In India there is much talk about the growth of microfinance possibly causing a repeat of the 2010 crisis, when the sector grew fast and there were allegations that multiple lending led to the overleveraging of clients. Having largely recovered from the 2010 crisis, the growth of microfinance today creates a new set of challenges. The findings of the recently released Inclusive Finance India Report 2016 suggest that these challenges should be addressed soon.
Growth of debt is concentrated in a few client segments
There is a consensus based on interviews conducted for the report that the growth of microfinance is aggressive, putting strain on the credit officers. The data on regulated microfinance institutions (MFIs) that submitted their numbers to the Microfinance Institutions Network indicates that over the past year, loan portfolios grew by 84 percent and loan disbursements grew 45 percent. In comparison, consider these numbers:
- 22 percent growth in branches
- 38 percent growth in staff strength
- 44 percent growth in number of clients
- 45 percent growth in number of loans
Together, these numbers indicate that the loan portfolio grew at a substantially higher rate than branches, employees or clients. This means more debt within the same client segments, leading to overleveraging, which could end up in a large-scale default.
Growth of loans is heavily concentrated in a few MFIs, and staff load is increasing
In addition, 22 of 71 registered MFIs have a portfolio of more than $73 million, and these represent 90 percent of the sector on all parameters. The typical employee at one of these providers is possibly managing more clients with larger loans, which leads to a larger concern about the quality of the growing portfolio.
How could these challenges play out?
Compared to 2010, there are better customer protection measures in place: caps on loan size, repayment frequency, tenor, margins and lending rates. Also, the MFIs report loans to credit bureaus and use credit reports in disbursement decisions. Due to MFIs’ aggressive growth targets, however, growth is being pushed in areas with limited debt absorption capacity. These include areas with limited credit off-take, little urbanisation, thin diversification in non-farm activities, and no robust banking system.
As the figures above show, India is seeing a concentration of loan portfolios across a modestly expanding branch network and rising loan amounts. All of this suggests some serious pockets of concentration risks for MFIs. The data point to three possible scenarios:
- Stress in a given MFI because of excessive growth. If large defaults are in a single MFI, the contagion could be managed. If the MFI is systemically important and its products are difficult to differentiate, then the problem might spread to other MFIs.
- Stress in isolated geographies. In 2006, there were isolated incidents of default and stress in Kolar, Krishna and Nizamabad districts. They were brought under control, but they were precursors of the 2010 crisis. Any instance of regionally focused stress events should ring alarm bells.
- Stress in a geographical area spreads with a domino effect. Uttar Pradesh province, which is seeing aggressive growth and anecdotal reports of stress, will have elections soon. Any stress-induced crisis there would likely have wider consequences.
Worry, but don’t panic
While there are worries, there might not be cause for panic. For instance, Bengaluru district has the highest portfolio, but as it subsumes the large city of Bengaluru, there are opportunities to lend for diversified livelihoods. Stress represents the ability to cope and changes contextually. The loan size of $400 in Bengaluru is easier to absorb than in remote areas.
A paper issued by Microfinance Institutions Network flagged issues that are causing stress:
- Ambitious targets for field staff in areas of over penetration and concentration
- Undue influence exerted by members and leaders due to excessive reliance on them
- Inadequate time spent by MFI staff on compulsory group training
- Proxy and ghost clients
India’s newspapers report debt stress from eastern Uttar Pradesh, Madhya Pradesh, Chattisgarh and Jharkhand provinces. Interestingly, these reports do not match the list of districts that have the largest MFI exposure, suggesting that concentration may be in areas with greater capacity to absorb debt. For example, the district of Azamgarh in Uttar Pradesh was featured as a debt stress area in news articles but does not feature in the top 100 districts in terms of concentration. However, the district has reported incidents that are flagged by the Microfinance Institutions Network. These anecdotal incidents, plus instances such as suicides or attempted suicides due to indebtedness and coercive recovery practices, obstruction by ring leaders, mass default, or the closure of branches by government officials, could snowball into a crisis.
A crisis could be averted if the MFI sector investigates such instances and takes measures to prevent them from spreading. MFIs, in particular, should be concerned about reputational risk. For instance, the data in the Inclusive Finance India Report 2016 is only from regulated MFIs; however, self-help group programs exist alongside providers regulated by the state law (co-ops, nidhis, chitfunds). Some providers pretend to be mainstream but are unincorporated. Any negative news about them is also going to affect the regulated MFIs, so it is important for regulated MFIs to demonstrate superior practices that differentiate themselves from the others.
Do MFIs have manageable default levels in spite of the overall stress in the banking sector, continuous droughts across the country, and now demonetisation? The microfinance sector is having a dream run: great valuations, two successful IPOs and eight new small finance banks. Is this euphoria going to last?
The microfinance sector should now be careful and pause to ensure that it does. Slowing down, pausing, and taking stock of the negatives is important. Otherwise, they could have a far-reaching effect.
An insightful Analysis. Looking for such more ....!
Can any one doing a detailed study. I mean at gross root level.but situation seems like AP Crises
The book "Micro finance Principles and approaches ; Ten commandments for responsible financing to the poor" by Dr V.Rengarajan (Notion press-2013 Amazon. ) may be useful to you.
