The Indian Microfinance Impasse

A small pocket in South India has made the microfinance industry sit up and review its heady growth and practices

By Saumya Roy
Published: Apr 5, 2010
DEAD END: Shut out from taking MFI loans, beedi worker Shama is back to borrowing from money lenders
Image: Gireesh G V for Forbes India
DEAD END: Shut out from taking MFI loans, beedi worker Shama is back to borrowing from money lenders

Mohamed Saifulla smiles as he pulls out a thick folder in the pale green office of the Anjuman-E Islamia of Kolar. He may well smile. Saifulla and the Anjuman committee are in a great part responsible for the Indian microfinance industry now finding itself with its back against the wall. The outgoing president of the Anjuman committee, made up of nominees from the town’s mosques, Saifulla has agreed to show us details of women borrowers who were harassed by microfinance institutions for repayments. Instead what he brings out ceremoniously from a plastic bag is a file with clips of blog accounts, comments and newspaper articles about how the committee brought microfinance repayments to a grinding halt in Kolar.

“Most of them agree with us,” he says, basking in his new celebrity status and pointing to articles that say the meteoric growth of microfinance could lead to problems. Saifulla knows he has caught India’s MFI industry by the scruff of its neck. Upon a directive from Anjuman in February 2009, Muslim women borrowers stopped repayments Kolar, Mysore, Ramanagaram, Tumkur and other neighbouring towns in Southern Karnataka amounting to a default of around Rs. 60 crore for microfinance institutions (MFIs), probably the biggest default in the Indian microfinance industry.

While MFI activity in India has grown exponentially, the top five MFIs have more than doubled their client bases and grown at more than 45 percent over the last couple of years, some areas like Kolar are facing saturation. But for an industry that prides itself on near 100 percent repayment rates and doubled its turnover last year, the Kolar standoff is bad news not just for the loss of the money but for the larger ills that plague the entire microfinance ecosystem.

Microfinance has changed social and economic equations even in conservative societies. Is it now being held hostage by interests that are threatened by this change? Or has the industry skipped processes in its eagerness to grow? Turns out it is a bit of both. What the microfinance industry is also pondering is how this can be prevented from happening again.

On the Ground
The growth of MFIs in Kolar has been a natural consequence of the socio-economic fabric of the place.
A poor, area with a considerable Muslim polulation, Kolar was known for housing India’s only gold mines, an hour away from the town. But when the mines closed, it came to depend on silk factories as did Ramanagaram, a rocky place known more as the location of the cult film Sholay. But with the decline of silk factories, most women just sit outside their houses endlessly rolling beedis that earn them no more than Rs. 60 or Rs. 70 a day.

Most who say they started small businesses, including pushcarts selling firewood or vegetables or opened repair shops, say they suffered losses because people had no means to buy. With no way to earn, the lure of the increasingly available MFIs loans became hard to resist but harder to return.
Jabeen (who uses a single name) is a defaulter like hundreds of others who have taken multiple loans from MFIs. Jabeen and three friends have gathered at her house to talk about their financial woes. Jabeen says she took loans worth Rs. 15,000 and Rs. 12,000 from Rores Micro Entrepreneur Development Trust and FFSL Microfinance for house repairs and to give her husband — an auto driver who wanted to start a small business. But that did not work out and eventually Jabeen had to take a loan from the money lender to make her weekly repayments. So, it was with some relief that she told MFI officers that she would not repay till the Anjuman allowed her to.

But a year later Jabeen and her friends agree that they need loans of at least Rs. 10,000 a year to pay school fees or celebrate festivals. “If the Anjuman asked us to stop paying can they give us even Rs. 100?” Jabeen demands even as an Anjuman member, who accompanied us to her house, glares at her. The choking of MFI loans has meant that they are now borrowing small amounts at high interest rates from moneylenders.

