Paper

Microfinance: A Fairy Tale Turns into a Nightmare

Analyzing the commercial model of microfinance in India
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This paper discusses the current disillusionment with microfinance in India.

Discussions on microfinance in India include multiple lending, interest rates and the debate whether a bubble is being built around lending to the poor. The commercial microfinance model, with its minimalist and standardized model of lending, has run into trouble. Many microfinance commercial organizations have entered the market in search of profits and are competing to lend to the poor. These organizations:

  • Have put understanding poor people’s needs aside, and are chasing targets and numbers;
  • Do not see the poor as human beings with individual identities and needs;
  • View the poor as data points that add up in their profit statements.

Reacting to negative feedback from the media, the Reserve Bank of India has sent an advisory to commercial banks. The government of Andhra Pradesh, India has promulgated an ordinance to rein in MFIs. The paper recommends that the Reserve Bank of India look at specific instances and pull up delinquent organizations, instead of harping on interest rate caps and threatening to remove microfinance from the priority sector list.