Microfinance institutions (MFIs) are beginning to feel the effects of Andhra Pradesh’s move to make conditions more stringent for the sector. On Monday, ratings agency Crisil said it put 12 MFIs on a ratings watch with “negative implications”, as fears deepened of increasing defaults. Repayment rates in Andhra are already below 20%. Criticism of the sector is also at its height—the latest coming from former RBI governor Y.V. Reddy, who compared microlending with the subprime bubble that led to the financial crisis in the US.
Any downgrade will further crimp credit flows at a time when some MFIs are looking for emergency funding. Shares of SKS Microfinance, one of the MFIs tracked by Crisil, are trading at around half their historic highs.
It’s a difficult time for microfinance, and it’s easy to be cynical about the sector. But it will take more than just hindsight of a bubble to put the sector back on track.