At the Crossroads

Microfinance in India

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RAJESH CHAKRABARTI and SHAMIKA RAVI*

Abstract
As of early 2011, the microfinance industry in India, one of the largest in the world, is facing a moment of reckoning. The recent developments in Andhra Pradesh, the cradle of microfinance in India, have stamped the future of the sector with a huge question mark. This paper sketches the background of the microfinance movement in India as well as its current geographical distribution and outreach; chief models and major players; and, finally, the economics of interest rates in the sector. It discusses the offerings made by Microfinance Institutions (MFIs) ranging from simply credit to other financial services to a plethora of social services packaged with microfinance and the effect this has on interest rates. It discusses briefly the tension between the twin objectives of profitability and development and how this is tackled differently in profit-oriented MFIs versus non-profits, and outlines the role of government in the microfinance movement in India. The recent events in Andhra Pradesh, their rationale, fallout and implications in the larger context, are discussed.

This paper sketches the background of the microfinance movement in India as well as its current geographical distribution and outreach; chief models and major players; and, finally, the economics of interest rates in the sector.

Introduction
The microfinance industry in India, one of the largest in the world, is facing a moment of reckoning today. From roots going as far back as the 1970s, the sector had come to prominence and demonstrated spectacular growth in the last decade and a half. According to the Finance ministrys mid-year analysis of the financial year 201011, the combined micro credit outstanding in India is estimated at US$6.7 billion with nearly 30 million beneficiaries. Growth in MFIs activities had reached year-on-year rates of 7080 per

* The authors would like to thank Kanika Chawla, Ranjan Nayak and Sesha Sairam for excellent assistance. The responsibility for the errors and shortcomings rests with the authors alone. The authors, both at the Indian School of Business, Hyderabad, can be contacted at rajesh_chakrabarti@isb.edu and shamika_ravi@isb.edu, respectively.

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The combined micro credit outstanding in India is estimated at US$6.7 billion with nearly 30 million beneficiaries. Growth in MFIs activities had reached year-onyear growth rates of 7080%with some 62% growth in unique clients and 88% per annum growth in terms of portfolioover the past five years.

centwith some 62 per cent growth in unique clients and 88 per cent per annum growth in terms of portfolioover the past five years. It has been widely heralded in academia, government and international development circles alike as the solution with the greatest promise of poverty reduction and financial inclusion. At the same time, it has also emerged as a major profit centre activity with private equity institutions reportedly investing US$500 million in the last two years.1 And yet the recent developments in Andhra Pradesh, the heart of microfinance in India, have indeed stamped the future of the sector with a huge question mark. The governments resolution, coming in the wake of close to 30 farmer suicides in various parts of the state allegedly linked to recovery pressures of microcredit providers, has made it extremely difficult for private microfinance players to carry out their daily operations. Recovery rates have slumped from near perfect to below 30 per cent in many cases. In a broader context, the move has created policy uncertainty about the sector in general and almost overnight transformed the image of MFIs from that of saviours of the poor to unfeeling usurers. The RBI report submitted by Mr. Y.H. Malegam has sought to bring some clarity but the matter remains far from settled. Only weeks before the Andhra Pradesh ordinance, Hyderabadbased SKS Microfinance had carried out the wildly successful first-ever IPO by an MFI in India. The turn of events leading both to the SKS issue and the Andhra Pradesh ordinance have posed several questions about the microfinance sector in India, many of which are perennial issues that the industry has had to grapple with around the world. As microfinance supposedly seeks to end poverty through profitability, to quote the subtitle of SKS founder Vikram Akulas recent book, where does the emphasis lie? Do the different models of microfinanceselfhelp groups versus group-lending versus individual lendingdiffer in their stress? Clearly, private equity funds that have been falling over one another to invest in profitable MFIs have high returns on their minds. On the other hand, there is wide recognition of the changes that the sector has brought in the lives of millions. And yet most anecdotes stress the effect of micro-loans. What other offeringsmicro-insurance and micro-advisory services, for instancecould be more welfare enhancing? Interest rates in the sector frequently exceed 25 per cent. The justification commonly provided runs in terms of higher information and transaction costs of micro-lending on the one hand, and the much higher rates charged by the only alternative source of finance, moneylenders, on the other. But are the margins commensurate with these explanations? Do small private players play by a different set of rules than the major banksoften the public-sector onesin this matter?

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Finance Ministry (2010).

For sure, like any other industry, the microfinance industry encompasses significant heterogeneity in players and practices; universal conclusions are hard to come by. Nevertheless, a better understanding of these issues requires both an appreciation of the background and evolution of the industry in Indiaas it involves unique features like the mix of private and government roles in its spread and growthas well as the issues affecting MFIs elsewhere in the world. That, indeed, is an objective of this paper. The rest of the paper is structured as follows. The next section sketches the background of the microfinance movement in India including its origins and rationale, expansion, evolution, and growth as well as its current geographical distribution and outreach; chief models and major players; and, finally, the economics of interest rates in the sector. The third section covers the offerings made by MFIs ranging from simply credit to other financial services to a plethora of social services packaged with microfinance and the effect this has on interest rates. The fourth section covers the quintessential tension between the twin objectives of profitability and development and how this is tackled differently in profit-oriented MFIs versus non-profitsboth world-wide as well as in India. The fifth section discusses the role of government in the microfinance movement in India in both its regulatory role as well as a major player. The sixth section narrates the recent events in Andhra Pradesh, their rationale and implications. The seventh and final section concludes with underlining the broad contours of the current controversy, the resulting uncertainty about the industrys future and what it means in the larger context.

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Microfinance is a process that includes financial intermediation such as supplying credit, savings and insurance products with a goal towards social intermediation such as reducing poverty and enabling empowerment.

Microfinance in India: A Brief Background

Microfinance has been described as the provision of financial services to those excluded from the formal financial system. It is a process that includes financial intermediation such as supplying credit, savings and insurance products with a goal towards social intermediation such as reducing poverty and enabling empowerment. Until the late nineties, it was commonly believed that the poor are unbankable. This was because they lack collateral, which is a prerequisite for accessing all forms of formal finance. So, for generations, poverty reproduced poverty. Microfinance thus emerged as a tool for breaking this vicious cycle as it does not require any collateral. And there lies the wider appeal of microfinance as a way of doing business with the population that was considered unbankable. Before microfinance entered the low income segment of the finance market, there were essentially only two sources of credit for the poor. The first were the informal commercial lenders, including moneylenders, traders and landlords. The second source of credit consisted of the state owned banks such as Regional Rural Banks and specialised schemes such as Integrated Rural Development Programme. The informal commercial lenders are characterised by easy access but

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Microfinance is seen as a way to bridge this gap between access to information and resources. The core idea of microfinance is to come up with innovative collateral substitutes such as a joint liability contract.

