Microfinance Focus, December 12, 2011: Addressing a plenary session at the Microfinance India Summit 2011 in New Delhi today, Prof. N. Srinivasan, author of the State of the Sector Report said that the Indian microfinance sector is in a state of impasse.

“One of the things we see despite the problems is that there has been a growth in number of clients and portfolio outstanding. The growth is just marginal. In 2012, there might be signs of deceleration”, he said.

Talking about the ground realities in Andhra Pradesh post microfinance ordinance, Prof. Srinivasan said that the state regulation came hard on those who were operating in the sector actively.

“In AP, you couldn’t do much beyond October in the sector. This is because liquidity dried up. The risk perception of banks and promoters had become high. When the promoters developed a high risk, then we were really in deep trouble. Some of the promoters really gave up. Liquidity flows has been quite hesitant. The hardcore funders thought the risk was too high”, he added.

Further, while customer protection levels did increase in AP, there were restrictions on the kind of pricing and loans. Another problem arose as protection levels went up, choices of way of doing finance services were limited.

“Credit indiscipline, on part of the borrowers’ side, is irreversible in the short time. A lot of work is needed before AP clients get back discipline in borrowing. Social performance comes down to the field in actual practice. Having a code of conduct, restricts how you carry out products or how you price products”, he said,

Srinivasan believes that the microfinance industry needs to redesign their products and revisit their mission. “We need to satisfy our customers to serve their needs. Also we need to revisit our own mission and business strategy to satisfy our stakeholders and ourselves and lastly, we need to reinvent ourselves”, he concluded.

Segmenting the industry into SHG and NBFC microfinance, Mr Alok Prasad, Chief Executive Officer of Microfinance Instituitions Network (MFIN) said that the SHG movement has had strong support from the government and NABARD, which is directionally looking much better.

“The crisis was triggered with the government wanting to do something with the SHGs. The NBFC-MFIs which were targeted by the AP law last year were greatly impacted”.

However, change is necessary for the industry and it needs to deal with it. All of us in the industry need to take more responsibility, he said.

Speaking about the opportunities that came out of the crisis, Veena Mankar, Managing Director of Swadhar Fin Serve said, “We need to establish partnerships with banks, SHG, business correspondents, mobile payments etc”.

Stressing on the need to add one more stakeholder other than the client and investor, she said “We cannot forget employees. We need to have a robust staff that would prevent fraud. The stakeholder has to be client, employee and investors”.

She further highlighted the need to move away from groups, individual loans and solely women. There is a need to provide bigger loans to fund livelihood options of clients, she added.

Responding to the issues of the State of the Sector report, Vijayalaskshmi Das, CEO of Ananya Finance for Inclusive Growth said that there is a need to understand household cash flow and the impact of the next phase of microfinance on women's status in the family.

He also emphasized on the need to large equity fund for the industry. “As a sector we need to work towards the creation of an Indian equity fund”.

“Also the need to understand risk is very critical. We should encourage smaller organizations to continue their work and help them to survive”, he said.

Gregory C Chen, Regional Representation for South Asia, CGAP who believes that the Indian microfinance crisis is unfolding said that some issues are still playing out.

“India’s microfinance has a broad canvas. I worry about competition between all these models. There’s bad competition but also good competition. CGAP looks to India for the kind of innovation that has been going on. There is a lot of innovation in SHG and MFIs. Yet we are still stuck with the question, how we create more space for SHG and MFIs when the RBI leaves banks at the center of their policy making”, he said.

Ending the panel discussion, Rajalaxmi Kamath, Associate Professor at the Center for Public Policy, Indian Institute of Management said that he agrees with the need of creating an equity fund especially for the smaller organizations.

“A lot of the development is due to external players and smaller players are hit the most. And you need a special equity fund to prop up the smaller”, he said.