Microfinance industry draws scrutiny

NEW DELHI/MUMBAI Thu Oct 28, 2010 7:25pm IST

A customer of a micro finance institution strings beads into necklaces at a workshop in a slum area in Mumbai February 17, 2007.    REUTERS/Prashanth Vishwanathan/Files

A customer of a micro finance institution strings beads into necklaces at a workshop in a slum area in Mumbai February 17, 2007.

Credit: Reuters/Prashanth Vishwanathan/Files

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NEW DELHI/MUMBAI (Reuters) - India's microfinance industry, which surged to prominence when George Soros-backed SKS Microfinance raised $358 million in an IPO, faces a regulatory clampdown that could erode profits and hurt growth.

Reports of dozens of suicides by poor borrowers in Andhra Pradesh, the hub of India's microfinance sector, prompted the state to enact rules against aggressive recovery practices by lenders who make loans that average about $150 to poor customers at interest rates that can top 30 percent.

The finance minister said this week that he expects the industry to develop a code of conduct on interest rates and recovery practices, while the Reserve Bank of India (RBI) recently set up a panel to study issues surrounding the sector.

Several industry insiders and watchers said greater oversight is needed, although many worry about overregulation.

"Hopefully, MFIs will clean up their act in terms of higher levels of client protection and appropriate behaviour," said Shubhankar Sengupta, promoter of Arohan, a small microfinance lender based in Kolkata.

The rise of for-profit microfinance has made billions of dollars in credit available to millions of poor people in India and elsewhere, but it has also spurred controversy.

Backers say commercial microfinance makes lending attractive to poor borrowers who would otherwise be at the mercy of unregulated moneylanders who are known to charge interest rates as high as 100 percent.

Critics are uncomfortable with high profit margins earned from poor borrowers, and worry that the social mission of microfinance has been sidelined in favour of profits.

For graphic on microfinance in India and globally, click link.reuters.com/nux22q


Amid ongoing scrutiny of the sector in India, industry leader SKS on Wednesday announced that it was cutting rates for new loans to 24.55 percent annually, from 26.69 percent.

The prospect of new regulation and negative publicity are expected to delay the IPO plans of several operators in India.

New rules could also make it hard for them to attract the sort of multiples commanded by SKS, the only listed player in India, which was valued at more than six times book value, or three times the global average, when it listed in August in a heavily oversubscribed issue.

Shares in SKS Microfinance have fallen 19 percent since Oct. 4, in part because of ongoing media attention surrounding the firing of its chief executive just two months after its listing.

Share Microfin Ltd, Spandana Sphoorthy Financial Ltd, Asmitha Microfin and Bhartiya Samruddhi Finance are all planning IPOs, analysts told Reuters in August.

Spandana, the country's No.2 player, had hoped to raise as much as $400 million in an IPO early next year but sources with direct knowledge of the matter said the offer may be delayed in the wake of recent industry developments. Spandana could not be reached for comment.

"IPOs will come but they may not go for such high valuations like SKS," said Nikhil Poddar, analyst with Alchemy Share and Stock Broking.


Muhammad Yunus, the Nobel Prize-winning pioneer of microfinance in Bangladesh and founder of Grameen Bank, has expressed his displeasure about microfinance's move from its social mission to a commercial model.

"The direction is very clear that microfinance institutions have to pass on the benefits of economies of scale and lower costs to clients in the form of lower interest rates," said Royston Braganza, chief executive of Grameen Capital India.

Grameen Capital India is a Mumbai-based nonprofit consulting and investment banking firm that is a collaboration between Grameen Foundation, IFMR Trust and an arm of Citigroup.

Mexico's Compartamos became the first microfinance company to go public, in 2007, bringing the debate over the industry's dueling objectives -- the so-called "double bottom line" -- to the fore.

"The business case for the existence of MFIs is so strong, you cannot finish it off. There is a huge market and there is a huge need that banks are not able to meet," Arohan's Sengupta said.

India is home to roughly 400 microfinance lenders with a combined 207 billion indian rupees ($4.6 billion) in outstanding loans to 70 million poor people. The 10 largest players account for roughly 80 percent of the industry.

With a potential base of 120 million unbanked homes, microcredit demand in India has the potential to rise sharply.

New rules are expected eventually to bring down interest rates, and reduce aggressive lending and collection practices, potentially squeezing out smaller players. Ultimately, that could make the industry more transparent and accountable, if less profitable.

"If at the end of it, the unethical people are rooted out of the sector, that will be good for business," said Atul Takle, a spokesman for SKS Microfinance.

(Additional reporting by Sumeet Chatterjee; editing by Tony Munroe and Lincoln Feast)


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