very high interest rates. The state owned banks, on the other hand, aimed at targeted lending through heavily subsidised schemes that were eventually siphoned off by local elites and educated households. This led to high default rates and high arrears and the banks suffered large losses. Microfinance was therefore well positioned to fill this gap between the large loss making subsidised state schemes and expensive and sometimes exploitative informal lenders. There is another way to understand why microfinance is a natural way to improve access to finance for low income households. Informal lenders have rich information about these households and therefore effective means of enforcing repayments. But they are limited in their resources. These are typically small jewellery shop owners or traders who operate on a small scale. The formal lenders such as the state owned banks, on the other hand, have very limited information about the clients and therefore ineffective enforcement mechanisms in the absence of collateral. But they have access to large resources and can operate on a bigger scale. Microfinance is seen as a way to bridge this gap between access to information and resources. The core idea of microfinance is to come up with innovative collateral substitutes such as a joint liability contract. Microfinance in India is still at a nascent stage whether we look at it from a scale or a scope perspective. It is estimated that between 350 and 400 million people live below the poverty line in India, which means that between 70 and 80 million households need microfinance services. Only 8 per cent of all poor rural households have access to microfinance products where the average loan outstanding is Rs. 5,500. Close to 56 per cent of the poor still borrow exclusively from informal sources. If we consider the scope of microfinance by looking at access to different financial products, 70 per cent of rural poor do not have access to deposit or saving account and less than 15 per cent have access to any kind of formal insurance. Expansion, Evolution, Growth and Current Geographical Distribution and Concentration The Microfinance Information Exchange (MIX) data shows that there are 233 microfinance institutions currently operational in India with a cumulative outreach of 20 million households. It is important to bear in mind, however, that these are self selected groups or organisations that report data to the MIX. This might exclude a substantial group of smaller MFIs that operate as Non-Government Organisations and which might not have the means or incentive to report this data. It is important to bear in mind that microfinance institutions in India come in different forms. SaDhan, an association of Indian MFIs, claims that in the year 2009, there were more than 2,000 NGOs involved in the NABARD SHG-Bank linkage programme. And out of these, approximately 800 have some operations in financial intermediation. Then there are MFIs that are organised as co-operatives

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such as over 500 Mutually Aided Cooperative Thrift and Credit Societies. Finally, there are the large NBFCs, which are regulated by the RBI. Data from CRISIL, an independent rating and research company, highlights the growth of microfinance sector in India (Chart 1). CRISIL estimates MFIs loans outstanding to have increased to Rs. 114 billion in year 2009 as compared with Rs. 60 billion in the year 2008. Moreover, there is also a steady increase in microfinance outreach with the total number of borrowers increasing from 3 million in the year 2000 to almost 16 million in year 2009. Several large MFIs have accomplished more than 100 per cent year-on-year growth. Chart 2 outlines microfinance operations by regions within India and the loan portfolio across regions. As has been the trend since the beginning of the microfinance movement in India, the concentration

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CHART 1 Growth Trends

120 100 Rs. billion 80 60 40 20 0 2006 2007 Year

Loan outstanding
Borrowers

18 16 14 12 10 8 6 4 2 0 2008 2009

CHART 2 State-Wise Performance of MFIs

Source:

Microfinance India, State of the Sector Report 2010.

No. million

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While the SHG model was the first to start in the country, its current pre-eminence has much more to do with government adoption rather than first-mover advantage.

is largely in the four southern states of Andhra Pradesh, Tamil Nadu, Kerala and Karnataka. Cumulatively, this region has 51.1 per cent of Indias microfinance outreach. In contrast, the northern states and north-eastern states of India contribute a mere 4 per cent to the total microfinance outreach in India. When we look at the graph for the loan portfolio, as expected, more than half the loan portfolio is concentrated within the southern region. The pre-eminence of the South, and in particular, Andhra Pradesh, can be traced to a collection of factors, including the history of womens anti-arrack campaigns in the 1980san agitation that went a long way in organising women in groups and setting the stage for SHGs in the years to come. More recently, the Chandrababu Naidu administration in Andhra was among the first state governments to officially adopt the SHG movement, which led to a massive rollout that was continued under later governments. Outreach and Models In India, currently there are several models of microfinance operational and these include the NGOs, the NBFCs and the Self Help Groups. According to the Microfinance India: State of the Sector Report 2010, 45 per cent of all MFIs in India are regsitered as NBFCs, which include all the large commercial institutions such as the ones listed in Table 1. Societies, the next popular form, have a share of nearly 30 per cent. If we look at the expansion in operations of the Self Help Group model and contrast it to the MFIs, which include the NBFCs and the NGOs, we note that over the last few years MFIs have contributed aggressively to the total disbursement. In the year 200809 the MFIs accounted for nearly 64 per cent of the total disbursement (Chart 3). This reflects the acceptance of MFIs as commercially viable institutions that can attract capital and resources. While the SHG model was the first to start in the country, its current pre-eminence has much more to do with government adoption rather than first-mover advantage. As we shall see in a subsequent section, governments adoption of the model led to an expansion on an unprecedented scale. As the Malegam report points out, about 75 per cent of the funding for the NBFCs have also come from banks and specialised financial institutions like SIDBI with total direct lending amounting to Rs. 13,800 crore as well as securitised loans amounting to another Rs. 4,200 crore. Beyond the SHG and MFI classification, we can also divide institutions within the Indian microfinance industry on the basis of other dimensions. There are institutions with a business model built around the philosophy of stripped down credit as against one of credit plus (see Table 1). While SKS and Spandana fall under the simple credit model, BASIX functions along the credit plus philosophy. This

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TABLE 1 Product Offerings of Top 50 MFIs

Top 50 MFI by CRISIL MFI Region Outreach Services

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Legal Number status of Active borrowers

Percen- Average Insur- Funds Training/ Volun- Agricul- Second tage of loan ance Trans- Consultary ture and tier women balance fer ting/ sav- business lendborroper Ser- Capacity ing develop U L Y . ing J wer borrovices building ment to wer (Rs.) services MFI 100 100 92.9 100 97.3 7279 6489 5209 10584 5263 X X X

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Full scale finan2 cial1 1 0 services

Aadarsha Welfare Andhra Society Pradesh Adhikar Orissa Arohan Financial West Services Ltd (AFSL) Bengal Asmitha Microfin Ltd ASOMI Andhra Pradesh Assam

NGO NBFC NBFC NBFC NGO

18930 62652 187754 1340288 40449

Bandhan Financial West Services Pvt Ltd (BFSPL) Bengal Bhartiya Samruddhi Finance Limited (BSFL) BSS Microfinance Pvt Ltd (BMPL) BWDA Finance Limited (BFL) Cashpor Micro Credit (CMC) Centre for Rural Centre for Rural Reconstruction through Social Action (CReSA) Community Development Centre Andhra Pradesh