As we leave the house they call out to say they would like to work, earn and then take loans and repay but that there are no jobs for women to do here in Kolar. To give this desperate message out they change their minds about not allowing their names to be used for this article.

NAYSAYER: Saifulla is not part of the new Anjuman Committee that will decide if and how the loans are to be repaid
Image: Gireesh G V for Forbes India
NAYSAYER: Saifulla is not part of the new Anjuman Committee that will decide if and how the loans are to be repaid

The Anjuman’s Conundrum
A little over a year ago, Anjuman’s Saifulla says he didn’t know microfinance companies were in Kolar. One day, he says, more than a thousand women MFI borrowers came to this office and asked him to help get them relief from MFI repayments. He and Anjuman members in Ramanagaram narrate stories of how women had tried to commit suicide, sold off children and posed with several men to repay loans or get multiple loans. After looking hard, some of the stories of distress turned out to be true while others seemed like embellishments.

Then, borrowers and MFIs say, Anjuman committee members went  around telling women to stop taking or returning loans or have their hair chopped off and be denied Muslim burial facilities. It not only worked but spread to other towns as well.

A year later, the Anjuman committee’s popularity is rather waning due to the lack of options forthcoming from them.

“I feel the Anjuman is in a corner right now,’ says Sanjay Sinha, co-founder of  development consultancy EDA Rural Systems. “If they remove this ban now, people will say they have bowed to pressure,” says Sinha, who is now writing a paper on the Kolar default.

The Missteps and the Mess
But perhaps the stakes in Kolar are the highest for the MFI industry for whom this is becoming a growing image problem. Anurag Agrawal, senior vice president at Intellecap, an advisory firm for social enterprises, says Kolar is among five to 10 towns that have seen saturation coverage of MFIs over the last couple of years because they have a high density of population, are close to metros where MFI headquarters are and have a large number of potential borrowers. Intellecap research suggests there were 43 MFIs operating in Kolar. More conservative estimates put it at 16, of which eight are members of industry body, Sa-Dhan. An Area Lucrative Index by Intellecap, shows that MFIs prefer to enter an area that already has two or three MFIs, than an area with no MFIs, he says.



 Flip Side: Navida from Ramanagaram pawned jewelry and sold utensils to make weekly repayments. She makes beedi now, but says she sleeps better.   Image: Gireesh GV for Forbes India

In such areas, new MFIs may end up skipping traditional processes and systems while giving loans, analysts say. For instance, Daniel Rozas, a Brussels based consultant, says while MFIs start with a loan amount of Rs. 5,000 or less, a new MFI may come in and offer a higher loan to someone who already has a first loan. The older MFI may then also give a higher loan sooner to retain the borrower.
To deal with the competition, older MFIs may also have quickened processes. Five-day training periods may have come down to a day and each loan officer may be dealing with as many 800 clients giving them just a few minutes with each. Also, loan officers are increasingly being asked to sell financial and other consumer products along side, affecting their relationships with borrowers.

“Months before the incident, we were approached by many MFIs asking what they should do with controlling competition,” says Anna Somos Krishnan, executive director at Planet Finance which works with MFIs including some in Kolar. “We advised them to stop lending there and don’t go further with client acquisition. Yet, I assume, they did [go and get more clients].”

There is an increasing opinion that lending to people who already have loans has been a big mistake. In Ramanagaram, Haseena Taj, a gangly silk worker with a toothy smile, says she had four unpaid MFI loans when the Anjuman’s call came. She and her husband took a loan of Rs. 5,000 to start a small business. But that didn’t work out and the couple, who earn around Rs. 100 a day, took four more loans to repay this and fend for their three children. Asked why she ran up loans of Rs. 64,000 over time to repay a loan of Rs. 5,000, Taj shrugs and says, “I didn’t think about it then.”

