MICROCAPITAL BRIEF: Experts Warn that New Legislation in Andhra Pradesh Might Reduce Profitability of Indian Microfinance Institutions (MFIs)

On the website of the LiveMint newspaper, a number of experts in India recently cautioned that legislations currently proposed in Andhra Pradesh, India, might cause a sharp drop in profitability of microfinance institutions (MFIs).

Among the many specifications proposed, the bill may prevent MFIs from charging interest totaling more than the principal amount and may prohibit borrowers from taking two microloans at the same time. Chandra Shekhar Ghosh, managing director of MFI Bandhan comments that “if they (Andhra Pradesh) enforce the law, this may affect operations and the repayment from borrowers”. Along the same lines, Mr D.R. Dogra, CEO of rating agency Credit Analysis and Research (CARE), argues that the legislation will “have a bearing on resource-raising abilities and profitability of MFIs”.

The urge for more regulatory oversight over MFIs came as a series of suicides were unearthed that were believed to be tied to coercive practices employed by MFIs [2], casting the industry in a negative light [3]. Amidst calls to rein in the sector, some MFIs have already moved to offer debt restructuring and lower interest rates to borrowers, although it is unclear whether a hard cap on interest rates would be included in the bill [4].

The Indian MFIs reporting data for 2009 to the Microfinance Information Exchange (MIX), the microfinance information clearinghouse, have an aggregate loan portfolio of USD 4.6 billion, total assets of USD 5.1 billion and 26.4 million active borrowers.

By Trevor Kwong, Research Assistant

Sources and Additional Resources:

[1] Source Article: LiveMint: Banks may see large defaults from MFIs over AP ordinance:

http://www.livemint.com/2010/10/28230540/Banks-may-see-large-defaults-f.html?h=B

[2] MICROCAPITAL BRIEF: Series of Suicides Related to Microloan Repayment Rock India, Raises Questions of Whether Interest Rates Charged by Microfinance Institutions (MFIs) are Too High:

https://www.microcapital.org/microcapital-brief-series-of-suicides-related-to-microloan-repayment-rock-india-raises-questions-of-whether-interest-rates-charged-by-microfinance-institutions-mfis-are-too-high/

[3] Wall Street Journal: India’s Major Crisis in Microlending

http://online.wsj.com/article/SB10001424052702304316404575580663294846100.html

[4] MICROCAPITAL BRIEF: Indian Microfinance Institutions (MFIs) in Andhra Pradesh Offer Debt Restructuring:

https://www.microcapital.org/microcapital-brief-indian-microfinance-institutions-mfis-in-andhra-pradesh-offer-debt-restructuring/

[5] Microfinance Information Exchange (MIX): India:

http://www.mixmarket.org/mfi/country/India

Browse the MicroCapital Universe and add your entry to the wiki at?https://www.microcapital.org/microfinanceuniverse/tiki-index.php