NBFC

2301433

100.0

6496

NBFC

1114468 228514 220645 417039 35118

66.4 99.9 97.91 100.0 100.0

9008 6335 4863 6412 7080

X X

Karnataka NBFC Tamil Nadu Uttar Pradesh Andhra Pradesh NBFC NGO NBFC

X X

Tamil Nadu

NGO Info not available on MIX data set and not even on its website NBFC 888600

Info not available on MIX data set and not even on its website 100

Info not available on MIX data set and not even on its website 6812 X

Equitas Micro Finance India P Ltd (Equitas)

Tamil Nadu

ESAF MicrofinKerala ance & Investments Pvt. Ltd (EMFIL) Future Financial Andhra Services Ltd (FFSL) Pradesh Gandhi Smaraka Grama Seva Kendram Gram Utthan Grama Vidiyal Micro Finance Pvt Ltd (GVMFL) Kerala

NGO

220011

99.22

7074

NBFC 257991 NGO 34833

100 40.02

9471 5317 X X X X

Orissa Tamil Nadu

NGO

67240

100 100

6044 7838

X X

X X

X X X

NBFC 772050

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I C R A B U 50L E T byN Top L MFI I CRISIL MFI

Outreach

Services Voluntary saving Agricul- Second Full ture and tier scale business lend- finandevelop ing cial ment to servservices MFI ices X

Money

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Tamil Nadu Karnataka

Legal Number status of Active borrowers

Percen- Average Insur- Funds Training/ tage of loan ance Trans- Consulwomen balance fer ting/ borroper Ser- Capacity wer borrovices building wer (Rs.) 99.39 9363 X

J U L Y 2 0 1 1 Grameen Financial. Karnataka NBFC Services Pvt Ltd (GFSPL) Hand in Hand Tamil Nadu IDF Financial Services Pvt Ltd NGO NGO NGO

352648

82118 129600 19603

100 99.97 Info not available on MIX data set and not even on its website 100 100 99.78 100

4939 4490 Info not available on MIX data set and not even on its website 8082 8160 7005 5956

X X X

Indian Association Tamil for Savings and Nadu Credit

Indur Intideepam MACS Janalakshmi Financial Janodaya Public Trust Madura Micro Finance Ltd (MMFL) Payakaraopeta Womens

Andhra Pradesh

Credit Union

24668 82161 9988

Karnataka NBFC Karnataka Tamil Nadu Andhra Pradesh NGO

NBFC 250208

Credit Union Credit Union

36543 36543

100 100

8624 8624

X X

X X

X X

Pragathi Mutually Andhra Aided Cooperative Pradesh Credit and Marketing Federation Ltd Rashtriya Gramin Assam Vikas Nidhi CSP Rashtriya Seva Samithi (RASS) RORES Micro Entrepreneur S.M.I.L.E Microfinance Limited Andhra Pradesh Karnataka Tamil Nadu

NGO NGO NGO

101389 47265 26238

90.71 100 100 100 100 100

5527 14284 5790 6644 7357 5598 X X

NBFC 214280 NGO NGO 90930 102094

Saadhana Microfin Andhra Society (Saadhana) Pradesh Sahara Utsarga Welfare Society (SUWS) West Bengal

Sahara Uttarayan West Bengal Sanghamithra Rural Financial Services (SRFS) Karnataka

NGO NGO

61128 118807

100 99.17

6128 5829 X

Sarvodaya Nano Tamil Finance Ltd (SNFL) Nadu

NBFC 147122

100

5819

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Top 50 MFI by CRISIL MFI Region

Outreach Percen- Average Insur- Funds tage of loan ance Transwomen balance fer borroper Serwer borrovices wer (Rs.) 64.97 100 63.92 1,773 7184 5017 X X

Services Training/ Consulting/ Capacity building

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Volun- Agricul-Second Full tary ture and tier scale sav- business lend- finaning develop ing cial ment to servservices MFI ices

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SEWA MACTS Andhra Federation Limited Pradesh Share Micro finance Ltd Andhra Pradesh

Credit Union NBFC NGO

62775 2357456 1225570

X X X X X

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Shri Kshetra Karnataka Dharmasthala, Shri Kshetra Dharmasthala Rural Development Project SKS Microfinance Andhra Pradesh Sonata Finance PVT. Ltd Uttar Pradesh

NBFC NBFC NBFC NBFC

5795028 85897 3662846 122656

100 100 91.95 100

7456 6580 9666 7265 X X

Spandana Spoorty Andhra Financial Ltd Pradesh SWAWS Credit Andhra Corporation India Pradesh Pvt Ltd (SCCI) Swayamshree Micro Credit Services1 Trident Microfinance Ujjivan Financial Services Pvt Ltd (UFSPL) Village Financial Services Welfare Organisation for Multipurpose Mass Awareness Network (WOMAN) Orissa

NGO

46105

5308

Andhra Pradesh

NBFC

174873 566929

99.16 100

7403 6540

X X

Karnataka NBFC

West Bengal Tamil Nadu

NBFC NGO

184020 36543

100 100

5781 8624

Notes: 1. Bandhan NGO is reported as part of Bhandan NBFC in the MIX data set. 2. CRISIL ranking was done for the year 2008; Data on outreach and services is from Microfinance Information eXchange, 2009.

is because the BASIX business model incorporates enterprise development and livelihood training along with credit. The main idea is that borrowers need training and information along with credit to successfully run enterprises. The objective of a microfinance institution that operates on credit only philosophy is to make credit available to those excluded from the formal financial market. The MFIs that operate on this simple standardised credit model have greater growth than those that have a credit plus philosophy. Another dimension to classify MFIs is based on group lending versus individual lending. First of all, it is important to note that there are few organisations in India that have a business model solely based

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The objective of a microfinance institution that operates on credit only philosophy is to make credit
Rs. billion 350 300

Source:

Microfinance India, State of Sector Report 2010.

CHART 4 Trend in Disbursements

available to those excluded from the formal financial market. The MFIs that operate on this simple standardised credit model have greater growth than those that have a credit plus philosophy.

250 200 150 100 50 0 2004-05 2005-06 2006-07 Year SHG-bank linkage MFIs Total 2007-08 2008-09 (E)

Source:

India Top 50 Microfinance Institutions CRISIL Rating, Oct 2009.

