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Banking

Microfinance: Upstart sector is put on the straight and narrow

Indian committee suggests controls on microfinance; Central bank keen to foster lending in remote areas

Microfinance is at a crossroads on the subcontinent. Muhammad Yunus is under investigation in Bangladesh by a government determined to discredit the Grameen Bank founder and Nobel Peace Prize laureate for deigning to seek higher office.

In India, the situation is worse. A spate of suicides in the impoverished southeastern state of Andhra Pradesh, most occurring in late 2010, were blamed on overzealous, even aggressive debt repayment collections by microfinance institutions (MFIs).

The Society for Elimination of Rural Poverty totted up 54 suicides in October alone. Most, SERP said, were caused by microfinance companies seizing houses, cars and even sewing machines, and hounding villagers to pay for the losses of family members and neighbours.

India’s normally sluggish parliament acted swiftly, setting up a committee headed by Reserve Bank of India board member YH ­Malegam. In January, the self-styled Malegam committee issued a report suggesting that loans by micro lenders be capped, with a maximum size of Rs25,000 ($550) and an interest rate ceiling of 24%. Other recommendations included the creation of a new category of non-bank financial companies, to be regulated by the RBI.

This put microfinance in a jam. On the plus side, the industry at last looks like getting the regulation it needs and deserves.

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