In the light of the ongoing crisis in India's microfinance sector, there is a need for an 'early warning system' that would predict disruptions in the sector, says, Elizabeth Larson, the regional manager for Asia at Microfinance Information Exchange (MIX). Larson told Governance Now that the system could work to reduce the risks the sector faces.

“No country has one so far, so India has a great chance to be a pioneer of an early warning system for microfinance. It is very easy. The data has to be collected and mapped by somebody and microfinance need to be on-board with that collection,” she said.

“We don’t have anything to predict with accuracy what is going to happen in the sector,” she added.

Larson believes that mapping data could help the Indian microfinance sector recover from its current crisis. "It could also stabilise MFIs in the future," she said.

The financial sector and economists use tailored warning systems to detect disturbances in the sector. Underlining the forecasting prowess of such systems, Larson said, “It could be used in preventing another crisis in microfinance sector and even knowing more about the market.”

Alarms were sounded in the second quarter of this financial sector regarding the health of the country's microfinance sector. With nearly 16 crore clients, mostly in rural areas, it is considered the world's largest. However, several small and medium MFIs have shut shop since 2010, when the first sweep of the crisis was felt. "Millions of rural poor borrowers in Andhra Pradesh are running thr risk of losing access to formal credit," the Economic Times reported on December 28.

There is still no blanket regulation of the sector. The centre's bill on MFI regulation proposing to make the Reserve Bank a regulator, however, is in public domain for feedback.