The chapter of Indian microfinance started from the agrarian state of Andhra Pradesh (AP). Some of India’s first MFI’s (Microfinance Institutions) got their start in Andhra Pradesh and also 5 of India’s largest NBFC (Non Banking Financial Company) MFI’s are headquartered in AP making it the epicentre of the microfinance industry in India. The region was the first to attract interest from mainstream investors.
Microfinance's designation as a priority lending sector made it advantageous for banks to lend to MFIs and by 2006, organizations in AP were experiencing a substantial inflow of capital. The public and private sector banks made large loans to MFIs with relatively little scrutiny, allowing MFIs to grow quickly without enough stability in the form of institutional capacity building or a solid capital base.
However, the lack of oversight into the MFI’s activities eventually led to oppressive lending practices, in the quest to meet their demands they lend money to already indebted borrowers, with data collected from IFMR’s (Institute for Financial Management and Research) centre of Microfinance showing that over 83% of households had loans from more than one source. Also, MFI’s took little notice of end utilization of money by the borrower and used abusive collections practices, culminating in 2010 with the sensational media stories of farmers in AP being driven to suicide as a result of their inability to repay their loans.
The outcome of all this was the crisis that broke out in October 2010 in the microfinance capital of India, which had its implications not only in India but globally too. The Reserve Bank of India reacted to this by introducing strict federal regulation on microfinance operations in February of 2011. These regulations included capping profit margins, lowering lending interest rates and narrowing the definition of an eligible loan client. The regulatory changes after the AP crisis had a widespread impact causing many banks to move out of the industry and withdraw funding.
However, Milaap had already addressed these shortcomings and the ways to overcome the same in their policy framework even before the crisis and came out positively in the otherwise resistant conditions for MFI’s working. Our credit policies are focused primarily on unmet and necessary rural needs such as water, sanitation, energy, education etc. through a subsidized capital with interest rate ranging between 12-14 %. Our medium of identifying right borrower and checking-in the end utilisation of the loan amount given has also enabled us to maintain a 100% repayment rate till date.
The microfinance industry has provided scalable and financially stable models for delivering financial services to low income people on large scale without actually relying on subsidies. They are essentially in need now, especially in large states like Andhra Pradesh where thousands of rural poor have benefited from them and now have access to credit , increased savings, insurance which has played a significant role in improving their standard of living.