MFIs have not given a single loan in a year and borrowers are back in the clutches of moneylenders in Andhra Pradesh, Microfinance Institutions Network CEO Alok Prasad tells Prashanth Chintala
A spate of suicides by borrowers led to the Andhra Pradesh Microfinance (Regulation of Money Lending) Ordinance last year. What is the situation in the microfinance sector now?
Not a single new loan has been given by any microfinance institution (MFI) in Andhra Pradesh. However, large MFIs outside the state still have some hope. The attitude of bankers is now neutral. The situation is, more or less, positive for large MFIs, which have no exposure to Andhra Pradesh and have good governance structures. However, the position is quite adverse for small MFIs. Last year, after the Andhra Pradesh legislation, all banks completely clamped down on fresh lending. And, the position has not changed much with regard to Tier-II minus and Tier-III MFIs.
What new risks have cropped up after the legislation?
Fundamentally, there are both regulatory, as well as political risks.
Are the political risks present only in Andhra Pradesh?
I see political risks even outside the state. Until the larger issue of duality of regulation is sorted out and settled by the proposed central law, there is a nagging fear that a few states may pass a law similar to Andhra Pradesh’s to suppress MFIs.
When do you expect the Centre to enact a new legislation on the microfinance sector?
The ministry of finance was able to come out with a draft Bill within three months. It is never this quick. Thereafter, it was put in the public domain. The Reserve Bank of India (RBI) also gave its comments, after which the ministry again took up the matter. Now, the Centre is bogged down with so many issues that it may not find time to take it forward soon.
Do you see it happening in the upcoming session of Parliament?
I am not very hopeful. Moreover, we have to recognise the reality that the introduction of a Bill does not lead to its instant passage. It would be referred to a Parliament sub-committee, and then to the finance committee. It could take six to nine months before the Bill is enacted.
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What fate awaits MFIs at if the enactment of the central law is delayed?
Outside Andhra Pradesh, large MFIs with good governance structures are likely to find more favour with banks. These may also be able to mobilise funds from banks. However, the real challenge is for the Tier-II minus and Tier-III MFIs. It is a bit difficult to guess how long these can carry on with their business operations in a sensible manner. In Andhra Pradesh, some large MFIs have undergone corporate debt restructuring, giving these 18-24 months to stabilise. The smaller ones, in any case, are at a dead end now.
Has any MFI in Andhra Pradesh closed down after the crisis?
In the technical sense, no MFI has shut shop so far. However, at a more practical level and from an effective business stand point, if you are neither lending, nor being able to collect past loans, you are no longer in business. That is the reality.
Is there hope for MFIs in Andhra Pradesh?
We are trying to talk to the state government to resolve the crisis. In my view, the government has to find ways to bring the situation back to normal. The government has to intervene.
Why should the government intervene?
Nearly Rs 5,000 crore of bank money is locked up in Andhra Pradesh. This is public money and it has to be unlocked. The government is accountable for that. After all, till October 15, 2010, when the Ordinance was issued in Andhra Pradesh, repayment rates in the state were 98-99 per cent. After the ordinance, the recovery rate crashed to 10 to two per cent. Since government intervention brought about this dramatic decline, the government has to find ways to deal with this.
Second, there is now an emerging credit gap from the formal sector in Andhra Pradesh. MFIs, on an average, were lending about Rs 6,000 crore a year. This became zero after the ordinance. In the last one year, MFIs in the state have not offered any fresh loan to borrowers in Andhra Pradesh. This credit gap is pushing people into the clutches of moneylenders.
Third, the credit history of MFI borrowers in the state has been spoiled. So, their ability to access new lending from the formal sector is completely compromised. This is a long-term damage that has to be addressed.
Are you able to convince the state government in this regard?
We have entered into a dialogue. There is growing recognition by the Andhra Pradesh government that the situation has gone out of hand, and has to be addressed. On its part, the Microfinance Institutions Network (MFIN) had placed before the government a formal pro-poor package. This envisages restructuring of loans, reduction of the interest rate, extending the tenure and almost offers an interest holiday. It has a large financial impact on MFIs, which it has agreed to absorb.
What should the government do to normalise the situation?
The government machinery had resolved to a negative propaganda, saying MFIs are bad and hence, loans need not be repaid. Now, the same machinery has to be deployed to say MFIs are RBI-regulated institutions and repayment of loans is a contractual requirement, and borrowers should abide by this.
The second requirement is many rules framed under the law have to be simplified to make these operationally convenient. The current rules make it almost impossible to offer a new loan. A single amendment to the Andhra Pradesh Act can help. It says borrower cannot have more than two loans, something RBI does not say. RBI had fixed a lending cap of Rs 50,000. Today, the fact is every borrower has at least two or more loans. Once this clause is amended, MFIs would be able to give new loans and collect past ones. The credit cycle would be re-established.
What is the fate of the ‘pro-poor’ MFIN package?
The government has referred it to a state-level bankers committee for discussion. Let us see how the bankers respond. The package has not been dumped, and something is definitely happening on that. But the political will is missing.
Would MFIs be viable if you slash the interest rate?
That is the arithmetic done by MFIN. Today you are confronted with the reality. It is better to get back something instead.