Over the years, the microfinance industry has witnessed aggressive lending by microfinance organisations which are driven by high internal rates of return set by new investors in the sector. This has resulted in overburdened borrowers who have been forced to stretching themselves to unconscionable limits. This has become a matter of concern for everyone, yet there hasn’t been concrete efforts for any regulatory action so far.

RBI is of the opinion that the amounts involved are too small to pose any systemic risk and therefore RBI has been involved in offering advice and has not interfered directly. The microfinance industry has the opportune time to first take steps on its own to address these issues. Many industry bodies including Sa-dhan are already on the way to develop shareable databases of borrowers and their track record of loan utilisation and servicing. Also the investors could also pursue prudential norms and not just IRRs.

Microfinance by itself cannot remove poverty. Investment in infrastructure, enabling organisations, functional markets, linkages to markets, awareness, agency — all these are important. Too little of these materialise, making microfinance loans look burdensome. The solution is to invest more for rural transformation, not choke off the trickle flowing into India’s arid hinterland.