It is strange that Prof M.S,Sriram whom I respect immensely in the last year's report completely repudiated Religare report should suddenly aware of the situation now when there were visible signs lin the last year itself.Demonitization has multiplied the complications as SRO have failed to take corrective action in the last two years.
Very useful article, concerns raised here are similarly applicable for all emerging MFIs or MFIs in new frontierss.
Media reports in India point out that India's banks are cutting down on their lending to MFIs and the MFIs say this is creating huge problems for them. When MFIs get into trouble simply because they cannot raise further funding for further on-lending, that is a good sign that they have entered the final stage of Ponzi financing. Very worrying....
The points raised by Professor is quite valid. There are areas like South Maharashtra, Madhya Pradesh and eastern UP that will see much danger.
1. There is default rising in shg related to NRLM too.
2. Such ‘self-regulation’ of MFI is not a worthwhile alternative and could lead to the crisis deepening further.
3. Demonetization will further see weak collections for MFIs hence slow down of growth but will wipe inefficient players.
1. MFIN’s push to seed Aadhaar in every new loan being disbursed will yield positive result.
2. SFB will provide much regulation required in this field .
1. . Growing fast in Micro finance sector in the given present status certainly causes greater concern. Why?
2. At the outset, two observations on this review include a) a lack of conceptual clarity on ,Micro finance and MFI and b) authenticity or adaptability of data available on MF for any meaningful discussion or policy decision on micro finance .
3. Regarding the first, universally acceptable concept on Microfinance indicates that micro credit is one of the MF package of pro poor financial services apart from micro savings, micro insurance , micro pension etc. Micro credit alone cannot represent MF holistically and as a corollary, the institutions that does mere money lending services, deserve to be baptized as micro credit institutions (MCI) and not necessarily as Micro financial Institution( MFI). This apart delivery of micro credit alone does more harm than good to the poor as evidenced in many studies. In the market, unethical competition in providing sequestered micro credit liberally in the name of financial inclusion has led to moral deterioration of the actors both in supply and demand sides and ultimately resulted in micro finance crisis in the recent past causing exclusionary implication in poverty sector. The lesson is exclusion anywhere is a threat to inclusion everywhere.This status in MF industry warrants for making innovative MF integrated products and services and innovative candid MFI providing all MF services to ensure making a tangible dent in Indian poverty canvas in the demand side and not necessarily the institutions with mere money lending services in poverty sector for their trajectory to become successful IPO and small banks as reported.
4. Second, with the given ambiguity on the concept on MF , It is debatable that the available data on micro credit from only reporting reputed MFIs is reliably adequate to interpret and make any prudent analysis on MF in true sense of the term meaningfully for making any policy decision towards poverty reduction in Indian context? Even MIX (Micro finance Information Exchange market) data, used for global monitoring MFI also suffer with the inclusion of MFI that do not deal with MF activities..
5. The points 3 & 4 highlighted above merit the attention of academicians, social science research institutions /universities for focusing on making innovative institutions and innovative financial products and services that truly represent pro poor Micro finance in India .
i agree with Dr.V.Rengarajan , micro credit alone cant solve the problem of poverty, it indeed creates a burden for the poor people more than helping them, a comprehensive package of different types of products and services should be offered to the destitute people not merely credit, this will inculcate the culture of finance in the mind of poor people, make them think of saving and also keep a small amount for insurance to meet any future crises. the term financial inclusion does not mean only offering cash to people, people should brought to the financial system from different windows, offering them cash is easy task and moneylenders could have done it hundred yeas ago in the best manners however helping those poor how to manage this cash is the main work.
in India and Morocco , the crises which took place in 2010 and 2007 respectively might b attributed to many reasons and one of them is the multiple lending, however, if we compare India in 2010 and now we shall find that, the RBI and other bodies have taken many serious actions and measures for the protections of the industry and its clients...this is good thing for it, in my opinion, in a very vast country like India with this huge population, i may consider it as a normal growth but this doe not mean we should don't check what is happening...number of MFIs in India is growing and accordingly number of clients,portfolios,staff and other parameters is increasing. this is a common thing...
the thing which worry me is the concentration of the MFIs in urban areas to save cost rather than going to rural areas to serve the needy people.
Thanks Ali Alshebami for your acknowledgement on my views on MF. The isolated micro credit which is camouflaged by the brand name ‘Micro finance’ and, delivered in the present regulatory frame work of financial institution has become ‘ a forbidden apple” for the pyramid people as it did more harm than good.. Unfortunately in the given financial structure the present financial inclusion system in the supply front ,has become a sanctified one to facilitate for claiming any digital/graphical achievement of Micro credit at surface level only regardless of social implication of financial inclusion at borrowers household level through micro credit in the demand side. Not to mention the persistent trend in loan related suicides in India in the last mile.
That is to emphasise the need for innovative delivery mechanism ‘denovo’ that enables delivery of pro poor micro financial services holistically through single window more from demand side perspectives rather than harping over the complexities inevitably hidden in the existing institutional frame work. Till then faster growth of micro credit in the name of micro finance in India remains a major concern I feel.
Interesting article. Its important to note that since the time this article was published, Bangalore, which is one of the most highly penetrated districts from a MFI perspective, has emerged as one of the most troubled areas