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How can we avoid repeating the Indian microfinance crisis in other countries?
Sanjay Sinha, the Managing Director of Micro-Credit Ratings International, thinks that there is still time to take action to avoid a very real collapse similar to the Indian crises in countries like Cambodia, Georgia, Nepal, Nigeria, and the Philippines, which he thinks are 'ripe' for such trouble.
He has provided a neat analysis of the 'great Indian microfinance crisis' of 2010 which got significant press coverage over the past year.
Sinha challenges some of the widespread viewpoints on the crisis and outlines the factors that were the cause of it. Apparently it wasn’t the exorbitant interest rates or client coercion that caused the collapse.
The main causes of the crisis summarised:
· High growth – Sinha argues that Indian microfinance sector grew too fast for its own good. Training the staff and managing the affairs become extremely challenging in these circumstances, which greatly contributed to the big crash.
· Multiple lending leading to over-indebtedness – the industry's quest for growth resulted in an over-simplification of its relationship with clients, less regulation, support, etc, leading to clients taking out loans while they were already burdened by other loans.
· Government's conflicting role as competitor and regulator at the same time. In the end the crash was caused, Sinha argues, by the government's microfinance programme with less efficient collection processes. Added to that were the new government regulations on microfinance, which effectively brought the industry to a halt.
· Over-reliance on a single source of funds.
How to avoid trouble in the future?
Sinha's top tips:
1. A moderate rate of growth to ensure that the systems for client acquisition, loan refinancing and collection practices keep pace with the organisation's expansion. Recommended growth rate is 30-50%
2. A better understanding of the needs of low income clients for financial products and more tailoring as opposed to 'one size fits all' approach.
3. A greater engagement with the political economy of the regions in which microfinance institutions operate
4. Ensuring a diversity of sources of funds. It has been shown time and again, Sinha argues, that microfinance clients have as much need for deposit services as for credit and that whenever the deposit option is available (ie Bangladesh) it provides an additional anchor of stability to the microfinance system.
At Deki we believe that ethical and responsible lending is of utmost importance. In 2011 Deki signed up for SMART Campaign client protection principles, which are set to deliver transparent and respectful financial services to all clients. We also work with our field partners to ensure that we protect our borrowers as best we can.