The Indian Microfinance industry (MFI) represented the middle ground between formal financial services provided by banks and informal financial services provided by moneylenders. The industry grew rapidly in the period 2004-2009, with an average increase in number of clients year-on-year being 91%, while the size of micro credit outstanding grew by almost 100% Y-o-Y indicating the massive levels of under penetration to a large part of the Indian population (source: ‘Inverting the Pyramid’, Third Edition, Intellecap Publication). The business models of microfinance also evolved in this period to become businesses which seek capital from the formal sources and lend to the poor at a margin as opposed to the non-profit model earlier.
This period of high growth was accompanied by a barrage of private equity investments chasing established as well as start up microfinance operations. One of the pit falls of the break neck speed at which micro credit grew, was an inherent oversight in capping credit to customer who have borrowed credit from multiple sources. This resulted in multiple refinancing to the same customer resulting in repayment stress and leading to a few cases of personal extremities; an apt calling card for political intervention. Accompanying these events was a two pronged media coverage highlighting (a) the new and seemingly limitless investment & profit opportunity keeping in perspective India’s unbanked population and (b) the anti-thesis to such investments – financial strangulation of the poor. While both arguments had its merits, the second parameter was again an opportune moment for a bit of political mediation. Only, it did not remain confined to a bit.
The bill is a classic example of "well intentioned" government intervention in a sector where a market failure has not been conclusively demonstrated. While it provides for certain broad controls and regulation, it fails to answer the question that led to the industry in the first place: what is the policy stance on ensuring credit delivery to the rural and urban poor?