China is learning from the mistakes made by micro finance institutions (MFIs) in parts of India, as Beijing seeks ways to bring banking and insurance to hundreds of millions of poorer, rural Chinese households.
The ADB earlier this year led a Chinese delegation to the southern Indian state of Andhra Pradesh, site of a spate of suicides in late 2010 blamed on the bullying of customers by predatory MFI moneylenders.
Along with Bangladeshs governments political harassment of Muhammad Yunus, the Nobel Peace Prize-winning founder of Grameen Bank, and the founding father of microfinance, this even caused many to believe that the concept had been fatally crippled.
Betty Wilkinson, a senior financial sector specialist at ADBs East Asia department, who led Beijings delegation to India, said Beijing saw clearly the lessons learned by aggressive MFI expansion in southern India.
The message for China in Andhra Pradesh was that there was simply too much lending growth, too fast, she told Emerging Markets. Beijing realised that there should have been more restrictions on the growing sector: geographical restrictions, transparency over the fees [charged by MFIs], and restrictions on interest rates.
For many, greed lay behind the problems in Andhra Pradesh. A few months prior to the suicides, SKS Microfinance completed a $350 million initial public offering. Micro lenders piled into poorer Indian provinces, leading to a crackdown by regulators. The upshot is that microfinance is now largely absent from Andhra Pradesh, a province that needs reliable rural banking more than ever.
Samit Ghosh, founder of Bangalore-based Ujjivan Financial Services, one of Indias most respected MFIs, said microfinance was now recovering from the crisis. The worst is over, with regulations clearly in place to protect customers, he told Emerging Markets.
But I think well see a real shakeout in Indian MFIs over the next year. Youll see as many as half of them either going to the wall or getting a severe haircut. Many expanded too quickly, lent too quickly, and were too focused on the profit motive.
The Chinese delegation, which included officials from Chinas banking watchdog, the CBRC, and executives at leading state insurers China Life and PICC, returned to Beijing determined to regulate the budding industry at a national, rather than - as in Andhra Pradesh - provincial level, and to place strict lending limits on all MFIs.
Wilkinson said China was nonetheless determined to push ahead with the industry, focusing on both micro lending and an area often overlooked micro insurance. Around 10 million rural Chinese have taken part in a pilot scheme since the beginning of 2008, with the number of customers rising 30% in 2011.
The most popular packages among farmers and rural residents have been crop insurance and emergency health insurance.
Regulators are bringing financial providers direct to Chinese villages to market to 70 or 80 households at a time, said Wilkinson. We see China Life and PICC, and banks, doing this every week.
The ADB reckons that 4,000 MFIs already exist in the Peoples Republic, split into two types of operation: smaller micro lenders, and a group of a thousand larger ones offering loans of up to $100,000 to both customers and to capital-starved small and medium-sized enterprises.