As the controversy surrounding microfinance companies in India refuses to die down, a new report scalds the sector saying that it has drifted away from the focus of its work - social good. “The poor do not seem to figure highly in their scheme of things,” the report says.

The report titled ‘Microfinance India: State of the Sector Report 2010’ also questions role of the different players in the sector. According to the report, “If the poor are to be left out of the financial systems that have been designed specifically with them as the original clients, then with what would they be served?”

Vipin Sharma, CEO, ACCESS Development Services said it is time for introspection for the sector. “It is a business which deals with the poor and unless you are sensitive and recognise the poor and their dignity we may be doing disservice to them,” he told Governance Now.

The report accused the companies of not deviating from the main agenda behind their wanting to be in this sector. “The direction is towards commercialisation, profits and choosing customers who would help them to realize the same,” the report authored by N. Srinivasan commented.

The study says that the sector should aim for greater level of transparency in dealing with customers.

“Not only the true prices paid by customers should be declared openly but further information relating to real recovery rates, government practices and processes adopted in the transformation of institutions should also be open for public scrutiny,” the report noted.

The report has come in the backdrop of the suicides in Andhra Pradesh linked to the strong arm tactics of MFIs in recovering debts. “The MFIs need to exhibit that they are relevant and appropriate institutions to deal with the problems of poor.”

The study also criticised harshly the role of intermediaries of the MFIs who are very active in collecting loans by using coercive method to the poor clients. “The emergence of ring leaders as key intermediaries between MFIs and the potential customers has distorted market discipline, as also the MFI lending process,” it said.

The role played by some states especially Andhra Pradesh came under heavy criticism after the recent suicides and its government effort to discipline the lenders in the state. “AP government took the view that MFIs are not playing a positive role and needed to be policed.”

Microfinance in India has almost 100 million clients and is considered probably as the largest microfinance market in the world. The study also sought the guidance of the regulator in the sector. “The NABARD should resume its leadership of the SHG bank linkage programme (SBLP) movement and become a champion of socially mobilized financial intermediation process.”  

However, the government is also planning to bring a bill in parliament next session to regulate the MFIs in India.

Sharma also added that self-regulation and code of conduct have not worked in the past. “Self regulation is a good idea but it doesn’t always work so people in this sector want now single, appropriate regulatory body for the sector.”