Services Offered By Microfinance Institutions Finance Essay

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In the last 5 Years the Indian Microfinance sector has witnessed tremendous growth, during which Microfinance institutions were subject to hardly any regulation. Most of the Microfinance institutions during that period were only subject to prudential requirements; but there was no regulation to address fair lending practices, pricing, or operations. The combination of minimal regulation and tremendous growth in the sector led to an environment where customers were increasingly dissatisfied with services offered by Microfinance institutions, culminating in the Andhra Pradesh crisis in the fall of 2010. Leading up to the Andhra Pradesh crisis, microfinance institutions were experiencing a huge influx of equity and debt investment from both Indian and Foreign Financial institutions. Some Microfinance institutions were doubling their book size each year, aiming to reach more areas and customers. As institutions started scaling up quickly, MFI employee hiring and training processes were less thorough, resulting in employees who were involved in inappropriate collection practices and lending models that led to customer over-indebtedness. In August 2010, SKS Microfinance held the first initial public offering (IPO) for a microfinance institution in India, raising USD 347 million and drawing attention to the potential profits of the sector. Media reports took different viewpoints on the IPO, some celebrating the sector, and others characterizing the profits as taking advantage of the poor. Further reports cited links between Microfinance Institutions (MFIs) lending and suicides in Andhra Pradesh. The incident culminated when Andhra Pradesh Chief Minister passed the Andhra Pradesh Microfinance Ordinance 2010, which includes a number of measures that greatly restricts microfinance institutions operations. As a result of the ordinance, and the general attitude towards microfinance in Andhra Pradesh, loan repayments dropped dramatically. Due to low repayment rates, microfinance institutions, with exposure to Andhra Pradesh, suffered significant losses. Banks stopped lending to microfinance institutions all over India, for fear that a similar situation would occur elsewhere, resulting in a liquidity crunch for microfinance institutions, which are largely dependent on bank lending as a funding source. With the sector at a standstill, microfinance institutions, microfinance clients, banks, investors, and local governments were calling for new regulation to address the prominent issues of the sector. The Reserve Bank of India (RBI) responded by appointing an RBI sub-committee know as the Malegam Committee. This committee aimed to address the primary customer complaints that led to the crisis, including coercive collection practices, usurious interest rates, and selling practices that resulted in over-indebtedness. The existing regulations did not address these issues, thus, who should respond to these issues, and how they should respond, was uncertain. This prolonged the general regulatory uncertainty and the resulting repayment and institutional liquidity issues. The Malegam Committee released their recommended regulations in January 2011. These recommendations were ‘broadly accepted’ by RBI in May 2011, though specific regulation was only released regarding which institutions qualify for priority sector lending at this time. Additionally, an updated version of the Micro Finance Institutions (Development and Regulations) Bill 2011 is in Parliament, which aims to provide a regulatory structure for microfinance institutions operating as societies,

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