2011 revisited | Microfinance sector's rough patch

The Rs 30,000-crore microfinance industry grappling with allegations of charging usurious rates, saw their fortune dwindling in 2011 with the Reserve Bank capping the interest rates for small loans.

The story of SKS Microfinance's bombastic market debut in 2010 was overshadowed in 2011 as reported management tussle in the company hogged the limelight through the year. This was followed by the exit of Founder and Executive Chairman Vikram Akula.

SKS, which brought the MFI sector into limelight in 2010 with a Rs 1,650 crore (around $350 million) IPO, had raised hopes of other players to tap the capital market.

But the series of low moments faced by the sector, including concerns of corporate governance and strong-arm tactics for loan recovery, pushed it into the dark.

Microfinance -- the business of doling out small loans at high interest rates to poor people unable to access conventional lending instruments -- has come under intense regulatory scrutiny following farmers suicide in Andhra Pradesh in late 2010.

The spillover effect of the 2010 crisis was seen in 2011 when the Reserve Bank came out with regulations capping interest rates charged by microfinance institutions (MFIs) from small borrowers at 26%.

In order to help sector, RBI brought the cash-starved MFIs within the priority sector lending category. The decision allowed them to access credit from commercial banks. It also created a separate category of NBFC-MFI.

Now, the loan by banks to MFIs for on-lending to small borrowers fall under 'priority sector' category and fixed the loan amount for an individual borrower at Rs 35,000 from an MFI.

The central bank said the loans could be disbursed to rural families with an annual income of Rs 60,000 or urban and semi-urban households with income up to Rs 1.20 lakh.

The RBI, however, left it to the borrowers to decide on the repayment period either weekly, fortnightly or monthly.

It has also asked the MFIs to ensure that 75% of the loan extended is utilised by the borrowers for income generation purpose.

The sector had come under criticism for multiple lending, inscrutable business models and high interest rates of over 30% reaching a peak and coercive recovery tactics used by the lenders.