Gold rush over for microfinance

KOLAR in Karnataka was once famous for its gold fields. But early last year, the district gave a warning shot to the next crop of gold diggers even though the mines here shut down long back. 

    The microfinance Gold Rush — the lure of 100% repayment despite interest rates as high as 35% — received a rude jolt after the Anjuman Committee issued a directive to the district's mosques forbidding believers from any further transactions with microfinance institutions (MFI). 
    The Kolar fatwa rested on dwindling incomes thanks to a slowdown in key trades in silk and handicraft and growing discontent against the tactics employed by MFIs for loan recovery. The following days showed MFIs, long feted for taking banking to the masses, how vulnerable could life be. Kolar had 43 MFIs, and together they lost Rs 60 crore. 
    For the nascent Indian MFI segment — with a loan book of around Rs 11,700 crore against a mere Rs 897 crore in 2005 — Kolar could just be the tip of the iceberg. 
    An extensive ET research on the sector across India shows that although the industry continues to be in a denial mode, worried regulators, lenders and borrowers themselves are distancing themselves from the Gold Rush and evaluating future options. 
    RBI deputy governor Usha Thorat agrees that there is aggressive pushing of loans to groups without ascertaining the repayment capacity of ultimate borrowers. 
    While that statement, coming from a central banker, is reminiscent of the subprime crisis which eventually brought down the US banking system, Ms Thorat dismisses that likelihood, saying the problem is not systemic. "The MFIs are too small for that," she told ET in an interview.