From this Wall Street Journal blog, writers Arlene Chang and Eric Bellman give us the summary on the controversy.
The microlending industry in Andhra Pradesh disbursed around $2.3 billion in loans in the year ended March 31. During the same period, state-sponsored self-help groups, with the help of local banks, gave out only $1.46 billion, according to Reddy Subramanyam, principal secretary of the state’s rural development ministry.
The inability of the state’s players to keep up with the nimble-footed microfinance institutions (even though the state-backed programs offer subsidized loans at as little as 3%) has embarrassed the government and made some bureaucrats suspicious about the kind of growth the microlending industry has been clocking every year.
“As long as they come with a social face and have serious intentions about it, we have no objection. But, they are luring poor people into taking loans whether they are in need of them or not,” says Andhra Pradesh’s minister for rural development, V. Vasant Kumar. “Their orientation is only to make money.”
These suspicions and a recent spate of suicides were enough to convince the state it was time to regulate. New regulation which started earlier this month required microlenders to register with at least five different government organizations. One of the required approvals is from the rural development department, which also hands out micro loans so in some sense is a competitor to the microlenders. It’s not totally different from letting Air India regulate Jet Airways.
Government officials insist that microfinance companies have lost their way in their scramble to expand and grow profits. The sector which used to worry about helping the less fortunate is now hurting the poor, they say.
“We feel that the time is right for regulation,” said Mr. Subramanyam of the rural development department. “As long as it was a social venture we didn’t need to put regulation, but when people and their interests are given a go-by we are looking at a different scenario.”