the transitions of indian microfinance

india’s beleaguered mfis are making a set of fundamental changes to their business models. in a bid to survive, one bunch is diversifying beyond microfinance into lending for cycles, vehicles, homes, tractors and whatnot. another lot is sticking to microfinance but making some significant changes within that — like who they lend to and how they lend.

in the process, they are all going through a bunch of massive transitions — from unsecured loans to secured loans, from group loans to individual loans, from the poor to those well above the poverty line. my latest story on the mfis discusses this transition and then talks about the issues this diversification poses before regulators.

(Usha) Thorat fears that if the NBFC arms lend the way MFIs did during the boom years of microfinance, there might be a surge in secured loans, but without enough due diligence into the end use of that loan, the borrower’s repayment capacity or the worth of the asset. For example, if a poor woman uses a loan to buy a house in a slum or an informal tenement, she won’t have a title. How can that serve as collateral then? There’s also the risk of priority-sector funds being used for other purposes. R Bupathy, former president of the Institute of Chartered Accountants of India (ICAI), says this risk is greater in a holding-company structure with many subsidiaries.

do take a look.

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