MFIs should not have made loans to people who have several loans or who don’t have the ability to repay, Anjuman members say. Some borrowers say they had pawned jewellery, sold off utensils, television sets and clothes to make repayments because that was the only means they had. “When there are rules and regulations for everything, then why not for MFIs,” says Azmathullah, who is in Ramanagaram’s Anjuman committee. “If they give loans, people will take.”

That’s what happened to beedi worker Shama. She took loans from two MFIs to help her husband start a brick selling business but has stopped repaying since the Anjuman diktat. Now, she has gone back to the clutches of the money lenders.

mg_24052_micro_finance_280x210.jpgCall for Regulation
Reserve Bank of India’s Deputy Governor Usha Thorat says “RBI has been getting suggestions on regulating MFIs from various quarters and has received a letter from AKMI about how the Anjumans have asked borrowers not to repay loans to MFIs”. But for now she doesn’t want to step in.

While MFIs are regulated by the banking regulator in large MFI markets, including Bangladesh, it is regulated indirectly by the RBI in India because MFIs here are not allowed to accept deposits.
Thorat says, “Banks are expected to have an oversight on MFIs which they finance. Where there is distress and borrowers are not able to repay, they should ask MFIs to restructure loans.

”So far the banks have come up with more quick fix solutions, including asking MFIs not to lend in Kolar and Krishna district in Andhra Pradesh, where a payment default took place some years ago. MFIs say banks have asked them about their lending in Kolar but beyond this they have been on their own.
Sa-Dhan’s executive director, Mathew Titus says, “Non-repayment is only a manifestation of larger issues that anybody lending to the poor needs to look at, for example things like migration and down-turn in markets for products produced by low-cost workers,  lead to such breakdowns. “Their approach to lending to the poor has to be different. We need to put money to understand features that affect poor households and money for training people in these fields.”

Stung by criticism, the industry has responded with self regulation. Recently, 31 large MFIs came together to form the Microfinance Institutions Network (MFIN), an industry body that will self regulate. It has speeded up setting up a credit bureau for the microfinance industry and proposed a code of conduct where no more than three loans or more than Rs. 50,000 will be given to a borrower.

Ramesh Bellamkonda, who heads BSS Microfinance, says it could help larger MFIs consolidate their market share but will impose an artificial limit on borrowers that may not match with their needs. Bindu Ananth, president of the Institute for Financial Management and Research (IFMR) Trust says, “It is not obvious that it will help and it could be anti competitive.”

Others say these norms may evolve as they are implemented but that the introspection is welcome. Somos Krishnan says Kolar underscores the fact that despite raising more than $200 million in the last few years, MFIs may not have invested enough in systems and processes and training loan officers to carefully assess and understand the customers. Additionally, the loan officers are not empowered to become the MFI’s whistle-blowers and prevent cases like Kolar. While Sa-Dhan has had a code of conduct for several years MFIs have not really had the processes to adopt it.

Meanwhile in Kolar, the Anjuman committee’s term is now over and a new committee will decide on the way ahead. Saifulla, who was also involved in a contentious argument over who would be on the new committee while talking to Forbes India, says it is likely to hold a town hall meeting and organise repayments if they are rescheduled and there is an interest rate waiver. The new committee may also want men to be involved in the process.

In Ramanagaram, a small amount of repayments have started coming in. Samit Ghosh, who heads Ujjivan, an MFI that operates in 13 states and is the secretary of AKMI, says AKMI has now set up a desk where women who feel they are unable to pay can come and talk about it so that MFIs can think of a solution, including rescheduling the loan.

Ujjivan is among several MFIs that will have financial literacy training before borrowers can get loans. For both MFIs and borrowers the message of caution may have come at the right time. Zarina Taj, of Ramanagaram, says she has loans of more than Rs. 50,000 from four MFIs before the Anjuman asked her to stop repaying. The middle-aged mother of four, who makes beedis says she took a loan to sell fire wood. Her husband doesn’t live at home or contribute money for the family. But with the business venture having failed, she ran up multiple loans to make weekly repayments. “The Kendras (MFIs) would push us to become members,’ she says. After the ban is lifted, she says she may think of another business venture, before being chastened by a friend.

