Monday, October 18, 2010

Microfinance bubble burst?

Many have been warning that the runaway growth in microfinance assets is not sustainable. is the bubble about to burst? Well, the AP government's ordinance is certainly ominous as it requires microfinance institutions to suspend collections until they have registered with local authorities. (see FT report). Banks cannot escape the fall-out as they as the primary funders of MFIs mainly in order to meet priority sector obligations.

A number of practices of MFIs are now coming to light: multiple lending, aggressive marketing of loans to the unwary (much like the sale of credit cards and consumer loans done by foreign and private banks), dubious HR practices (hiring 18 year olds and not issuing any appointment letters), weekly repayments, harsh recovery methods, forming liability groups out of self-help groups created by NABARD and other government agencies.

Some of the arguments for high interest rates charged by MFIs are downright absurd. Eg. The interest rate of 30% if ok as money-lenders charge over 100%. Says who? Besides, money-lenders don't market their loans. They make loans to people who come to them- and strictly against collateral.

It has taken the SKS IPO and a spurt in suicides in AP for people to wake up to what's going on. One thing is certain: microfinance will not be the same again.

8 comments:

Kelly Jacobs said...

Considerable means are spent for provision of consumer loans, including on habitation. That is, you yet haven't earned anything, but to you have already given the house, the machine etc. Truth under obligation to work on loan repayment 10, 20, 30 and more years. To pay all it (to give out huge volumes of credits) it is possible only at the expense of a poor currency issue.
About stock market. Really the stock market is provided by money only on 1-2 %. That is, only investors can remove 1-2 % of money lost-free as this market virtual and from the moment of its creation it was not provided that investors can leave and remove in large quantities from it at least that they really paid at an input.

Murugavel.J said...

One thing that constantly bothered me about the MFIs was this. How many legal productive enterprises are available in this country which give an IRR of more than 30 % on a sustainable basis ...??

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i LEAD said...

I agree with the author. Government should take strict measures against MFI, if such dubious practices like hiring employees without issuing appointment letters, multiple lending, etc still continues.

satyendra... said...

I think all are in process of earning mony by hook or crook. Microfinance institutions are also one of them & looting common innocent man. I also want to give example of institutions like muthoot finance & others, who is giving loan against gold.Basically they have appointed (or can say institutionised) the chain snachers without salery, who are facilitating them (In coming days perhaps you look the incidient like chain snaching increased after these institution came in full light!)

Rajan Alexander said...

Micro-Finance to Face Slow Painful Death. SKS Share to enter Free Fall. Sell, Sell, Sell!

SKS, the Indian micro-finance giant’s IPO was supposed to signal the coming of age of the micro-finance (MF). Instead, it contained the seed for the destruction of the entire industry. Their Rs 10 share on listing attracted a premium of Rs 975 and such was the investor confidence, it touched a high of Rs 1,490 in a matter of days. Then hell broke loose with the industry hit by charges of them profiteering and causing farmer suicides. Its reverberations were so strong that it had been felt by the industry all over the world. The stock plunged to Rs 890 before recovering to be a tad over its listing price and hovering around this range for the last one week. Technically and fundamentally, the share looks bearish and ready for a free fall. We expose the dark underbelly of a Frankenstein unleashed by NGOs.

Read more: http://devconsultgroup.blogspot.com/2010/11/micro-finance-to-face-slow-painful.html

Rajan Alexander said...

Micro-Finance to Face Slow Painful Death. SKS Share to enter Free Fall. Sell, Sell, Sell!

SKS, the Indian micro-finance giant’s IPO was supposed to signal the coming of age of the micro-finance (MF). Instead, it contained the seed for the destruction of the entire industry. Their Rs 10 share on listing attracted a premium of Rs 975 and such was the investor confidence, it touched a high of Rs 1,490 in a matter of days. Then hell broke loose with the industry hit by charges of them profiteering and causing farmer suicides. Its reverberations were so strong that it had been felt by the industry all over the world. The stock plunged to Rs 890 before recovering to be a tad over its listing price and hovering around this range for the last one week. We expose the dark underbelly of a Frankenstein unleashed by NGOs.

Read more: http://devconsultgroup.blogspot.com/2010/11/micro-finance-to-face-slow-painful.html

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