The AP government blames unlikely villains: microfinance institutions (MFIs), which have been expanding fast in the state.
The government has reacted by introducing an “ordinance” forcing MFIs to change their practices—cutting interest rates, changing from weekly to monthly repayments, etc.
Big Indian MFIs are now sharing information, pledging not to lend to a person who has already borrowed from three others and to keep total lending to a limit.
But there are challenges for MFIs seeking to enter mobile banking.
It suggests that fears of an epidemic of over-indebtedness due to excessive lending by MFIs are exaggerated.
Despite charging what may seem high interest rates, MFIs typically have wafer-thin margins because of the high costs of making and collecting payments on millions of tiny loans.
Chasing growth, MFIs seem to have piled into the same villages, lending to the same people.
Of 166 MFIs surveyed in 2009 by the Microfinance Information Exchange, a think-tank, all offered credit but only 27% offered savings products.
For the MFIs, the government's groups offer too little credit, too late.
In Andhra Pradesh (AP), the Indian state with the most microfinance borrowers and the base for the biggest for-profit MFIs, local politicians have bullied the business to a virtual halt.
In rural AP, 82% of households have such informal loans, whereas only 11% have loans from MFIs.
Designing Staff Incentive Schemes for the Loan Officers of Microfinance Institutions (MFIs);
The Indian government should also allow MFIs to take deposits, which they are currently prevented from doing: this would make them less dependent on capital markets for funding.
Even MFIs that borrow locally may find their banks’ funding is constrained by global conditions.
The bank is selling its stakes in successful MFIs.
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