By Abhishek Kunaparaju, Boston University
Vijay Mahajan, referred to as the father of Micro Finance in India, was least aware that his contribution to stabilize the financial lives of Indian poor, would eventually fall into jeopardy due to the corruption and irresponsibility in the nation. “I feel like my whole life’s work is turning to ashes. I’ve spent the last two weeks, just running to regulators and government officials, defending microfinance”, he says. The primary intention behind Micro Finance ($6.5 billion sector) is to provide financial services to low income people with affordable or low interest rates. In India, the state of Andhra Pradesh has the largest population of low income and debt - ridden farmers and hence, it is the largest Micro Finance market in the nation.
Though highly respected in its early years, the Micro Finance Industry in India today, is being intensely debated upon as its foundation principles seem to have been ignored or violated by several Micro Finance companies. Instead of establishing themselves as an alternative to the high interest rates charged by banks, these Micro Finance companies themselves have increased their interest rates drastically over the past few months. This exerted high pressure on the farmers and resulted in a large number of suicides. Highly concerned regarding this issue, the government of Andhra Pradesh ordered all Micro Finance companies to register with the state by October 29th and banned loan collectors from visiting people's homes. The state believes that the Micro Finance companies must not make profit from pressurizing the poor.
Apparently, the intensity of the damage is so high, that the government is also considering to put a cap on the interest rates charged by the Micro Finance companies, at least in the state of Andhra Pradesh. Implementation of a cap will cause significant damage to the Micro Finance companies, not only in the state of Andhra Pradesh but to companies all across India, as eventually all other states will follow the same steps to protect their farmers. "For the industry, raw material is money. If my raw material suddenly stops, how do I stay in business?", says Alok Prasad, chief executive of Micro Finance Institutions Network. Micro Finance Institutions Network is a group of 44 largest Micro Finance companies in India. Prasad and executives from the Micro Finance Industry have appealed to the Reserve Bank of India (RBI) to regulate their companies and business. Prasad says that the main reason behind approaching the RBI is that they have more knowledge than the government of Andhra Pradesh as far as the functioning of the Industry is concerned. However, the RBI is also concerned regarding the high profits recorded by the Micro Finance companies and ordered a panel to investigate the issue.
The Micro Finance Industry was a boon to the Indian Farmer initially and today, with the increasing number of suicides due to pressure from loan collectors, it seems to be transforming itself into a curse. Currently undergoing intense scrutiny from the government and the RBI, the future of the Micro Finance Industry in India along with the future of low-income Indian farmers is in great jeopardy.