It is some bit of chastening that all sides — MFIs, borrowers and community leaders — need as they move towards a regime of responsible lending.

 Illustration: Malay Karmakar


(This article is excerpted from the latest Forbes India 16 April, 2010 issue which is now available at news stands and book stores. You can buy our tablet version from

  • Siddarth

    The lure of meat brings the dogs. Microfinance once viewed as a market efficient way of providing the poor credit has now become a cover for the same hoodlums and anti social elements. It needs some broad regulation.

    on Apr 7, 2010
  • Devesh Sachdev

    Microfinance Companies need to sit back and ponder/decide on the overall positioning of their business whether it is commercial microfinance, responsible microfinance or social microfinance. The focus should shift back to relationship based business rather than transaction based.

    on Apr 6, 2010
  • Vasudevan P N

    The trend happening in micro finance space is what has happened in other lending sectors earlier. The small ticket personal loan (stpl) is a classic case in point. for over a decade citi corp and GE capital had successfully been lending small amounts (upto Rs. 50,000) to individuals as personal loans and it was very profitable. however in 2006, 7 new players viz icici, hdfc, hsbc, db, choladbs, indiabulls and fullerton entered and this led to significant amount of over funding of same clients and ultimately by 2008 all of them, including the first two successful pioneers downed shutters and wrote off huge amounts. the question is whether it can happen in micro finance.<br /><br /><br /> <br /><br /><br /> The answer is clearly that if we, in micro finance do what others did in other sectors, there is no reason why our end result would be any different. However herein, lies the key difference. The entire micro finance industry is a fully united industry which has never been the case with other sectors and lenders. In the MFI space, there is a new body called MFIN which is created which has all NBFC MFIs as its members. MFIN has now rolled out a code of conduct which lays down that no client shall be funded by more than 3 MFIs at any point in time. Also the funding should be only within what the client would be able to service and under no circumstance it can exceed cumulatively for all 3 put together, Rs. 50,000. This is a landmark agreement on self-regulation amongst the MFIs not heard of in any other sector. A strict enforcement mechanism is also put in place and consistent default by members on this, can lead to their name being struck off the membership of MFIN. Parallelly MFIN is in discussion with lenders and investors to make membership of MFIN a must to have lending / investing relationship. This would ensure that the code is followed truly by all.<br /><br /><br /> <br /><br /><br /> Also MFIN's code of conduct talks of transparency in communicating interest rates to clients and we have taken help of to help bring about ultimate transparency in the indian MFI sector. These initiatives are expected to fructify over the next few months/quarters.<br /><br /><br /> <br /><br /><br /> Parallelly Alpha Micro-finance consultants p ltd has recd equity investment from all the NBFC MFIs and has in turn taken a 5% stake in one of the credit bureaus. Alpha is in discussion with the credit bureaus and the MFIs and is helping the MFIs take their data out and make it bureau complaint so that it can be uploaded to them. While it is early times, Alpha expects that in about 9 months most of the members' data would be on the bureau and we would have authentic data on overall client indebtedness. Also alpha will be working with UIDAI to help as an enroller to collect biometrics of its member clients and family members and help them get Unique number which will further help in the credit referencing process.<br /><br /><br /> The amount of close coordination between the MFIs and their willingness to be self-regulated is something i have never seen either in the general NBFC industry nor in the banking industry (both of which i have worked earlier). While the criticism on heated growth of MFIs and poor client servicing is probably true in pockets, but one would have to come close to the sector to see the amazing level of serious intent of the sector to self--regulate. i am very confident that the MFI sector would be strengthened through such sector level initiatives and the sector would be able to sustainably take forward the national agenda of financial inclusion of the over 600 million excluded population, in a fair and ethical manner.

    on Apr 6, 2010
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