Abstract

This case is about the Indian Microfinance industry. It details the growth of the industry over the years and goes on to discuss the challenges faced by the industry after the government of the southern Indian state of Andhra Pradesh passed an ordinance severely restricting the activities of Microfinance Institutions (MFIs) operating from the state. The ordinance was in response to allegations that MFIs were practicing aggressive business practices which allegedly led to some borrowers committing suicide. Since most of the Microfinance industry was concentrated in the state of Andhra Pradesh, the new ordinance choked the Microfinance business in India. Big MFIs faced heavy losses while some smaller MFIs had to close down their businesses. The MFIs responded to the crisis by taking several initiatives. They trimmed their costs by cutting down on staff and closing down unviable branches. Many MFIs (both big and small) started diversifying into other related financing businesses. They hoped that this would diversify their revenue streams and mitigate the risks from any adverse policy decisions. The Microfinance industry in some states of India which did not put any restrictions continued to flourish. Many of the largest MFIs in India like SKS and Spandana started expanding their operations in those states. A new bill which sought to make the Reserve Bank of India (RBI) the sole regulator of the Microfinance industry was still pending before the Indian Parliament. The MFIs in India had their fingers crossed that the passage of the bill would mean better times ahead for the industry.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Understand the challenges that businesses may face due to the unfavorable policy decisions taken by governments.
• Discuss the ways in which companies can deal with unfavorable government policies that can stifle their business activities.
• Appreciate the importance of properly scrutinizing the macro environmental factors while running a business organization.
• Analyze the strategies that were followed MFIs operating in India to overcome the crisis.
• Identify the opportunities and threats faced by MFIs in India and discuss and debate the future strategies that they should follow.

Keywords

Indian Microfinance industry, Business environment, Regulatory environment, Unfavorable government policies, Macroenvironment, PESTEL, Key drivers of change, Opportunities, Threats, Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Ordinance, Microfinance Institutions (Development and Regulation) Bill