Unstable Core: is the funding of the Indian microfinance sector structurally flawed?

MicrofinanceFocus, 27 December 2011

On October 14, 2010, the Andhra Pradesh government issued an Ordinance that effectively shut down the microfinance market in the state.  That shutdown continues to this day, with collections at negligible levels.  It’s clear that the AP microfinance market is dead and will not recover for years.

Important as AP has been to India microfinance, it is not everything.  Despite the year-long crisis, repayment rates in other states remain strong.  And though AP-oriented MFIs have been seriously or even terminally wounded, others have remained unscathed.

Despite this, in the intervening period funding for MFIs – largely dependent on a handful of Indian state and commercial banks – has persisted in a state of severe liquidity deficit.  more →

Rethinking Multiple Borrowing

Financial Access Initiative, 14 September 2011; MicrofinanceFocus, 15 September 2011

Some time ago, I had a conversation with a microfinance investor.  What is the greatest challenge facing the sector? – I asked.  His answer:  multiple borrowing – multiple borrowing getting people into too much debt; multiple borrowing transforming micro-enterprise lending into consumer finance; multiple borrowing rewriting the traditional relationship between MFIs and their clients.

Of course, multiple borrowing is present in all of these cases.  But thinking about multiple borrowing along these lines misunderstands the basic situation. Multiple borrowing isn’t a reflection of some recent or extreme developments to be ascribed to runaway growth, greed, or willing ignorance.  And despite press articles to the contrary, it is neither a result of heavy market penetration, nor even saturation. No, multiple borrowing is an intrinsic part of the practice, one that has been with us for years. more →

Hidden Risks of Securitization, Part II: Establishing a Sounder Basis for Microfinance

Co-authored with Vinod Kothari; MicrofinanceFocus, 19 August 2010

Our earlier article on the Hidden Risks behind Microfinance Securitization raised serious concerns about the inherent and largely unrecognized risks embedded in securitizations of microcredit assets.  While we believe that this article provided a useful contribution to microfinance sector, we recognize that it is sometimes easier to be a critic than an actor.  As the issues we raised were serious enough to inspire action, in this follow-up we explore in greater detail some of the potential solutions that we believe could mitigate these risks. more →

The Hidden Risks behind Microfinance Securitization

Co-authored with Vinod Kothari; MicrofinanceFocus, 6 July 2010

The Reserve Bank of India (RBI) recently promulgated proposed guidelines for securitization by non-banking finance companies that if implemented, would essentially gut the widespread Indian MFI practice of selling (assigning) and securitizing portions of their portfolios.  One of us has already described these consequences in detail.  Not surprisingly, this proposal caused alarm in the microfinance community and has generated intensive lobbying efforts with the RBI to modify the ruling.  As the RBI considers their case, it should bear in mind another distinguishing characteristic that sets microfinance securitizations apart. more →

Avoiding a Microfinance Bubble in India: Is Self-Regulation the Answer?

Co-authored with Sanjay Sinha;  MicrofinanceFocus, 10 Jan 2010

We live in a time of object lessons.  The economic crisis continues to buffet many countries, including the US, where the unemployment rate has now breached 10% for only the second time in the last 70 years, taking only 18 months to get there – the largest and steepest increase since World War II.  Three years after the first rumblings in the US subprime mortgage market, many banks around the world are still ailing.

The microfinance industry has not been immune either – MFIs in countries as diverse as Nicaragua, Bosnia, and Morocco are under severe stress, while many others have seen their portfolio numbers deteriorate significantly.  For the first time in its 11-year history, the industry’s flagship private investment vehicle – Blue Orchard’s Dexia Micro-Credit Fund – reported a net monthly loss.

The sector in India has thus far successfully avoided this fate.  more →