Has the push for private investors led India into a Micro-financial Crisis?

Plummeting stock prices (well, only one company is traded on the market), cries for government regulation and politicians posturing to gain power, people's lives ruined, and an industry in crisis. Sounds familiar, doesn't it? Well, it's not what you think. India's micro-finance industry is experiencing a meltdown.

Grameen Bank, the gold standard for MFIs, has a banking license from the government of Bangladesh. Though their lending and ownership models are different from a traditional bank, they do operate as a bank and are subject to the same regulations and oversight. However, due to the way their banking system is structured, this is not how any MFI operates in India. MFIs in India are their own animal.

Last week I wrote my post around this exchange between Muhammad Yunus of Grameen and Vikram Akula of SKS Microfinance in India. Akula was arguing for the merits private money offered to MFIs, particularly in India. Yunus' contention was that by opening the door to private investors an MFI would lose sight of their social mission and become singularly focused on making a profit. In the two months since their debate at the Clinton Global Initiative it seems as though Yunus' concerns are being realized.

This is not to say that SKS is the lone culprit. In fact, while they are the largest, SKS is arguably the fairest MFI in India (their rates are at 24%; others charge as much as 60%). The move away from achieving a social mission through free market principals to just treating micro-finance as another vehicle to make a profit appears to be an industry-wide problem in India. There, MFIs are not banks. They were never subject to government oversight, or any regulating body for that matter(though that is changing). And it appears as time passed and more players and private money moved into the industry, this lack of regulation allowed the ideal of an MFI to be perverted. As Yunus claimed, it became "about exciting people to make money off the poor" and not accomplishing a social mission.

I don't mean to lay blame for this crisis entirely at the feet of the MFIs and their private investors. They are only one part of a much larger problem, as this article outlines in great detail (the parallels you'll see in that article to the financial crisis in the U.S. are uncanny). But the type of investing being done through the MFIs in India and the profits those MFIs were seeking ended up going beyond "impact investing" and "type 3 social ventures."

Though other factors enabled them, these MFIs still strayed far away from their original purpose to seek large profits and provide returns for their investors. I'm left wondering if that's not what the future holds for "impact investing." You'll likely always have those that are invested purely for philanthropic reasons and they will never expect much of a return. But how long before those simply looking to diversify their investments demand higher returns as other areas of their portfolio underperform? If they're unable to deliver, the social venture will lose investors and capital. If they purely seek profit, their social mission will likely suffer. Where is the balance? Is there a balance? Do investors with any expectation for a return have a place in "impact investing"? Is it even worth a social venture opening that door if it means that one day they might have to compromise their mission? Let me know what you think.

Thanks.

-Kyle