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on individual loans. Most are based on group loans, though some have a mix of the two types. If one compares the characteristics of these two types of institutions, one notes that institutions that do individual lending are mostly smaller, serve better-off clients, give out larger loans and have lower operational costs than institutions that do group lending. This is basically because individual loan contracts are typically made to clients who have graduated from group lending. These are clients who have successfully repaid several loans in the past, thereby building a credit history, and demand bigger loans. If one classifies MFIs along the basic objective, one has the large commercial institutions with strong financial bottom lines and the relatively smaller institutions with overriding social bottom lines. The

commercial MFIs have typically lower operating costs than the ones with overwhelming social objectives. Another major difference between them is the source of capital. Large commercial MFIs rely on banks and other market sources for capital while the MFIs with social objectives rely heavily on subsidised donor funds. Profitability of Indian MFIs Analysis of the return on assets of MFIs in India reveals high profit potential in the sector. Microfinance India: State of the Sector Report 2010, presents information on 70 MFIs with nearly 62 institutions reporting positive returns. More than half the sample (nearly 35 institutions) reports return on assets in excess of 2 per cent (see Chart 5). In contrast, a typical banking company exhibits a return on assets figure between 1 and 2 per cent. The best return on assets of a public and private bank is reported to be 1.6 per cent to 2 per cent. Return on equity is relatively a less reliable indicator across different forms of institutions or among different companies on account

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Most MFIs reflect a healthy return on equity. There are in total seven MFIs reporting return on

CHART 5 ROA Range-Wise Distribution of MFIs

equity of more than 50%, with the highest return reported to be 147%. There are a

16 14 12 10 8 6 4 2 0 Above 7% 4-7% 2-4% 1-2% 0-1%

significant number of institutions, however, that have ROE of less than

Source:

Microfinance India, State of Sector Report 2010. CHART 6 ROE Range-Wise Distribution of MFIs

30 25 20 15 10 5 0 Above 50% 2550% 1025% 010%

10%.

Source:

Microfinance India, State of Sector Report 2010.

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of the differences in equity and leverage ratios. But an institutions ability of service equity is a good reflector of its operational health. Most MFIs reflect a healthy return on equity. There are in total seven MFIs reporting return on equity of more than 50 per cent (see Chart 6), with the highest return reported to be 147 per cent. There are a significant number of institutions, however, that have ROE of less than 10 per cent. This for a high profit sector could potentially be a cause of concern, particularly, if we consider the fact that loan pricing is fairly homogenous across MFIs.

Micro-savings, its advocates claim, is more valuable than credit for poor households because of several reasons. Micro-savings can be used to build assets that can be used as collateral. These can also be used to self insure during times of need and can be used to smooth consumption if there is a shock to the household income.

Offerings Made by MFIs

It is important to note that the term microfinance has replaced microcredit in the last two decades as it truly reflects the all encompassing efforts to bank the poor. This change is due to an underlying shift in the financial inclusion outlook. There is widespread recognition that the poor require a basket of financial instruments like savings, insurance and asset transfers just like the non-poor. More recently, this has been well documented as findings from financial diaries of low income households across Bangladesh, India and South Africa (Collins, Morduch, Rutherford and Ruthven, 2009). Micro-savings, its advocates claim, is more valuable than credit for poor households because of several reasons. Micro-savings can be used to build assets that can be used as collateral. These can also be used to self insure during times of need and can be used to smooth consumption if there is a shock to the household income. Most MFIs in India that operate as Non-Government Organisations require clients to save a certain minimum amount before they become eligible for loans. This is in tune with the basic principle the Self Help Group model of microfinance. Early savings are viewed as a disciplining mechanism for clients of microfinance loans. MFIs that are registered as Non-Bank Financial Companies, however, are not allowed to collect deposits as per regulation in India. Over the last decade, micro-insurance has gained popularity as an instrument to achieve financial inclusion in India. There are several instruments such as life insurance, health insurance, and property and crop insurance that are being tried out. Among these, life insurance has been the most successful in terms of profitability and outreach. One reason for this being that it is commonly offered as a product tied to the loan. Health insurance, on the other hand, has been piloted by several MFIs but few schemes have been rolled out extensively. And those too provide limited coverage and rely heavily on the public healthcare system. SEWAs health insurance programme is one of the pioneers in this field. BASIX rolled out one of the largest health insurance schemes in Indian microfinance in 2005. A study by Rai and Ravi (2011) found that while the outreach of health insurance expanded, the claims to coverage ratio remained quite low. This was in part due to the lack of financial literacy where borrowers did not fully comprehend the

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benefits of the health insurance product tied to their loan. And as would be expected, the claims to coverage ratio improved over the years as clients began to understand the product and see the benefits. The study also found that low claims could be partly explained by the lack of empowerment measured as health seeking behaviour of women beneficiaries of the health insurance scheme. Women as borrowers are significantly more likely to file claims than women as non-borrowers who are enrolled in the health insurance scheme as spouses. There is no such difference among male beneficiaries. Property (catastrophic) insurance has been sold by some MFIs such as SEWA. This was particularly helpful for low income households in Gujarat during the flash floods and earthquakes. An innovative insurance scheme called Rainfall Insurance was promoted by BASIX with support from the World Bank. The basic idea of this product is to insure against bad weather directly rather than against crop yield. This is a sophisticated weather derivative and the benefits are not limited to farmers. This product however had few takers primarily due to poor marketing and lack of financial literacy where people perceived it to be too complicated.

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The new paradigm in international microfinance is the financial systems approach, which claims that exponential growth can only come from commercialisation. The aim is to attain wide outreach in a sustainable manner.

The Commercialisation of Microfinance

Commercialisation is used to refer to the movement of microfinance out of heavily donor dependent and subsidised operations into one in which microfinance is managed on a business basis as part of a regulated system. The new paradigm in international microfinance is the financial systems approach, which claims that exponential growth can only come from commercialisation. The aim is to attain wide outreach in a sustainable manner. In India, the main drivers of commercial microfinance are MFIs that started out as NGOs but have since transformed themselves into licensed NBFCs and large retail banks such as ICICI and SBI. Most would agree that without the profit motive, it is difficult to have organisations that would engage in the activity in a sustained and efficient manner. On the other hand, a total fixation on the bottom line can easily lead to mission drift of a microfinance organisation. It is therefore the razors edge that all microfinance providers have to walk on. It seems globally the social development model accounts for about 90 per cent of microfinance organisations but the 10 per cent of profit-oriented providers are very large and account for over half the industry assets (Morduch et al 2008). The non-profits lend more to the bottom of the pyramid while the for-profits tend to focus on a slightly higher tier. Also non-profits are more likely to go for grouplending while for-profits go largely for individual-lending. There is not much difference in loan quality though. So, in conclusion, forprofits and non-profits have somewhat different profiles in the microfinance industry, but both have important roles to play. Compared to Latin America where commercial microfinance is

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The main consequence of commercialisation of microfinance in India is that it has transformed ownership of the MFIs. Most MFIs started as NGOs but realising that commercialisation was inevitable for exponential growth, transformed themselves into regulated commercial entities.

most advanced and where loan portfolios are based on microenterprises that grow and generate employment, in India microfinance still primarily targets poor marginalised women. The MIX data shows that an overwhelming proportion of profitable MFIs in India are commercial NBFCs. The main consequence of commercialisation of microfinance in India is that it has transformed ownership of the MFIs. Most MFIs started as NGOs but realising that commercialisation was inevitable for exponential growth, transformed themselves into regulated commercial entities. This gave them access to diversified funding sources and the entire governance structure of the organisation changed. This brought in broader competencies such as technological advancements, experimenting with new products and processes; it has also pushed organisations away from group loans towards individual and better clients. The biggest drawback of this process, however, is that it has led to over-indebtedness and rise in strategic defaults, as we witnessed in the Andhra Pradesh debacle.

