Private Equity Backed For-Profit Microfinance Companies in India face Societal Backlash

Microfinance has become one of the hottest growth sectors in India attracting Private Equity Companies eager to take advantage of India’s Growth Story.A Number of For-Profit Microfinance Companies have grown exponentially in  recent times with funds raised from Foreign PE Firms.The Business Model of these Financial Intermediaries is highly profitable with 25-40% Interest Rates being charged from India’s Poor Population who don’t have access to credit facilities.Borrowing from Banks at 10-12% and lending at 25% gives a huge spread which more than covers the cost of operations in dealing with a huge number of very small borrowers in far flung areas.The recent IPO of  SKS Microfinance was a huge success instantly makings it promoters instant millionaires.The stock which  was expensively valued nonetheless managed to climb by almost 40% in the last 2 months.It brought into focus the whether making such huge profits through essentialy usury from the poor was ethical or not.

Microfinance faces Societal Backlash

Some of the practices like intimidation of borrowers,irresponsible lending and high interest rates have started to receive media attention.Poor and illiterate Indian villages are being offered multiple loans by numerous microfinance companies similar to the subprime crisis in USA.The Andhra Pradesh Government has passed a law regulating these institutions after 35 suicide deaths were reported due to microfinance loan problems.The Court has also upheld a challenge to the law and the government has arrested around 9 people from the top 2 lending institutions Spandana and SKS Microfinance.The Company has already received a huge amount of negative publicity after it sacked its CEO Gurumani under controversial circumstances just 2 months after the IPO.Expect the stock of the company to come under renewed pressure .

No stay on microfinance ordinance: Andhra HC – IBN

The Andhra Pradesh High Court has issued directives to microfinance institutions not to use coercive methods and to apply for registration.More than 35 suicides and still counting.That’s the death toll of debt ridden villagers in Andhra Pradesh due to alleged harassment at the hands of Micro finance institutions and the issue as always is quickly taking a political hue, with the state’s major opposition parties like the Telugu Desam taking to the streets against the state government’s apathy.

Meanwhile nine employees of microfinance companies, among them SKS Microfinance and Spandana, have been arrested for harassment.