Are we witnessing times of diluted Micro-finance objectives?
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20 December 2010Prathima Rajan
Microfinance, synonymously cited for growth in emerging markets has been witnessing its share of negative publicity of late. The spotlight is currently on how the sector is rapidly becoming an area of exploitation for individual benefit. The recent crisis in Andhra Pradesh (India) has drawn the attention of microfinance practitioners worldwide towards regulations & compliance within the MF operation space. India’s sporadically growing unregulated MFIS have created havoc and have resulted in suicide of many borrowers for over –indebtedness, specifically in the state of Andhra Pradesh. The alarming debt to equity ratio, which is high in India as compared to other similar economies, finally resulted in the regulators intervention. The drilled down motive behind investors funding MFIs was more for an individual profit than that of social objective. This translated into high pressure on the MFIs for repayments. The Reserve Bank of India set up Y H Malegam committee to probe into MFI issues to bar MFIs from stock markets and private equity (PE) saying that such moves are profit-driven, thus defeating the very purpose of financial inclusion. Apart from the clear need for a separate regulator for MFIs, there are several points of concerns at the individual MFI level like lack of transparency, conflicts of interests in ownership, accounting standards, lack of clearly defined roles etc. To conclude, micro-finance, which started as an informal lending sector at local levels has now transformed into a full fledged industry with significant capital market participation and global integration. This is also accompanied with some of the pain points discussed earlier; therefore any further development in this space will clearly call for fair rules and regulations together with compliance and supervision on the part of various stakeholders.