Wednesday, January 25, 2012

Changes in micro finance activity in India

In response to the new regulations briefly outlibed in The RBI will now directly regulate microfinance sector, MFIs seem to be shifting their focus to better income groups. Some of the possible changes are outlined by M Rajshekhar & John Samuel Raja in ET special: New journeys, new challenges as India's microfinance promoters sail into new lending areas:

"MFIs are taking one of two approaches. Some are restructuring to exceed this 15% norm - legally - and still be eligible for priority-sector loans. Take Equitas, which has three businesses. Both its new businesses, vehicle loans and housing loans, are 100% subsidiaries of Equitas Microfinance.

Further, Equitas has acquired an NBFC, to which it will transfer all its microfinance assets. This will become the third 100% subsidiary of Equitas Microfinance, which will then be renamed Equitas Financial Services and become a holding company. Since the 15% cap will apply only to the microfinance subsidiary, all three businesses can expand without limits.

The other approach is to stay within microfinance, but tweak products and operations. As Ujjivan Microfinance, which is moving into individual loans, is doing. Managing director Samit Ghosh agrees the microfinance business is not as profitable as before, but doesn't think it makes sense to diversify.

All these years, the microfinance industry promoted itself as a potent means to pull people out of poverty. But now, in its bid to survive, the industry is looking beyond the poor. Is this mission drift? Ujjivan's founder, Samit Ghosh, thinks so.
Says Ramesh Arunachalam, a rural finance consultant: "If they wanted to make a dent on poverty, they should have developed post-harvest loans for farmers, etc." Such loans, he says, would have enabled farmers to wait for prices to improve before they sell their produce.

Most MFIs looking to diversify say they are doing so out of duress, not because they see an opportunity. But, in doing so, they are giving up the poor plank they grew themselves and their reputations on."

From a review of David Roodman's new book on micro finance A voice of reason amid the sound and fury of the microfinance debate:
"In one sense another nail in the coffin for claims that tiny loans can end poverty, the book is also a humble manifesto for reform. While Roodman insists financial services are no likelier to "lift" people out of poverty than clean water or electricity, he argues that the thriving microfinance industry can still deliver crucial services to millions in need of better ways to manage their money."

I have not read the book but read some posts in his blog David Roodman's Microfinance Open Book Blog
. The post Finalized Brief based on Due Diligence says a brief and the draft of the book are available online.


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