Despite the Reserve Bank of India (RBI) now acting as the regulator of the microfinance sector, the impasse in Andhra Pradesh is continuing, with the effect that some of the micro-lenders have shut shop, while those who survived, are struggling to put their house in order.
In October 2010, the state government of Andhra Pradesh introduced an ordinance to curb micro-lending operations of private players. The new law was introduced following allegations that micro-lenders charge an exorbitant rate of interest and use coercive methods for loan recovery.
It was mandated that private microfinance companies obtain a no-objection certificate from the state government before offering fresh loans to poor borrowers. Micro-lenders were also directed not to recover money on a weekly basis.
"At the ground level, the situation is still the same. Borrowers are being encouraged not to repay the loans. We are writing down our entire loan portfolio in the state. The business is no longer viable for us," said the chief executive of a Hyderabad-based microfinance company who requested anonymity fearing backlash from local political parties.
The crisis had a cascading effect on banks which had lent money to microfinance companies in Andhra Pradesh.
In February 2011 as many as five micro-lenders - Asmitha Microfin, Future Financial Services, Spandana Sphoorty Financial, SHARE Microfin and Trident Microfin - requested banks to restructure their existing loans. Two more microfinance institutions - BASIX and SWAWS Credit Corporation - restructured their bank loans a year later. Industry analysts estimate that banks restructured over Rs 6,000 crore microfinance loans in the past three years.
However, uncertainty remains over the recovery of these loans, as some of the micro-lenders have again requested banks to restructure these loans for a second time.
"When we opted for debt restructuring, we assumed that there will be some improvements in the collection rate. But there has been no improvement at all. We have requested banks for a second round of debt restructuring as we are not in a position to start repayment," Kishore Kumar Puli, chief executive of Trident Microfin, told Business Standard during a recent conversation.
Concerned over the crisis, RBI had formed a committee under the chairmanship of Y H Malegam in October 2010, to study issues and concerns in the microfinance sector. Hopes were raised when the central bank introduced a set of norms to regulate microfinance companies in December 2011 (which was modified a bit in August, 2012) and the Micro Finance Institutions (Development and Regulation) Bill, 2012 proposed RBI as the sole regulator of the sector.
It was believed that once the Bill becomes an Act, it will automatically repeal the rules introduced by the state government of Andhra Pradesh. However, with the Bill still pending with a parliamentary standing committee, the hopes are fading fast.
Also, doubts have been raised over RBI being the sole regulator of the sector. "As far as we are concerned, we are still being governed by the state government's law," said a top executive of a microfinance institution based in Andhra Pradesh.
However, officials of Micro Finance Institutions Network (MFIN), the industry body of micro-lenders, clarify that RBI is now the sole regulator for the sector. The central bank has already introduced margin and interest cap for micro-lenders, prescribed minimum capital adequacy ratio and classified micro-lenders as a new category of non-banking finance company - NBFC MFI.
"In legal terms, there are two types of microfinance companies - NBFC MFI and NGO MFI. Almost 90 per cent of microfinance business in India is conducted by NBFC MFIs and they are squarely under RBI's regulations. NGO MFIs are currently not under RBI's regulations but the Bill proposes to bring these companies under the central bank's purview. In Andhra Pradesh, the state government's Act has still not been repealed. So, it is material for microfinance companies that have operations in that state. But nationally, RBI is the regulator for the sector," said a senior MFIN official.
Micro-lenders are now pinning their hopes on the Supreme Court that offered interim relief to SKS Microfinance and allowed it to resume micro-lending operations in Andhra Pradesh. MFIN and several other micro-lenders have now approached the apex court seeking a similar relief.
In October 2010, the state government of Andhra Pradesh introduced an ordinance to curb micro-lending operations of private players. The new law was introduced following allegations that micro-lenders charge an exorbitant rate of interest and use coercive methods for loan recovery.
It was mandated that private microfinance companies obtain a no-objection certificate from the state government before offering fresh loans to poor borrowers. Micro-lenders were also directed not to recover money on a weekly basis.
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At that time, Andhra Pradesh was the largest market for Indian microfinance companies. It accounted for nearly a third of micro-lending business in the country. The new law crippled the industry, as borrowers stopped repaying their loans and losses mounted on the books of micro-lenders. A study revealed almost a third of micro-loan borrowers turned defaulter after the new rules were introduced.
"At the ground level, the situation is still the same. Borrowers are being encouraged not to repay the loans. We are writing down our entire loan portfolio in the state. The business is no longer viable for us," said the chief executive of a Hyderabad-based microfinance company who requested anonymity fearing backlash from local political parties.
The crisis had a cascading effect on banks which had lent money to microfinance companies in Andhra Pradesh.
In February 2011 as many as five micro-lenders - Asmitha Microfin, Future Financial Services, Spandana Sphoorty Financial, SHARE Microfin and Trident Microfin - requested banks to restructure their existing loans. Two more microfinance institutions - BASIX and SWAWS Credit Corporation - restructured their bank loans a year later. Industry analysts estimate that banks restructured over Rs 6,000 crore microfinance loans in the past three years.
However, uncertainty remains over the recovery of these loans, as some of the micro-lenders have again requested banks to restructure these loans for a second time.
"When we opted for debt restructuring, we assumed that there will be some improvements in the collection rate. But there has been no improvement at all. We have requested banks for a second round of debt restructuring as we are not in a position to start repayment," Kishore Kumar Puli, chief executive of Trident Microfin, told Business Standard during a recent conversation.
Concerned over the crisis, RBI had formed a committee under the chairmanship of Y H Malegam in October 2010, to study issues and concerns in the microfinance sector. Hopes were raised when the central bank introduced a set of norms to regulate microfinance companies in December 2011 (which was modified a bit in August, 2012) and the Micro Finance Institutions (Development and Regulation) Bill, 2012 proposed RBI as the sole regulator of the sector.
It was believed that once the Bill becomes an Act, it will automatically repeal the rules introduced by the state government of Andhra Pradesh. However, with the Bill still pending with a parliamentary standing committee, the hopes are fading fast.
Also, doubts have been raised over RBI being the sole regulator of the sector. "As far as we are concerned, we are still being governed by the state government's law," said a top executive of a microfinance institution based in Andhra Pradesh.
However, officials of Micro Finance Institutions Network (MFIN), the industry body of micro-lenders, clarify that RBI is now the sole regulator for the sector. The central bank has already introduced margin and interest cap for micro-lenders, prescribed minimum capital adequacy ratio and classified micro-lenders as a new category of non-banking finance company - NBFC MFI.
"In legal terms, there are two types of microfinance companies - NBFC MFI and NGO MFI. Almost 90 per cent of microfinance business in India is conducted by NBFC MFIs and they are squarely under RBI's regulations. NGO MFIs are currently not under RBI's regulations but the Bill proposes to bring these companies under the central bank's purview. In Andhra Pradesh, the state government's Act has still not been repealed. So, it is material for microfinance companies that have operations in that state. But nationally, RBI is the regulator for the sector," said a senior MFIN official.
Micro-lenders are now pinning their hopes on the Supreme Court that offered interim relief to SKS Microfinance and allowed it to resume micro-lending operations in Andhra Pradesh. MFIN and several other micro-lenders have now approached the apex court seeking a similar relief.