Impact of Microfinance in India

There is widespread acceptance that availability of financial services improves the lives of the poor. However, this belief is mostly backed by anecdotes, which unfortunately are not a substitute for careful statistical evaluation. In 1999, Jonathan Morduch noted that the win-win rhetoric promising poverty alleviation with profits has moved far ahead of the evidence and even the most fundamental claims remain unsubstantiated. There are very few impact studies and their results are far more subdued. There are studies that have shown that while some clients thrive and some will remain unchanged, there are also some that will slip backwards. The problem in assessing the impact of microfinance is that we cannot simply compare the outcomes of participants with the nonparticipants due to self selection. Clients of microfinance are either self selected or join the programmes because MFIs target villages and clients based on expected outcomes. This makes establishing a causal relationship between access to microfinance and outcomes very difficult. Randomised evaluations, in this case, would provide clear and credible evidence. There have been some randomised controlled trails across the world to explore the impact of a number of microfinance product designs such as group lending, for instance, Gine and Karlan (2006, 2009). In India, there has been one major study to measure the impact of microcredit becoming available in a new market. And the results indicate that in the short run, there are no significant positive outcomes on consumption, health, education or womens decision making. This was conducted by Banerjee et al in 2009 in 104 slums of Hyderabad over 18 months. The baseline survey showed that there was almost no borrowing from formal sources such as commercial banks or MFIs

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before the experiment. One-third of the households operated at least one small business and the average profit from these was Rs. 3,040 on a monthly basis. As a part of the experiment design, Spandana opened branches in 52 slums randomly selected from the 104 slums. The study reveals that as a result of this experiment, households were 50 per cent more likely to borrow from MFIs and were 32 per cent more likely to open a business. There were changes in the consumption pattern across different groups. Households with an existing business at the start of the experiment invested in durable goods and their profits increased. Households with a high propensity to become entrepreneurs saw a decrease in non-durable consumption like that on food and transportation. Households with low propensity to become entrepreneurs saw an increase in non-durable consumption. The scope of the results is limited due to the short time frame of the study. Certain outcomes take longer to manifest, particularly social outcomes such as health, education and decision making powers of women.

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In India, there has been one major study to measure the impact of

Government and Microfinance in India

While the microfinance sector in India, as in most places in the world, originated out of private initiatives of typically not-for-profits, and thrived, for a long while, without direct government supervision, the role of government in its scale-up can hardly be overemphasised. As Ramesh (2007) points out, the SHG movement in the country had largely been led by the RBI and NABARD in recent years after these agencies adopted the model in 1992. At the turn of the century, almost two-thirds of the SHGs were promoted by NGOs. Six years later, that share had fallen to a third, with the government (mostly state governments) promoting about half the total number of SHGs in the country, and the remainder being promoted by banks including the nationalised banks. Government certainly enjoys a significant scale advantage over the private players in scaling up. As Ramesh (2007) notes, it took SEWA 35 years to mobilise 8 lakh women. Dhan Foundation took 17 years to mobilise 2.6 lakh women. The Andhra Pradesh government, on the other hand, mobilised 80 lakh women in just 15 years. Notwithstanding the different time periods over which these expansions happened, the difference is striking. Among state governments, Andhra Pradesh was among the first to adopt the SHG model as a major strategy for poverty alleviation, cementing the states status as the unquestioned leader in the sector. Other Southern states have also been on the forefront in the area. The single biggest boost to the SHG movement came in 1999 with the adoption of the Swarna Jayanti Gram Swarojgar Yojana (SGSY) by the central government. SGSY was launched as an integrated programme for self-employment of the rural poor on 1 April 1999 with the objective of bringing the assisted poor families above the poverty line by organising them into Self Help Groups (SHGs) through the process

microcredit becoming available in a new market. And the results indicate that in the short run, there are no significant positive outcomes on consumption, health, education or womens decision making.

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Among government agencies, NABARD and SIDBI have played a particularly important role in microfinance in India. NABARD was an early adopter of the SHGBank Linkage programme linking SHGs to bank credit, often with the aid of NGOs acting as Self Help Promoting Institutions.

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of social mobilisation, and providing training, capacity building and income generating assets through a mix of bank credit and government subsidy. The scheme focuses on certain key activities based on the aptitude and skill of the people, availability of resources and market potential, and involves NGOs/CBOs/Individuals/Banks and Self Help Promoting Institutions. The subsidy allowed under the SGSY is 30 per cent of the total project cost, subject to a ceiling of Rs. 7,500 (for SC/ STs and disabled persons, the subsidy limit is 50 per cent of the project cost, subject to a ceiling of Rs. 10,000). For SHGs, the subsidy would be 50 per cent of the project cost, subject to a ceiling of Rs. 1.25 lakh or a per capita subsidy of Rs. 10,000, whichever is less. There is a special focus on the vulnerable groups such as SC/STs, women and persons with physical disability, who account for around 50 per cent, 40 per cent and 3 per cent of the Swarozgaries, respectively. The SGSY seeks to promote multiple credits rather than a one-time credit injection. Over the years, funds mobilised under the SGSY scheme both savings and loans outstandinghave come to account for over a quarter of the total bank lending to SHGs (see Table 2). Among government agencies, NABARD and SIDBI have played a particularly important role in microfinance in India. NABARD was an early adopter of the SHGBank Linkage programmelinking SHGs to bank credit, often with the aid of NGOs acting as Self Help Promoting Institutionshaving adopted it way back in 1992; over time the programme has become one of the biggest conduits of microfinance flows in the country. The institution of the Microfinance Development Fund (MFDF) in 2001 and its conversion to the Microfinance Development and Equity Fund (MFDEF) in 200506 have made about Rs. 200 crore available to NABARD for extending microfinance and taking the SHG structure beyond finance. Among banks too, nationalised banks have played a major role in the SHG movement. While ICICI Banks initiatives in the area of microfinance had been among the earliest ones, today SBI is by far the largest microfinance lender. Table 3 presents the sectoral break-down of microfinance lending by different agencies in the country during the period 200607 to 200809. While there can be no denying of the developmental role of the central and state governments, gaps have existed on the regulatory side. Much like the Indian software industry, microfinance in India has grown without a specific regulatory structure in place. Many MFIs function with a Non-Banking Financial Company (NBFC) licence from the RBI and hence are governed by the rules of that larger sector. Others that operate as Section 25 companies follow the Companies Act, 1956. However, given the distinctive nature of the industry, the special profile of its beneficiaries and the blend of organisational forms of its players, there is a clear need for a sector-specific regulator sensitive to the needs and responsibilities of the sector. But the regulatory structure for the microfinance industry is still in an emergent phase. In the wake

of the recent trouble in Andhra Pradesh and the report of the Malegam committee, jurisdictional issues are still not clear and whether statespecific laws or RBI regulations would have the final say is an issue that is yet to be sorted out.

