checks and balances more than a year before the Andhra Pradesh crisis, says Jennifer Isern, manager of access to finance services for South Asia. IFC has so far invested over $100 million in Indian MFIs, she adds. Victoria White, Senior Vice President and Regional Head for Asia at Accion, says the non-profit not only offers funds but also provides knowledge and technical support to MFIs.
The MFI industry is also taking many proactive measures, says Alok Prasad, CEO, MFIN, which works as a self-regulatory organisation. MFIs now share their loan information and borrower profiles with credit bureaus such as Equifax and High Mark Credit Information Services, he says. The repayment rate has climbed to as high as 98 per cent, he says.
The industry has also expanded outside Andhra Pradesh, which remains the top state in terms of gross loan portfolio as a large amount of bad loans remain on the balance sheet of MFIs. West Bengal, Tamil Nadu and Maharashtra have emerged as other large markets while Uttarakhand, Rajasthan and Punjab are growing at the fastest pace.
The industry, which earlier mostly lent to poor women in rural areas, is also tapping into a different demographic base. "We believe financial inclusion should not be restricted," says Veena Mankar, co-founder of Swadhaar Finserve, an MFI which works mostly in urban areas. "It does include men and also focuses on those that fall a little above the strict definition of poor."
Some new players are also entering the sector. One of them is Muthoot Fincorp, mainly a gold loan company which started a microfinance division in 2010. Sadaf Sayeed, Chief Operating Officer for the microfinance business at Muthoot, says Muthoot has ambitious growth plans despite the challenges the industry faces. "We want to be among the top three MFI players in India," he says. But he is not running after growth alone and is careful about handling the loan portfolio. "So far, we have only 0.3 per cent delinquency levels," he says. That's what other MFIs should also aim for.