The Journey of Indian Micro-Finance : Lessons for the Future

Contents: I. Introduction and Context. 1. Introduction. 2. A Tale of Two Women. II. Antecedents to the 2010 Crisis. 3. The precursors to the present Indian micro-finance crisis – the NABARD High level policy conference and the Krishna crisis. 4. The MFI Resurgence, Thanks to equity investors. 5. The return of the banker(s). 6. The general MFIs Grwoth Story. 7. Intervening events from March 2009 to March 2010. 8. The run to the 1st Indian micro-finance IPO. 9. The runaway success of the SKS IPO. 10. Andhra Pradesh Crisis and micro-finance as India’s sub-prime. 11. On presenting bad news to the Indian micro-finance industry. 12. Who were the So Called Rogue MFIs in Andhra Pradesh who caused the crisis? 13. Responses by the state government, reserve bank of India and micro-finance associations to the Andhra Pradesh crisis. 14. Contagion: A Serious consequence of the Andhra Pradesh crisis. 15. The Malegam committee report. 16. Credit Bureau. 17. Implications of the Andhra Pradesh crisis for Indian Micro-finance. III. Critical issues and lessons for Indian micro-finance. 18. Corporate governance in Indian MFIs: Critical issues and lessons form the Indian experience. 19. The Governance of risk management and compensation at MFIs: Critical issues and lessons. 20. Management information system: Critical issues and lessons. 21. Internal controls: Critical issues and lessons. 22. Internal controls and internal audits: Suggestions for MFIs and regulators. 23. The broker agent in Indian micro-finance: A Frankenstein’s Monster created by MFIs? 24. Loan officers and their case loads: something Puzzling. 25. Multiple lending: Critical issues and lessons. 26. Zero PAR. Legal notices and insolvency petitions: Delinquency management from the field. 27. Understanding the client acquisition process in MFIs: Critical issues for the RBI. 28. Effective interest rates: Critical issues and lessons. IV. Regulation and Supervision of Micro-Finance. 29. Regulation and supervision of micro-finance: Critical issues and lessons from crisis situations. 30. Supervision of NBFC MFIs: Critical issues and lessons. 31. Micro-finance assets and priority sector lending: Critical issues and lessons for supervision. 32. Business correspondents for financial inclusion: Critical issues and lessons. 33. Self-Regulation in Indian micro-finance: Critical issues and lessons for stakeholders. 34. Consumer protection regulation in micro-finance: Critical issues and lessons. 35. Regulation and supervision of micro-finance: A Suggested framework. V. Conclusion. 36. The financial inclusion paradigm: Critical issues and lessons. 37. Re-Engineering the financial inclusion paradigm to facilitate inclusive growth. VI. Technical appendix.

Two lines that matter-of-factly sum up the tale – not just of a life lost but also of an industry gone horribly wrong - an industry plummeted into a crisis by the loss of the very lives that it swore to elevate! The year 2010 saw the Indian micro-finance industry suffer a crisis of faith that questioned the very basis of its existence. In October 2010, The Government of Andhra Pradesh, a state often described as the micro-finance capital of India, reported that as many as 54 people had committed suicide due to harassment related to debt repayment. For a country that is yet to recover from the agrarian crisis that continues to claim the lives of farmers at a regular rate, this was yet another body blow! The champions of the downtrodden had turned into agents of oppression and harassment - or so it seemed!

Did the angels actually turn demons? Was this India’s sub-prime? And why did such a fate befall an industry that even during the global economic crisis was the darling of bankers and investors worldwide? Ramesh. S. Arunachalam offers an objective ringside view into the ways of functioning of the industry even as he provides numbers to substantiate the enormity and the implications of crisis, born primarily out of the pressures of commercialization and incentives gone terribly wrong, the lack of sufficient regulatory/supervisory attention and the rigid and impractical stand of some state governments. He turns the crisis into a learning opportunity, touching on critical issues - like corporate governance, MIS, internal controls, risk management, compensation, regulation/supervision, financial inclusion and several other aspects - that came up during the churning! A framework of suggested remedial measures, which brings up the end, highlights practical action steps that need to be taken if the industry is to regain its credibility as a prime mover in the area of development and inclusive growth!