This long article in The Wire is a critique of how regulation impacts the lives of the most vulnerable sections of Indian society. The first stage of this drama unfolds during the first wave of Covid in April-June 2020:
“When the COVID-19 pandemic began, microfinance operations came to a complete standstill in India. The state issued a mandate requiring lenders to offer a moratorium that allowed borrowers the option not to make loan repayments for five months. This offered relief in the short term. Some households reported eating better than before despite the lockdowns, since they weren’t required to make microfinance repayments. However, lenders were allowed to levy interest at the regular rate of 24% per annum on the principal outstanding on the loans. Debt thus multiplied during a period when incomes came to a standstill. At first, the Reserve Bank of India (RBI) had permitted microfinance providers to charge interest on the interest outstanding to them as well as on the principal. The Supreme Court later reversed this decision, and microfinance providers refunded the compound interest collected.
After the moratorium ended lenders rescheduled loans, but with opaque terms which were not shared with the borrowers. The borrowers said they had no idea how the amount due each month was being calculated or how many instalments they finally would have to pay. In the weeks before the second surge in COVID-19, when it had seemed like normalcy was returning in India, microfinance providers had started netting off loans. They offered larger loans to borrowers and deducted previous dues at the time of disbursal. Those who had availed themselves of this then discovered in a short while that they had much higher debt and microfinance providers did not offer a moratorium when lockdowns were enforced again….
Microfinance companies instructed loan officers to continue permitting delays on a case-by-case basis in order to prevent mass default…”
Through 2022 and 2023 microfinance lending grew rapidly. Many borrowers ended up with loans from 4-5 microfinance lenders. Then in March 2022 the RBI liberalised the rules & regulations applicable to microfinance lenders:
“In March of 2022, the RBI announced a revised regulatory framework for the microfinance sector that incorporated many changes that microfinance providers had demanded. The RBI agreed to many of their requests, announcing a revised regulatory framework for the sector In March 2022. The changes included removal of the cap on interest rates, an increase in the lending limit, and permission for risk-based pricing. This effectively meant removal of protections put in place after the microfinance crises in 2009-2010 when aggressive lending had spurred a crisis of over-indebtedness. Following the reforms, the microfinance sector has seen rapid growth. The higher interest rates charged to clients made it easier for them to attract them. The raised lending limit meant that they could lend more to each client. Microfinance providers have expanded operations in new regions, which have higher poverty levels and more economic uncertainty….”
The March 2022 relaxations from the regulator turned out to be pro-growth, allowed higher risk taking and higher profit margins for the lenders thus attracting new capital to the sector. That in turn resulted in excess supply of credit.
Then came stage 3 of the drama – a 180 degree about turn from the regulator. We quote from the Business Standard’s 25th Nov ’24 edition (https://www.business-standard.com/finance/news/after-rbi-strictures-mfis-tighten-norms-to-make-lending-more-responsible-124112500895_1.html): “Over the last few months, the RBI has gone public with its concerns on a slew of practices adopted by the MFIs, including usurious high interest rates, multiple lendings to single borrowers and even practices like not crediting loan repayments to the rightful accounts despite being paid by borrowers.
On October 21, the RBI also asked four entities including Navi Finserv, DMI Finance, Arohan Financial Services and Asirvad Micro Finance to cease and desist from sanctioning and disbursing new loans because of unfair practices….
Microlenders have also tightened the norms on lending to a client who has slipped into the non-performing asset category, as per the MFIN guidelines.
No lending will be made to a delinquent client who has not repaid an outstanding of over Rs 3,000 for over 60 days as against 90 days at present, the guidelines for MFIN members state….
Interest rates will be “closely reviewed” by the boards of the regulated entities to ensure that efficiency gains are passed on to clients, the MFIN statement said.”
The result of this 3-stage drama where rules were relaxed in Stage 1 (due to Covid), relaxed further in Stage 2 (when the lending party was already underway) and then tightened severely in Stage 3: millions of low income borrowers with debt that they are unlikely to be able to repay and an microfinance industry teetering on the edge.
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