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.