Microfinance industry draws scrutiny

India's microfinance industry, which surged to prominence when George Soros-backed SKS Microfinance raised $358 million in an IPO, faces a regulatory clampdown that could erode profits and hurt growth.                                           
 

Reports of dozens of suicides by poor borrowers in Andhra Pradesh, the hub of India's microfinance sector, prompted the state to enact rules against aggressive recovery practices by lenders who make loans that average about $150 to poor customers at interest rates that can top 30%.                          
 

The finance minister said this week that he expects the industry to develop a code of conduct on interest rates and recovery practices, while the Reserve Bank of India (RBI) recently set up a panel to study issues surrounding the sector.                                            
Several industry insiders and watchers said greater oversight is needed, although many worry about overregulation.                 
 

"Hopefully, MFIs will clean up their act in terms of higher levels of client protection and appropriate behavior," said Shubhankar Sengupta, promoter of Arohan, a small microfinance lender based in Kolkata.                                           

The rise of for-profit microfinance has made billions of dollars in credit available to millions of poor people in India and elsewhere, but it has also spurred controversy.                                           
 

Backers say commercial microfinance makes lending attractive to poor borrowers who would otherwise be at the mercy of unregulated moneylanders who are known to charge interest rates as high as 100%.                                           
 

Critics are uncomfortable with high profit margins earned from poor borrowers, and worry that the social mission of microfinance has been sidelined in favour of profits.