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Recent Developments in Andhra Pradesh

The state of Andhra Pradesh accounts for nearly 40 per cent of all microfinance activity in India. Hyderabad, the home of by far the largest number of microfinance giants, is virtually the capital of microfinance in India. Till a few months ago, the state wore this distinction as a badge of honour. The sector also owed a lot to government support in Andhra Pradesh for its lead in this sector (see Ramesh (2007)). In recent years, Andhra has also been the home of a few of the fastest-growing for-profit MFIs, including the top two: SKS and Spandana. SKS, which had made waves in the past by initiating the practice of private equity participation in the microfinance sector, had

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TABLE 2 SGSY and Bank-Linkage

(Amounts in Rs. crore) Particulars 200708 No. of SHGs A. SHG-Bank Linkage Model Saving of Total SHGs SHGs with Banks as on Out of which 31 March SGSY Bank Loans disbursed to SHGs during the year Bank Loans outstanding with SHGs as on 31March Total SHGs Out of which SGSY Total SHGs Out of which SGSY 5009794 Amount 200809 No. of SHGs Amount % Growth (200809) No. of SHGs 22.2 Amount 200910 No. of SHGs 6953250 Amount % Growth (200809) No. of Amount SHGs 13.6 11.8

3785.39 6121147

5545.62

46.5

6198.71

1203070 1227770

809.51 1505581

1563.38

25.1 31.1

93.1 38.5

1693910

1292.62

12.5 1.4

17.3 17.9

8849.26 1609586 12253.51

1586822 14453.3

246649

1857.74

264653

2015.22

7.3 16.5

8.5 33.4

267403

2198

1 14.8

9.1 23.6

3625941 16999.91 4224338 22679.84

4851356 28038.28

916978

4816.87

976887

5861.72

6.5

21.7

1245394

6251.08

27.5

6.6

B. MFI-Bank Linkage Model Bank Loans disbursed to SHGs during the year Bank Loans outstanding with SHGs as on 31 March Note:

518

1970.15

581

3732.33

12.2

89.4

691

8062.74

18.9

116.0

1109

2748.84

1915

5009.09

72.7

82.2

1513

10147.54 -21.0

102.6

Actual number of MFIs provided with bank loans would be less as several MFIs have availed loans from more than one bank. Source: NABARD (2010).

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TABLE 3a Microfinance Activities of Scheduled Commercial BanksPublic Sector (Amounts in Rs. lakh)
As on March 31, 2010 Sl. Name of Bank No. Details of SHGs Saving linked with Banks No. of SHGS No. of Members Saving Amount Out of total SHGs under SGSY Scheme No. of SHGS No. of Members Saving Amount Out of total SHGs Exclusively women SHGs No. of SHGS No. of Members Saving Amount

Public Sector BanksAll India Position 1 Allahabad Bank 2 Andhra Bank 3 Bank of Baroda 4 Bank of India 5 Bank of Maharashtra 6 Canara bank 7 Corporation Bank 8 Central Bank of India 9 Dena Bank 10 IDBI Bank 11 Indian Bank 12 Indian Overseas Bank 13 Oriental Bank of Commerce 14 Punjab & Sind Bank 15 Punjab National Bank 16 State Bank of India 17 State bank of Bikaner & Jaipur 18 State Bank of Hyderabad 19 State Bank of Indore 20 State Bnk of Mysore 21 State Bank of Patiala 22 State Bank of Travancore 23 Syndicate Bank 24 Union Bank of India 25 United Bank of India 26 UCO Bank 27 Vijaya Bank TotalPublic Sector CBs 78861 269645 114285 180173 75015 245283 129703 27256 37992 54839 217384 257891 7351 178166 2777 42240 144977 18159 42843 3354 110692 121601 67654 125461 103721 45466 859115 3235949 1312641 2123950 750154 3585054 1332753 328609 NA 642223 3309105 3093507 53824 1995265 28395 556824 1739790 217665 728246 35674 NA 1547841 762408 1028951 1248643 585471 5257.95 24268.05 11531.87 21592.43 380.13 17486.97 8621.45 2527.93 3370.71 5750.06 32110.59 36502 990.02 21580.55 420.76 549.12 11427 84650 858.77 842.17 257.13 15613.61 17638.83 8201.49 13459.65 5644.12 1806.87 63900 3813 49893 74557 21650 77374 85652 1641 9555 NA 18515 160091 2622 87842 1849 10242 NA 213370 5520 2429 1049 44278 13799 39306 36926 37586 5235 689350 42515 564260 857391 216502 1258197 795092 22183 5578 NA 182828 24187 933079 18804 133146 NA 60825 43606 11402 NA 187350 431175 273450 449051 61808 4441.77 266.86 4658.16 4703.86 108.27 3291.83 5978.07 158.33 648.01 NA 971.41 417.32 6545.02 334.92 122.9 NA 166.95 207.69 81.83 4797.43 2728.19 4944.55 3859.85 1922.47 364.36 50584 269645 80862 145153 38948 227690 99619 25419 29809 34507 207762 247574 5282 114029 1510 36846 130675 5495 39103 1907 101836 106783 52453 104448 91157 40587 551274 3235949 978035 1700531 389482 3300795 977203 303165 9 392836 2958001 2920008 38172 1259920 15865 464730 1570713 60425 702476 19835 NA 1401122 597229 868650 1092772 527224 3312.5 24268.05 6018.18 9970.41 194.77 15053.44 6250.54 2339.4 1485.59 3592.63 30728.37 31242 776.28 15160.38 189.72 479.03 10443 70778 208.85 890.23 154.43 14364.51 15031.13 4974.39 10533.74 4434.48 1534.54

