Uneven Growth of MFIs Leading to Bubble

The market penetration of MFIs has continued its rapid growth and Indian MFIs have added six million customers in 2009. This is of course good news. The less good news is that the state that was already the most heavily penetrated in 2008 – Andhra Pradesh – was also the largest contributor to that growth. Surprisingly, the second largest contributor is Karnataka, itself a heavily penetrated state, and of course home of the current repayment crisis in Kolar and other southern districts. Indeed, of the top five growth contributors, the three southern states of Andhra Pradesh, Karnataka and Tamil Nadu contributed 54% of new MFI clients in India during 2009. Since these states in 2008 already accounted for nearly half of all microfinance clients in India, the clear conclusion is that growth continues to be driven by states with an already large client base.

In a country where each state has a population equivalent to medium sized countries, it is perhaps inevitable that this analysis is complicated by regional considerations within states. Thus, while southern Karnataka undergoes a delinquency crisis caused substantially by such a bubble, northern districts of the state continue to be under-served. Similarly, while AP has a very high concentration ratio with bubbles developing in the Guntur-Warangal-Vijaywada region, Medak district (not far from Hyderabad) continues to be under-served. Such large variations within states with high overall penetration numbers suggest that multiple lending is a far greater problem in many local areas than the statewide numbers would suggest. But bubbles aren’t isolated to just these few states. In West Bengal, for example, the region around Kolkata is served by many MFIs with substantial multiple borrowing. Perhaps the most piquant situation is that in Uttar Pradesh (UP), where the Lucknow-Kanpur region has seen substantial MFI activity leading to a local delinquency crisis, despite the fact that the state as a whole is one of the least penetrated of all the larger states in India.

Given this focus on penetration levels and local delinquency issues India as a whole still has vast regions that are largely unserved by microfinance, but this is beginning to change. While in absolute numbers the heavily penetrated states have contributed the bulk of the growth in 2009, the less-penetrated high-population states are generally growing faster. Indeed, the inversely proportional relationship between existing penetration and growth is undeniable, suggesting that the heavily penetrated state need not be MFIs’ growth engines for much longer, potentially reducing one of the major obstacles to the MFIs’ efforts to curb over lending.

Microfinance – Way forward for Financial Inclusion.

Microfinance is generally defined as specialized financial tools - such as small loans, savings accounts and insurance policies - available to poor households and small businesses that do not typically have access to financial services.

Inclusive financial services are now recognized as one way to empower individuals and communities to lift themselves out of poverty. As has been demonstrated since the first experiments with microfinance, many people living in poverty can improve their livelihoods when given the opportunity to save, invest, and insure.

It is estimated that there are now over 10,000 microfinance institutions (MFIs) operating throughout the world. The spectrum of organizations involved in microfinance is vast: most are small local NGOs, but an increasing number of international organizations, credit unions, government agencies, banks, charities, and the world's largest private financial institutions are now providing or helping to provide microfinance products.

Microfinance means more than giving out small loans. Although loans are one of the most important services offered by MFIs, there are many other services under the umbrella of microfinance. Microloans are typically smaller than the loans offered by banks in the developed world. But even a few hundred Rupees can often allow a small business in a rural village get off the ground.

My Dream - Rural & Semi Urban Housing

Housing is one of the most serious challenges facing India’s socio-political economy today. While food security has been largely achieved and clothing today is not a serious problem for the poor, shelter remains beyond the reach of millions in India even after 50 years of the country’s independence. This is a matter not merely of deep concern but also a matter that requires immediate attention and urgent action. For a normal citizen, owning a house provides significant economic security and status in society. For shelter less persons, a house brings about a profound social change in their existence, endowing them with an identity, thus integrating them with their immediate social milieu.

According to the 1991 Census, the rural & semi urban housing shortage was 13.72 million consisting of 3.41 million households without houses and 10.31 million living in unserviceable kutcha houses. These figures will grow with population growth over the years. The major factors which had affected growth of rural 7 semi urban housing are lack of government support, negligible presence of housing finance institution and apathy of organized real estate players. However off late government has recognized this and It has announced a National Housing and Habitat policy which aims at providing ‘Housing for All’ and to facilitate construction of 13 lakh additional housing units in rural areas annually with an emphasis on extending benefits to the poor and the deprived. But still the outreach of housing finance institutions in the rural and semi urban areas is negligible. There is virtually no institutional finance going in for the creation of infrastructure support services in the rural and semi urban areas.

The challenges for housing finance institutions to fund rural and semi urban housing are to make credit scoring model for targeted borrower as this segment of population generally do not have credit history and to get clear title for creating lean mark on property. Organized real estate players are not keen to foray on semi urban housing as they would find it difficult to mobilize capital for execution of projects due to lack of interest from financial institution and real estate funds. On the other side sale of property would again be impacted due to lack of credit.

In spite of challenges I can clearly see huge opportunity for every one be it consumer, housing financial institution, real estate funds and developers provided government adopt a multi-pronged approach of evolving strategies for extending the outreach of housing finance in the rural areas, sourcing of capital from both internal and external sources and the development of a menu approach for housing and habitat development.

To promote more participation of housing finance companies Real Estate Funds may closely work with National Housing Bank and Housing Finance Companies to facilitate policies and credit scoring model which suits rural and semi urban housing. The enhance credit flow will definitely generate interest in developers as urban housing is becoming overcrowded and land prices are souring, which is putting pressure their profitability. To facilitate this Industry have to make recommendations to government for forming an apex body, which would act as regulator and protect consumer’s interest and also facilitate induction of Science and Technology inputs on a continuous basis into the sector for low cost housing.