Just read this on NYT:

How does it affect UP and are you concerned about it?

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Hi Pradeep,

The situation is really unfortunate and saddens me deeply. My sympathies lie with the borrowers who had unmanageable debt piled on them. I am concerned about the situation.

While several MFIs like Ajiwika are very socially focussed and are making the right sized loan to the right borrower and collecting it the right way, a few MFIs in their quest for hyper profits have lost their way. This has affected the public perception of microfinance.

Our partner bank just like several other banks in India has stopped lending to MFIs. I am hoping that in the next few weeks some lending will resume and we can resume with Ajiwika. The bank may now ask for a higher guarantee percentage.

At a broader level in my view the two most important things needed in India for long term growth and effectiveness of microfinance are:
1. Getting the incentive structure right for all participants in microfinance
2. Stringent client (borrower) protection practices.

Both are regulatory in nature. The Reserve Bank of India which oversees banking in India has setup two panels - The Malegam committee and the Sharma committee, to look into some of these aspects. Their reccomendations are due by the end of January.

With good sensible regulations that encourage MFIs that put their borrowers interest first and support the livelihoods of the borrowers through financial and business advice, I see good potential for UP.

On the non-microfinance side we are seeing potential for UP in several areas. e.g. recently we got an innovative proposal for supporting diary farmers where we fund these farmers directly through a bank ( There is no microfinance institution involved). But launching these products will take time.


The Malegam committee report will be submitted to the regulator (Reserve Bank of India) on the 20th of January. Hopefully they will have sensible regulatory recommendations and that will reduce the uncertainty thereby encouraging banks to start lending again.


I am keeping my fingers crossed.



The Malegam committee report was submitted to the Regulator today - http://www.rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage...

- Please see the annexure at the bottom for specific recommendations


My first cut impressions on this:


- Reasonably comprehensive in covering aspects of microcredit that needed attention.

- They have specified some caps on the interest rate (24%) and the margin MFIs can make over the cost of funds. While MFIs that have large scale can make good profits if they desire, this will reduce possibilities of profiteering.

- It is detailed and very workman like middle of the road approach. 

- They have recommended several measures to prevent multiple lending etc. that can put poor families under debt stress.


What is missing:

- It does not recommend a central regulatory body for all MFIs. The large for-profit NBFC MFIs will continue to be regulated by the Reserve Bank of India (RBI). Smaller mostly non-profit MFIs are left out of the regulation. It is proposed that they be regulated by another body called NABARD. This is status quo. After this crisis Banks may become even more risk averse and now there is a possibility that they are likely to become less supportive of smaller MFIs outside the ambit of RBI's regulation. 

- The recommendations could have been more visionary. e.g.I quote the report:

'In a utopian society, all microfinance credit would be extended only by not-for-profit making entities.  However, the ground realities dictate otherwise.  Both the SBLP model and the MFI mode, therefore, need to co-exist as do co-operatives, trusts and societies.  The SBLP and MFI models must be viewed not as competitive but as complementary models both sharing a common cause.".

There are some MFIs like SKDRDP in India which is a non profit and that has done truly outstanding work  (http://www.skdrdpindia.org/ , http://www.amazon.com/Development-Divinity-Dharma-Institutions-Micr...).

Similarly there are great examples of member owned organizations such as Grameen Bank or Sewa Bank. And as Prof. Yunus wrote recently the ownership of a microfinance institution matters in how well they go about achieving their mission. ( http://www.thedailystar.net/newDesign/news-details.php?nid=169263). There is no reason why we should not attempt to create more of such organizations.

- The report correctly identifies that mere extension of credit alone will not help. I quote the report 'The lesson, therefore, to note, is that mere extension of micro-credit unaccompanied by other social measures will not be an adequate anti-poverty tool.'.  While one of the problems is correctly identified, caps on margin will by their nature reduce the provision of  social measures. While many of the smaller  MFIs mostly non-profits offer services beyond credit, they are likely to be continued to be challenged in raising funds from banks. 

Thus I think that there could have been more measures to ensure that single bottom line pro-poor organizations get the necessary support.


Overall there are a lot of positives in the recommendations. These recommendations if  well implemented will at the least create a stable environment. 


Now we need to work with the bank on getting lending restarted.






The final shape of  the regulations are likely to emerge by the end of March as per the regulator - http://www.business-standard.com/india/news/decisionmfi-regulation-...


Will have more updates soon.



Bhalchander, in your other post you included this question: Is the external investor driven profit-maximizing approach appropriate for solving complex problems such as poverty?

Can you clarify UP's policy regarding MFIs with a "profit-maximizing approach"? Ajiwika is not for-profit is it?
Ajiwika is a not-for-profit. However they will be transforming into a Non Banking Finance Company (NBFC) and a for-profit legal form in the future. Being a NBFC they can get equity from social investors and also give social returns to investors. Having equity will also increase the Bank's comfort in lending to an MFI, so equity is important.

An organization called Dia Vikas which is a social investor agreed to became an investor in Ajiwika after we started proving guarantee support to Ajiwika. Our guarantee support was a catalyst in helping Ajiwika get investment from the right kind of investor.

Dia-Vikas is the Indian arm of Opportunity International Australia. ( http://www.dia-vikas.org/, http://diavikas.org/modules/user/partnerDetails.php?partnerId=37&am...). From what I have gathered from Dia-Vikas over a phone conversation, if they invest in a for profit entity their goal is capital ( equity) preservation and not profit maximization.

You will also find Prayas ( the second MFI we planned to sign up) in the list of Dia-Vikas's partners - http://diavikas.org/modules/user/partnerDetails.php?partnerId=38&am...).

Hope this helps.

The regulators have a crucial role to play going forward. Caps on interest rate will I think do more harm. The poorest borrowers who are often in the most remote areas are served by mostly non-profit MFIs. The loans sizes tend to be smaller and the operational costs tend to be higher. Hence their interest rates tend to be higher. Non-profit MFIs charge higher interest rate than for-profit MFIs because of the nature of their clients. It is counter intuitive, but a study also confirmed the same facts.

The second thing an interest rate cap could do is reduce due dilligence by MFIs. This is another risk.

Third it might exclude the poorest borrowers in the most remote regions.

On the other hand the article does not suggest what kind of regulation is needed.
A brief post on Forbes. I share the same concern Grameen foundation also seems to have:

“Not all MFIs in India are at fault,” she says. “Our concern is that the current situation will hurt the others that are doing the most good.”

Smaller and non-profit MFIs that are more socially focussed but who may not have adequate equity ( because they do not promise great returns to their investors) are likely to find it quite hard to get loans from banks after the crisis tides over.

This is an area where the regulators need to create a level playing field.
Could it be possible to resume lending with a bigger/ 100% guarantee of the loan from us ?
Hi Sverre,

Just heard back from the bank. The bank is not willing to lend even with a 100% guarantee. Banks are waiting on reports from two committees ( Malegam committee and Sharma committee) that have been set up to suggest the way forward. The reports from these committees are awaited towards the end of January. Banks are now adopting a cautious wait and watch approach.

We are trying a few things including talking to some other banks and looking at other MFIs and also other countries.

Any news regarding when we will have new loans on the website?


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