1887682 15327

1216891 15453057

2619029 14522

973527 12333989

3919680 46555114 353340.23 1068694 11768490 81569.05 3263210 38660410 284408.59

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TABLE 3b Microfinance Activities of Scheduled Commercial BanksPrivate Sector (As on March 31, 2010) (Amounts in Rs. lakh)
Sl. Name of Bank No. Private Sector Banks All India Position 1 AXIS Bank 2 Bank of Rajasthan 3 City Union Bank 4 Dhanalakshmi Bank 5 Federal Bank 6 HDFC Bank 7 ICICI Bank 8 ING -Vysya Bank 9 Jammu & Kashmir Bank 10 Karnataka Bank 11 Nainital Bank 12 Ratnakar Bank 13 South Indian Bank TOTALPrivate Sector CBs TOTALAll Public Sector CBs-(from table 3a) Grand Total Commercial Banks Grand Total Commercial Banks 3919680 4052915 5E+07 353340.23 1068694 5E+07 367389.24 1088160 11768490 81569.05 11992640 83147.57 3263210 3350054 4E+07 284408.59 4E+07 290057.64 No. of SHGs No. of Members Saving Amount No. of SHGs No. of Members Saving Amount No. of No. of SHGs Members Saving Amount

47 1436 7773 19370 2400 45407 19307 12426 1127 7351 680 721 5245 9945 133235

705 16681 NA 336755 NA 635698 289605 122596 NA 108585 6850 8003 75229 145490 2E+06

6.4 284.12 299.01 2992.7 227.17 525.34 1066.63 6897.15 85.21 663.59 44.06 229.3 385.58 342.75 14049.01

19 1049 1621 4123 188 378 NA 6698 527 911 495 143 2440 874 19466

285 11656 NA 65968 NA 5292 NA 64711 NA 14234 4950 1504 41353 14197 224150

4.67 235.58 65 182.44 17.55 4.59 NA 654.89 50.21 146.67 29.77 5.94 135.71 45.5 1578.52

47 1174 NA 1112

705 12961 NA NA

6.4 203.69 NA 1911.22 83.08 520.39 1066.63 488.2 50.21 589.76 0.12 167.4 296.85 265.1 5649.05

6771 106947 34285 573146 19307 289605 5523 527 6125 16 413 4585 63268 NA 91317 160 4552 67661

6959 101743 86844 1E+06

Source: NABARD (2011).

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Given the distinctive nature of the industry, the special profile of its beneficiaries and the blend of organisational forms of it players, there is a clear need for a sector-specific regulator sensitive to the needs and responsibilities of the sector. But the regulatory structure for the microfinance industry is still in an emergent phase.

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its headline-grabbing and hugely successful IPO (oversubscribed almost 14 times) in August 2010. To many it was the signal of the Indian microfinance industry coming of age and several other capital issues were being planned even though many engaged in social sector activism, including Muhammad Yunus himself, were less than impressed by what they perceived to be a shift of focus from social impact to investor returns. The celebrations were short-lived however, and not just because of the top-level personnel changes happening at SKS soon after the IPO. Within weeks of the IPO, Andhra Pradesh was engulfed by a spate of close to 30 farmer suicides, allegedly linked to coercive collection methods of MFIs. More than half these unfortunate farmers were allegedly borrowers of SKS and/or Spandana. The resulting crash in the stock of microfinance in Andhra Pradesh has few parallels in recent times. The political establishment swung into action following the suicides and the MFIs were demonised in the vernacular media. Vandalism of MFI offices by political goons was followed by police interrogation. Overnight Andhra Pradeshs blueeyed boy had become a pariah, and private MFIs persona non grata. The yesterday crusaders against mass poverty became persecuted as pitiless usurers exploiting the hapless poor. It is Andhras pre-eminence in microfinance that has made the recent turn of events particularly notable and ominous for the industry. For sure this was not the first time that microfinance had been at the centre of negative media glare, not even in Andhra Pradesh. Only four years ago, a spate of suicides in the states Krishna district had been linked to barbaric practices of MFIs. That impasse had ended with the state setting up village and Mandal-level vigilance committees to oversee the functioning of MFIs, the industry lobby proposing a code of conduct for MFIs and the latter voluntarily reducing interest rates. This time the crisis was further precipitated by the promulgation of the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Ordinance, 2010, on October 15, later ratified by the Andhra Pradesh Assembly with some changes on December 15. In both episodes, the problem has been identified as a debt trap and over-borrowing by the poor from multiple, competing MFIs resulting in a near-default or default situation worsened by aggressive collection practices resulting in disastrous calamities like suicides. In both occurrences, the exact linkage between the suicides and the MFI involvement has been tenuous. The main features of the October Ordinance included a requirement for MFIs to register themselves with government authorities, prevention of further lending in cases loans were outstanding, and restriction of collection at a frequency no higher than once a month. Coupled with administrative bottlenecks that made registration difficult and the widespread political campaign maligning

the MFIs as loan sharks that encouraged default, this brought the industry to a practical halt for several weeks in Andhra Pradesh. The reduction in collection frequency arguably affected saving discipline as well. In any case, the major players saw their recovery rates drop from above 90 per cent to below 30 per cent post-Ordinance. Clearly, the activity became untenable for most players in Andhra Pradesh and threatens the very survival of the sector on its home turf. The biggest victims are the poor who would now be denied credit flow. It is important to understand that the purported problem in the case of the suicides lay not so much with multiple borrowing itself as with over-indebtedness caused by a lack of proper credit infrastructure and the resulting inability of MFIs to judge the suitability and creditworthiness of the borrowers. Of course, the eagerness of some lenders to push credit cannot be entirely ignored either. With only about a quarter of the microfinance loans in the state going to productive purposes, the use of loan remains another major concern. At worst, the NBFCs may be guilty of mis-selling loans and of loanpushing. The social implications of indebtedness and bankruptcy are as much responsible for the drastic and unfortunate steps the victims had taken (assuming in the first place that the deaths were indeed related to microfinance). Given its quasi-public good nature, the credit infrastructure in most well-functioning credit markets is provided by institutionsprivate or publicthat are separate from lenders. It is partly this gap that has, for decades, helped the village moneylenders maintain their grip over the market. The industry-supportive solution to the problem would have involved an attempt to fill this lacuna. But the actual development was differently focused. While the state governments concern at the farmer suicides is, of course, understandable, the Ordinance is a clear example of regulatory overreach that threatens to do no less than stifle the entire industry. Also as noted before, the Andhra Pradesh government itself is a major player in the microfinance sector and the government-led SHG programme, often in competition with the NBFCs in the microfinance space, has alleged that the latter poach on SHG members to extend loans. Clearly, there is a significant conflict of interest between the industry player and regulatory roles of the government, which may have contributed to the harshness of the Ordinance. The situation resulting from the Andhra Pradesh Ordinance compelled the RBI into looking at developing a policy for MFIs to end the impasse and avert such situations elsewhere. The Malegam committee constituted towards this end submitted its recommendations in January 2011. The recommendations are quite far-reaching in nature and include creating a new class of NBFCs, NBFCMFIs, for regulatory purposes. These NBFCMFIs, the Committee has proposed, should have a net worth of at least Rs. 15 crore with a minimum of 90 per cent of their assets being qualifying assets. These qualifying assets or micro-loans are non-collateralised loans to households with annual

