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Transparent Pricing In India
Please note that MFTransparency is no longer collecting new pricing data. The data displayed for this country is for historical purposes only and does not represent current products or prices in the country. Note that the most recent data refresh was done in 2013 as shown in the graph for the Microfinance Institution’s network (MFIN) members. The data collected in 2014 are for those MFIs voluntarily submitting their data.
The Transparent Pricing Initiative in India has published standardized pricing data from 82 microfinance providers, representing loans given to over 27 million active borrowers. The Initiative first collected data in 2010, just before the microfinance crisis. The MFIN member data-set was refreshed in 2013 in partnership with the Microfinance Institutions Network (MFIN India).
Microfinance in India
India is one the largest microfinance industry in the world. From early beginnings in 1990s, the microfinance industry in India went through significant changes during 2000s, including commercialization and high growth. However, in October 2010 the industry suffered a crisis resulting from the issuing of an emergency Ordinance (The Andhra Pradesh Micro Finance Institutions (Regulation of money lending) Ordinance, 2010) by the government of Andhra Pradesh (AP) aimed at regulating the activities of MFIs operating in the state. The onerous provisions of the Ordinance (promulgated as a law in Dec 2010) halted the activities of the MFIs in the state and, in the months to follow, nearly 100% of AP’s borrowers (accounting for 30% of total microfinance borrower in the country) defaulted on their loans. Indian banks reduced their willingness to lend to any MFI across the country and, as a result, MFIs across India were forced to contract their business plans.
At the start of the crisis, there were an estimated 32 million borrowers (27 million of which are covered in the MFTransparency 2010 dataset). The number of borrowers reduced significantly after the crisis, however over the past year the industry made a strong come-back and MFIs, outside of AP, on an aggregate basis registered 40% growth.
Truth-in-Lending Legislation
Since 2010, the microfinance industry in India has undergone some significant changes in regulations and operations. On the regulatory front, in 2011 the Reserve Bank of India (RBI) created a new category of Non-Banking Financial Company (NBFC MFIs) and laid down a detailed set of regulations, based on the Malegam Committee Report, including clearly defined microfinance loans, pricing, target population, client protection principles, and other prudential regulations. The directive initially introduced a maximum interest rate cap of 26% (using the declining balance method) which was later replaced with an interest margin cap (of either 10% or 12% depending on the size of the institution) limiting the interest income earned by MFIs over the institution’s cost of funds. The new legislation limits additional components of loan pricing to a maximum of 1% for the loan processing fee, and also limits the size of the insurance premium.
Complementing these regulatory directions, there also have been a number of self-regulatory initiatives aimed at promoting responsible business practices in the microfinance market such as the Industry Code of Conduct, the development of a Credit Bureau ecosystem and an increased focus on social performance among others.
India Price Graph
The Price Graph shown below currently displays the prices of microloan products offered by institutions that are members of the MFIN network. As of March 2013, MFIN member MFIs provided credit to over 24.4 million clients, have a gross loan portfolio of USD 3.92 billion, and represent 85% of the microfinance business in the country. Non-MFIN members will be invited to submit their refreshed pricing data in the second phase of the Transparent Pricing Initiative in India.
Each data-point represents a real loan given to a real borrower, calculated using original loan documentation from the institution. The size of the data-point correlates with the number of borrowers that have a loan of that product at that loan amount. The color of the data-point correlates with the Transparency Index of the sample. The interactive legend beneath the graph can be used to change the graph axis and labels. Try the custom feature to see price correlations with attributes such as loan purpose, institution type, loan term and percent of gross national income.
Microfinance in India is characterized by relatively small loan sizes when compared to other countries. The data shows that there is a very narrow range in the prices of microloans, and the price curve is flat in relation to loan size. All products score very highly on the Pricing Transparency Index. This is a result of the standard use of the declining balance interest rate and the regulatory restriction on fees.
