Microfinance Focus, July 30, 2011: The current crisis in Indian microfinance has brought down the portfolios of Indian MFIs by 50% from their peak in October 2010. While some may see this as a cause for celebration, it has caused collateral damage to the lives of low income families, both recent and potential customers, which is a far more important issue. The RBI has attempted to resolve the issue by defining limits on interest rates, margins, incomes of microcredit borrowers, and the size of loans to be provided to such borrowers and on various other business conduct issues such as tenure, repayment frequency and collateral. This has generated hot debate but not much real light in terms of a close examination of the actual impact of the measures announced on the availability of microcredit to those who need it.

The purpose of this paper is to undertake such an examination. The content of this paper is particularly important in the context of the draft Microfinance Bill (now in the public domain) that seeks to formalize some of the measures that the RBI has announced as part of its definition of qualifying assets for priority sector lending by commercial banks.

The paper undertakes a time series analysis of the yields on loan portfolio of the 16 largest MFIs in India that account for over 80% of all the MFI services provided in the country. Historical yield data is compared with the pricing and margin caps announced by the RBI to determine the feasibility of MFI operations within the new regulatory regime. It also looks at the income limit and maximum loan size criteria to determine their relevance for the availability of microcredit to various income segments of the population.

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