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While the intent of the Malegam committee recommendations is easy to understand, their practical implications are less obvious. Insisting that an MFI ensure that 75% of its loans go to productive usesthrice the current levels admitted by the committee itselfis imposing more than a little burden on the lender.

income below Rs. 50,000, with loan size and/or total indebtedness not exceeding Rs. 25,000. Finally repayment should be monthly or less frequent. At least 75 per cent of the credit should be for income generating purposes. The NBFCMFIs would be exempt from Moneylenders Acts and loans to these MFIs by banks would continue to enjoy priority lending status. There needs to be a margin cap over cost of funds12 per cent for MFIs with total loan portfolio size below Rs. 100 crore and 10 per cent for othersas well as an overall interest cap of 24 per cent on individual loans. Several provisions discourage overborrowing, multiple-lending and ghost-borrowing including the one making it the responsibility of the MFIs to ensure that a borrower is not part of more than one Joint Liability Group (JLG) till the time a Credit Information Bureau takes up the task. There are provisions for borrower protection including those regulating recovery methods and the suggestion to formulate a client protection code by the designated sector regulator. While the intent of the Malegam committee recommendations is easy to understand, their practical implications are less obvious. Insisting that an MFI ensure that 75 per cent of its loans go to productive usesthrice the current levels admitted by the committee itselfis imposing more than a little burden on the lender. The regulatory compliance will add significantly to the operating costs of all MFIs while at the same time pushing down the interest rate from the current average of about 30 per cent to the new cap of 24 per cent. Using MIX data for 2009, Subramanian (2011) points out that while there is no significant difference between loan size and revenue per rupee of lending between the smallest and the largest MFIs, the operating costs of the former are almost twice those of the latter. The effects of this squeeze would therefore be disproportionately more for the smaller players, leading to consolidation in the industry. This may well be an intended effect, making it easier to regulate the sector and possibly tilting the field in favour of the government sponsored SHG schemes, but it is also likely to dry up credit flow to the poor. Given that the central issue here is that of consumer (borrower) protection, the wisdom of regulating prices remains questionable. The Malegam committee argues that if its provisions come into effect, there would be no need for a separate Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act. But the Andhra Pradesh government has not dropped the Bill yet. The committees recommendations also have to be reconciled with an older ongoing legislative processthe drafting of the Microfinance (Development and Regulation) Bill 2010 by the Central Government, that among other things, seeks to make NABARD the apex regulator in the microfinance area.

The Road Ahead

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The Indian microfinance journey over the last two decades has been a historical one but its eventfulness in the last three years has

perhaps been unmatched before. On the one hand, international private equity jostled to enter the fieldthree PE deals bringing in US$52 million in 2008 followed by 11 the following year fetching US$178 million2followed by a spectacular IPO making global headlines. On the other hand, charges of unethical and extortionist practices by MFIs led to arguably a draconian measure in its home turfAndhra Pradeshhalting the industry in its tracks. There is no doubt that the microfinance movement in India has been as gigantic as the country itself and yet opportunities abound. The movement remains unbalanced with the microfinance penetration index (a states share of national microfinance clients divided by its share of the national population) in the South being over 10 times than that in the Northern region.3 As for poverty penetration, (the denominator now being the states share of the nations poor), the worst performing Central Region, again scores less than the South. The regional disparity aside, the growth in microfinance has been beyond doubt. Clearly, crores have reached the poor or the nearpoor in many parts of the country. What is therefore more than a little surprising is the absence of evidence of a clear improvement in key measures of welfare: consumption, health, education or womens decision making. It seems that it is systematic investigation of impact assessment that has lagged the microfinance revolution in India. Notwithstanding its phenomenal growth, the microfinance industry in India today stands at a juncture marked with uncertainty. Much depends on the policy stance and a settlement between the Centre and the states about jurisdictional issues. Whether the visible hand of the state in India would prove to be a nurturing one for the industry or a crushing one, only future can tell. And it better tell it soon, for there is hardly much time to dither.
References
Bhat Ramesh, Mavalankar Dileep, Maheshwari Sunil Kumar, Saha Somen (2007), Provision of Reproductive Health Services to Urban Poor through Public Private Partnerships, The Case of Andhra Pradesh Urban Health Care Project, IIMA Working Papers WP 20070107, Indian Institute of Management Ahmedabad, Research and Publication Department. Abhijit Banerjee, Esther Duflo, Rachel Glennerster and Cynthia Kinnan (2010), The Miracle of Microfinance? Evidence from a Randomized Evaluation, Working Paper, MIT. Ashok Rai and Shamika Ravi (2009), Do Spouses Make Claims? Empowerment and Microfinance in India, World Development, forthcoming. Collins, D., Morduch, J., Rutherford, S. and Ruthven, Orlanda (2009), Portfolios of the Poor: How the Worlds Poor Live on $2 a Day, Princeton University Press. Dean Karlan, Xavier Gine, Jonathan Morduch and Pamela Jakiela (2006), Microfinance Games, Working Papers 936, Economic Growth Center, Yale University.

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Clearly, crores have reached the poor in many parts of the country. What is therefore surprising is the absence of evidence of a clear improvement in key measures of welfare. It seems that it is systematic investigation of impact assessment that has lagged the microfinance revolution in India.

2 3

Srinivasan (2010). Srinivasan (2010).

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EDA Rural Systems and APMAD (2006), Self-Help groups in India: A Study of Lights and Shades, a report prepared for Catholic Relief Service, CARE, USAID and GTZ/NABARD. Finance Ministry (2010), Mid-Year Analysis 20102011, Department of Economic Affairs, Ministry of Finance, Economic Division, Government of India. Karlan, Dean and Xavier Gine (2009), Group versus Individual Liability Long Term Evidence from Philippine Microcredit Lending Groups, Working Paper 61, Yale University, Department of Economics. NABARD (2011), Status of Microfinance in India: 200910, www.nabard.org. Ramesh, Jairam (2007), Self-help Groups Revolution: What Next?, Economic and Political Weekly, Sept 8. Srinivasan, N. (2010), Microfinance India: State of the Sector Reports, Sage Publications, New Delhi. Subramanian, Krishnamurthy (2011), Malegam Report to Hurt Microfinance, Economic Times, February 8.

Addendum
In its Monetary Policy for 201112, the RBI has largely accepted the Malegam Committees recommendations with a few changes like raising the interest rate ceiling from the proposed 24% to 26%, and the household income eligibility ceiling for MFI loans to Rs. 60,000 for rural areas and Rs. 1,20,000 for urban areas from the proposed Rs. 50,000.

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