Microfinance has no doubt improved the lives of the poor in India but sometimes it leads people to borrow too much, to the extent that over indebtness can lead to suicides in extreme cases, says a new book.

"The controversy in Andhra Pradesh shows that the impact of microfinance needs to be more rigorously documented in order to convince policy makers and regulators that the movement should be supported," writes Prabhu Ghate in 'Indian Microfinance: The Challenges of Rapid Growth'.

In March 2006, the Andhra Pradesh government raided and temporarily closed down nearly all branches of microfinance institutions functioning in Krishna district.

The step led to widespread criticism in the media and did much to reverse the slowly growing awareness and appreciation of the good work being done by microfinance institutions.

One short term impact of the crisis was a heightened perception of political risk among banks, which both increased the interest rates as well as reduced new lending to microfinance institutions in Andhra Pradesh.

Another impact has been a sharp diminution in the rate of growth of microfinance institution model in Andhra Pradesh. The writer says though the rate of growth of microfinance in India has accelerated to a great extent in the past few years, making it the largest in the world, the sector continues to face persisting challenges.

The main challenge facing the sector is identified as the need to enhance borrower, public and regulatory support and understanding, by increasing transparency in dealings with borrowers and by educating the poor.

In his book, Ghate attempts to put together a one-stop document that will help readers catch up on the latest developments, issues and achievements of the microfinance sector in India.

"The sector is growing rapidly, both in the scale and in the diversity of actors, and is sitting on the cusp of regulation. It is, therefore, in the midst of rapid flux," he says.

"For some time now, there has been a growing demand by practitioners, financial institutions, policy makers, regulators, the research community, the media and the development community generally for a periodic, comprehensive and up-to-date account of the sector.

"Players in various parts of the sector want to know much more about the parts of the sector they would like to engage with more," says Ghate, who is an independent researcher and consultant and had worked as a senior economist at the Asian Development Bank [Get Quote], Manila.

He goes on to cite a few examples, saying bankers and social venture capitalists are vitally dependent on the success of the efforts of the training and capacity-building service providers in easing human resource constraints facing the sector, and would like to know more about their activities.

According to Ghate, insurance companies are interested in opportunities offered by self help group (SHG) bank linkage programme, just as bankers are curious about the opportunities that might lie in money transfers.

"Additionally, not enough is known about the unfolding priorities of the donors. Everyone is affected by what the regulators in turn need to know more about the sector they are charged with regulating," he writes.

This book furthers the goal of microfinance in India to bring the sector together to look at critical issues, propose solutions and vision the harmonious growth of the sector as a whole.

Indian microfinance has continued growing rapidly towards the main objective of financial inclusion, extending outreach to a growing share of poor households and to the approximately 80 per cent of the population, which has yet to be reached directly by the banks.

The larger of the two main models - the self help group bank linkage programme - covered about 14 million poor households in March 2006 and provided indirect access to the banking system to another 14 million, including the borderline poor.  

Although firm estimates are lacking, the other, the microfinance institution (MFI) model, served 7.3 million households, of which 3.2 million were poor.

Even allowing for a degree of overlap of borrowers from both models, the total number of poor households being reached was roughly a fifth of all poor households, as well as a smaller share of the larger number of non-poor households who have yet to be reached by the formal financial sector.

Apart from providing financial services to both these segments of the population, there is widespread evidence that the much stronger competition provided to the informal sector has significantly improved the terms of credit provided to both segments by this sector, which is losing its share to both the formal and the (semi-formal) MFI sector.