India's microfinance sector faces collapse

INDIA'S troubled microfinance industry has appealed for $222 million in emergency funds to keep it afloat.

INDIA'S troubled microfinance industry has appealed for $222 million in emergency funds to keep it afloat.

There have been warnings the sector is just a fortnight from collapse following a revolt over "usurious" collection practices in several states.

The 15-year-old Indian micro-credit sector is facing a liquidity crisis brought on by a public campaign that linked a spate of farmer suicides in the southern state of Andhra Pradesh to onerous interest rates and coercive collection methods.

The campaign prompted the state government last month to pass an emergency law suspending all collections, imposing a ceiling on interest payments and outlawing coercive collection methods.

Some politicians also advised their constituents to stop making repayments on their loans, prompting banks, spooked by the negative publicity and payment boycott, to refuse further credit to the sector.

Micro-Finance Institutions Network, which represents 44 for-profit companies operating in India, this week called on private and public banks to extend an emergency line of credit to the industry to help keep its struggling players afloat.

MFIN president Vijay Mahajan said that by refusing to extend additional loans to micro-credit companies facing a liquidity crunch, "the banks are basically converting a problem into a crisis".

"They are causing a liquidity problem which will kill us."

Speaking at a microfinance conference in New Delhi, Mr Mahajan, who heads microfinance lender Basix, also described the Andhra Pradesh government's moves as "complete misuse of democratic processes and law and order machinery".

Despite a High Court stay of the ordinance allowing microfinance companies to resume collection, Mr Mahajan said political leaders and law enforcement officers were preventing staff from entering villages and towns across AP to collect repayments.

"Today anyone can say 'Don't repay your microfinance institution loan'."

Stephen Rasmussen, a former world bank microfinance expert now with independent policy and research centre the Consultative Group to Assist the Poor, warned that unless normal business resumed within a fortnight -- and banks reopened their credit lines -- the industry faced a crisis.

"If either of those things does not happen now, and quickly, I think we will have serious consequences and we won't get the opportunity to go on and create the reforms that we need to have," Mr Rasmussen said. "I think things would have to change in the next two to three weeks."