MFIs need regulation

MFI sector in India is expanding exponentially. There is frenzy of activity is scale up and create value for investors and promoters. In this process it is likely that supervision would slacken and unhealthy competition would start. Signs of this have already manifested in the districts of Kolar, Ramnagarara and Mandya Districts of Karnataka. While larger MFIs might be able to absorb the resultant losses, it is the smaller locally based MFIs will have to bear the brunt.Further there is the risk of these adverse features spreading to other areas affecting the whole sector. The remedy lies in better regulation-either self regulation or better by RBI

I sometimes wonder whether a bubble is developing in the Indian Micro-finance space.

Micro Finance Institutions are trying to scale up too fast in a bid to enhance value for the shareholders and investors. Banks find it convenient to lend to MFIs because of the lower transaction costs and the opppertunity to classify such advances as Agriculture lending,lending to weaker scetions and sometimes to Scheduled castes and Tribes. For all these categories, there are multiple targets stipulated by the regulators.

Multiple lenders make it difficult to have any effective monitoring and control.In short there is excess liquidity. It is left to the MFIs to have self control. Loans at the field are renewed with enhancement which sometimes masks real defaults . An ideal environment for an accident to happen or a bubble to burst